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RAY SPUDECK, CHIEF ECONOMISTFLORIDA OFFICE OF INSURANCE
REGULATIONDECEMBER 3, 2009
Systemic Risk: Initiatives and Issues
Systemic Risk: What is it?
The risk inherent to the entire market or entire market segment. www.investopedia.com
Risk that affects an entire financial market or system, and not just specific participants. www.investorwords.com
From the FSB, IMF, and BIS: in practice G-20 members consider an institution, market or instrument as systemic if its failure or malfunction causes widespread distress, either as a direct impact or as a trigger for broader contagion. The interpretation, however, is nuanced in that some authorities focus on the impact on the financial system, while others consider the ultimate impact on the real economy as key. http://www.financialstabilityboard.org/publications/r_091107c.pdf
International Financial Supervisory Activities
In April 2009, the G20 asked the IMF, the BIS and the FSB to develop guidance for national authorities to assess the systemic importance of financial institutions, markets and instruments.
The first report, “Initial Considerations” was published in October 2009
Initial Considerations Report
Developed the definition used in the first slide
Identified three characteristics to assess systemic importance:
Size Substitutability Interconnectedness
Future Work to develop high level guidelines
Other bodies are creating their own work products as well
IAIS Activity
Financial Stability Committee Provided Feedback to FSB,BIS,IMF document adding
an additional consideration – development timeframe
Subcommittees and Workstreams to be identified on: Macroprudential Tools Macroprudential Surveillance Systemically important financial institutions
The IAIS “Systemic” Work
Workstream A – Development of Macroprudential Tools for National Authorities
Purpose: Financial sector authorities should have suitable macroprudential tools to address systemic vulnerabilities. Measures that are simple to understand and to implement would be preferable to more complex ones, and tools that rely on pre-specified limits or rules are attractive. However, rules need to be complemented with the informed judgment of financial sector authorities based on their joint assessment of the risks across the financial system.
Workstream B – Development of Macroprudential Surveillance Purpose: The IAIS will enhance analysis of insurance markets and explore the
possibility of conducting macroprudential surveillance. The Financial Stability Committee will develop concrete proposals by the end of 2009 and report to the Executive Committee (as per wording in the Financial Stability Framework approved by Exco in Rio)
Workstream C - Systemically Important Financial Institutions (SIFIs) and The
“Too Big To Fail” (TBTF) ProblemsPurpose: The G20 has called on the FSB to propose by the end of October 2010
possible measures to address the “too big to fail” (TBTF) problems associated with systemically important financial institutions (SIFIs). The FSC will work in conjunction with the FSB to ensure that issues relevant to the insurance sector are taken into account and will encourage other IAIS working parties to consider related issues in their work programs.
My Thoughts
Is the insurance sector a natural generator of systemic risk episodes? I am skeptical.
Financial Guarantee Insurance
Is insurance one of the largest natural transmission pathways? I am a believer
We need to be part of the discussion to avoid the unintended consequences of bad policy; our seat at the table is imperative
THANK YOU
The Work is Just Beginning