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1. What is systemic risk in finance?

Systemic risk is the risk which potentially bankrupt or bring down the entire system or

entire market if one player is eliminated, or a cluster of failures occurs at once.

In finance, systemic risk is the risk of collapse of an entire financial system, where the

failure of a single entity or cluster of entities can cause a cascading failure.( A cascadingfailure is a failure in a system of interconnected parts in which the failure of a part can

trigger the failure of successive parts.)

Systemic financial risk occurs when contingency plans that are developed individually to

address selected risk are collectively incompatible. It is the quintessential ³knee bone isconnected to the thigh bone´ where every elements that once appear independently is

connected with every other elements.

2. The effect of systemic risk in the financial crisis in general?

In financial crisis, any collapse of an entity could be the catastrophy to entire financial

system. A company going bankrupt can trigger the failure of other companies, which may

be very successful at that time. Let imagine how the global economy will be if the

financial system collapses. Surely, it will be very terrible.

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For example, HSBC announces the bankruptcy, what will happen? Every people will

find out that leaving money in banks is not safe. They will get their money back, and all

banks have difficulties to raise money. Because of the shortage of money, some banks

will also collapse. Banks don¶t give money to companies, and manufacturing stops. Nogoods, no food, so terrible.

2. About AIG

American International Group, Inc. (AIG)- one of the largest insurance firms in the world

- is a holding company for a network of subsidiaries primarily engaged in insurance and

insurance-related activities, including property, casualty, life, financial services,

retirement savings products, asset management, and aircraft leasing. AIG operates in

more than 130 countries.

AIG is the leading underwriter of commercial and industrial insurance in the United

States and holds the number two position in the U.S. life insurance sector. The

corporation, whose earliest roots were in Asia, has had an active history of mergers,

acquisitions, and consolidations, and under the renowned stewardship of Maurice R.

"Hank" Greenberg from the late 1960s into the early 21st century the company has growninto a global insurance giant.

Anh Ti p b sung thêm ph n thông tin cho các nhánh nh c a AIG nh AGF, AIGCFG, AIGCI, AIU

Impact of AIG on US and world economy

The failure of AIG would cause turmoil in the U.S. economy and global markets, andhave multiple and potentially catastrophic unforeseen consequences.

y If AIG went bankrupt, it would trigger the bankruptcy of many of the financial

institutions around the world are also major holders of AIG's debt.

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y A failure of AIG could create a chain reaction of enormous proportion from

governmental agencies, corporations and consumer to counterpartie

y The immediate damage to credit markets worldwide

y Fall in the foreign exchange value of the dollar y Increase in Treasury borrowing costs

y Doubts about the ability of the U.S. to support its banking system=> B h t ph n IMPACT OF AIG ON US AND WORLD ECONOMY=> Trong file PDF trang s 7 có ph n GLOBAL IMPACT, anh trích d n cái ó rar i tóm t t vi t l i.=> Ch này anh Quang vi t giùm anh Ti p xem cu i cùng AIG có thu c financial

systemic risk ko nhé!3. FINANCIAL CRISIS 2008

The Federal Reserve lowered its discount rate no less than 27 times between 2001 and

2003. Low interest rates, facilitated by the huge trade surpluses which China and other

countries used to purchase US Treasury Bonds, stimulated rapid growth in credit.

Accompanying rises in house prices further fuelled credit growth, especially through

mortgage lending. In the US, subprime market mortgage lending, to households without

the essential means to repay loans, took on huge proportions

Thêm nh ngh a mortgage lending là gì?

US mortgage lenders, which were then sold throughout the financial system as assets.

They were able to issue and securitize these bad loans due to a combination of inadequate

regulation and financial innovation. The latter made it difficult for other institutions toassess the risks of these securitized mortgages and led to increased subprime mortgages

nh ngh a v subprime mortgages.

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The reasons of the crisis: easy credit, bad loans, weak regulation and supervision of

complex financial instruments, debt defaulting, insolvency of key financial institutions, a

loss of credibility and trust, and financial panic and mass selling-off of stocksand a

hoarding of cashby banks and individuals. With the interconnectedness of financialmarkets, especially amongst the developed countries, the panic spread rapidly, causing a

widespread µcredit crunch¶ and sharp declines in consumption, investment and trade in

initially all of the G7 countries.

CONSEQUENCES

House prices and financial stock prices started to plummet. This reduced the value of

household wealth in the US by trillions. The solvency of a number of well-known

international financial institutions was threatened. About $750 billion in such losses had

been recognized as of November 2008. These losses have wiped out much of the capital

of the world banking system.

N guyên nhân là do REAL ESTATE BUBLE => DEFI N ITIO N OF REAL ESTATE.

15 September 2008, the firm of Lehman Brothers filed for bankruptcy

Bài này ch y u nói v AIG thì dù gì sau khi vi t v Lehman Brothers c ngph i á ng chút xíu n AIG. N u ko bài s ko có s liên k t.

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As of August 2008, financial firms around the globe have written down (REDUCE THE

VALUE OF ASSET IN THE COMPANY) their holdings of subprime related securities by

US$501 billion. The IMF estimates that financial institutions around the globe will

eventually have to write off $1.5 trillion of their holdings of subprimeMBSs.

Definition of ³subprime´ Definitions of subprime securities/ subprime MBSs

Wall Street¶s Dow Index experienced its largest one-day point loss in history.

The International Monetary Fund estimated that large U.S. and European banks lost more

than $1 trillion on toxic assets and from bad loans from 01/2007 to 09/2009. These losses

are expected to top $2.8 trillion from 10/2007. U.S. banks losses were forecast to hit $1

trillion and European bank losses will reach $1.6 trillion. The IMF estimated that U.S.

banks were about 60% through their losses, but British and European banks only 40%. Tìm hi u thêm ko ch v s m t i m trong ch ng khoán mà còn v các m t:

B O HI M, T L TH T N GHI P, GIÁ TR N G DOLLAR, « làm cách nào ócho nó k t n i c v i ph n ti p theo mình s nói v h l y n u ko c u AIG.

4. How Big is the Systemic Risk in Insurance ?

_ While the term ³insurance´ is used, AIG and its industry brethren sell and service not

just the traditional property, casualty and life insurance policies, but accident and health

coverage, pension and retirement policies, and a variety of wealth accumulation vehicles,

such as annuities.

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_ The systemic risk is mostly centered in the ³life insurance´ business because it is this

subsector that has the greatest variety of investments and obligations that subject to loss

of value of the underlying investments.

_ The life insurance industry employs approximately 2.3 million people in the U.S. who

sell individual and group policies. There are over $19 trillion of face value validity

policies in the U.S. and 375 million policies.

_ Over the past decade, the voluntary termination rate on individual policies decreased

remarkably (to six percent by 2007) as consumers could obtain liquidity from other

sources.

_ A significant rise in surrender rates ± inspired by consumers¶ needs for cash or because

of rumor or real failure of insurance companies ± could be disastrous. Because of

widespread loss of liquidity, the industry would struggle to raise enough cash to meet

surrender requests. A ³run on the bank´ in the life and retirement business would have

sweeping impacts across the economy in the US. In countries around the world with

higher savings rates than the U.S., the failure of insurance companies like AIG would be

a catastrophe

5. If the AIG had failed, what would have happened?a. The reasons lead AIG to failure

AIG original problems ± an over-reliance on U.S residential mortgage-backed securities in its investment portfolios ± has now been deepened by weakness in the commercial

mortgage-backed securities market, the global real estate market, the global equities

market, slowing business and consumer spending activities and the concomitant demandfor higher liquidity by regulators and customers around the world.

Mortgage-backed securities: A type of asset-backed security that is secured by a

mortgage or collection of mortgages. These securities must also be grouped in one of the

top two ratings as determined by a accredited credit rating agency, and usually pay

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periodic payments that are similar to coupon payments. Furthermore, the mortgage must

have originated from a regulated and authorized financial institution.

b. The consequences if the AIG had failedy General Impact on Economy

A failure of AIG would have a devastating impact on the U.S. and global economy.

The economic effects may include unemployment for a large portion of the 116,000employee and adverse impact on AIG¶s 74 million customers worldwide.

Treasury would need to respond to the fall in the foreign exchange value of the dollar,

increase in Treasury borrowing costs and doubts about the ability of the U.S. to supportits banking system => a crisis of confidence

y Life Insurance Policyholders

If AIG fails, policyholders are likely to seek to ³cash in´ policies, placing enormousstrain on the insurance system, as well as bond and equity markets as assets are liquidatedto pay policyholders

± Third-party sellers of AIG products would face an unmanageable spike in customer

redemption demands, damaging consumer confidence

± Forced sales of assets would be required to cover withdrawals

± Surrender of insurance policies at above-normal actuarial rates could impair current policyholders as capital, along with state guarantee funds, might be insufficient to pay all policyholder claims

y Impact on Retirement Savings

AIG Retirement Services is handling 6.7 million policies/accounts ± including manyretired Americans. Income from AIG¶s 403(b) plans is often the beneficiary¶s only sourceof retirement income

This failure would be one of the largest failures in the history of life insurance, puttingapplicable retirement savings significantly at risk and causing a loss of confidence in the

private pension system in the U.S.

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± Failure would produce an immediate ³run on the bank,´ which would likely lead tostate seizures of local operations, causing a lock-up in customers¶ retirement accountsand payment of monthly/quarterly annuity checks

± Seizure by state regulators would have an adverse impact on state guarantee funds,which are unfunded, resulting in assessments against other insurance companies

± Such assessments in an already weak market could lead affected industry players to sellassets,resulting in downward pressure on fixed income markets

± Under current market conditions and because of the capital intensive nature of the fixedannuity business, capacity may not be picked up by peers

± Given the foregoing, there is a risk of undermining the confidence in the private

pension system in the United Statesy Consumer Finance Impact

An AIG failure could lead to the failure of American General Finance (AGF), America¶ssecond largest ³Main Street´ lender. A failure of AGF could:

Eliminate $12 billion to $15 billion in U.S. consumer lending over the next 3 years thatis not provided by banks

Trigger a default (and related litigation) on more than $23 billion of AGF debt held byU.S. and European investors

y Extensive Business Disruption

AIGCI covers a wide range of business and non-profit organizations, including:

± 15,000 farms and agricultural businesses

± 30,000 commercial and residential contractors, including almost every major U.S.infrastructure project

± 5,000 schools; school boards; elementary, secondary and higher education facilities;libraries; museums; and art galleries

± 23,000 non-profit and social service organizations

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± 2,600 energy and environmental organizations, including power utilities, superfundsites, oil and gas exploration businesses, alternative energy concerns and electric utilities

± 21,000 healthcare providers, including doctors, medical facilities, hospitals, and nursinghomes.

± 7,000 real estate businesses including real estate agencies, commercial and retail buildings and mobile homes

± 9,800 transportation and travel concerns, including airlines, busses, trains, cargo ships,hotels, taxi cab companies and trucking companies

± 550 public entities including local governments, water authorities, airport authorities,housing departments, community development administrations and police and fire

departmentsAIG Commercial Insurance (AIGCI), the largest property casualty insurance operation inthe United States. Consequences of a failure of AIGCI include:

± AIGCI would immediately write less business and many businesses would cancel their existing policies, causing a substantial impact on cash flow

± In the event of negative cash flow, AIGCI would start liquidating its investmentsecurities, including its municipal bonds holdings (AIGCI is the second largest U.S.

investor in municipal bonds)

± As clients turn to other carriers, the loss of AIGCI¶s capacity in the marketplace wouldsignificantly drive up the cost of securing property-casualty insurance

y Impact on Global Capital Markets

An AIG failure could have similar or worse consequences on the global financial marketsas that of the Lehman bankruptcy. Similarities include:

± The large size of their derivatives books: AIG Financial Products Corp. (AIGFP) hasapproximately $1.6 trillion in notional derivatives exposures

± The large number of counterparties involved in a wind-down of the derivatives books.

Counterparties include top banks, sovereign wealth funds, money managers and hedgefunds

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Total client base: more than 1,500 major corporations, governments, and institutionalinvestors would be affected

_ Widespread impact of rating downgrades.

Downward pressure on values of underlying assets resulting from terminations of and thecalls pursuant to the underlying and associated contract.

_ US Municipal Market

AIG is the 2 nd largest holder of US municipal bonds which approximately 51.1 billionsUSD . A forced sale of AIG of municipal bonds to pay out debt would significantly stressthe US Municipal market. => leading directly to a decrease in attractiveness of US¶sgovernment securities and a consequent increase in borrowing costs for the US

government and related issuing entities.y Seizure of foreign assets

An AIG failure would likely result in the immediate seizure of certain insurance businesses of AIG by domestic and foreign regulators.

± The seizure by one regulator in a given region (e.g., Asia) would almost certainly havea domino effect and lead to the seizure of insurance businesses in multiple jurisdictionsacross the region

± Even if there is not an immediate seizure of the insurance businesses, there will besignificant policy cancellations which will likely lead to seizures

Seizure of foreign assets could lead to:

± Loss of assets to repay the Federal Reserve

± Collapse of AIG¶s public debt

± Loss of value of the U.S.Treasury¶s Preferred Shares

PH N C A TÍ B U

At that time, the US government bailed out AIG with an $85b emergency two-year

rescue loan in return for a 79.9% stake and control over all AIG's assets.

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Analysts said the demise of AIG - which has policy holders in 140 countries and insures

deals and investments across the globe - would have had a great impact on financial

markets. Were the company to fail, many banks and investment funds around the world

would lose their insurance cover at a time when defaults on payments are likely to rise.

AIG¶s interconnection with the whole planet is massive. AIG employs 116,000 people in

136 countries, including 5,000 in US. In the UK, AIG writes 12m insurance policies a

year. In 2006 it signed a £56.5m four-year sponsorship deal with Manchester United.

Tí B u coi l i ph n này nhé, tìm hi u k h n v gói c u tr . Coi thêm thông

tin trong file word b ng ti ng Vi t c a Vy g i làn u tiên. Ch bài vi t thnày Vy c ng ko bi t trìn bày thông tin ra sao n a.

ánh giá s l c v gói c u tr

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Tong Hop 1