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Financial Stability Monitoring Tobias Adrian Daniel Covitz Nellie Liang

Financial Stability Monitoring Tobias Adrian Daniel Covitz Nellie Liang. Discussion by Hong Yan. What Does This Paper Do?. Identifies sources of systemic risk that could destabilize the financial system A framework that distinguishes shocks (exogenous) and vulnerabilities (endogenous)

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Financial Stability Monitoring Tobias Adrian Daniel Covitz Nellie Liang

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  1. Financial Stability MonitoringTobias AdrianDaniel CovitzNellie Liang Discussion by Hong Yan

  2. What Does This Paper Do? • Identifies sources of systemic risk that could destabilize the financial system • A framework that distinguishes shocks (exogenous) and vulnerabilities (endogenous) • Vulnerabilities include leverage, maturity mismatch, interconnections, complexity and risk prices • SIFIs, shadow banking, asset markets and nonfinancial sectors • Develops preemptive policies to promote financial stability • Focusing on mitigating vulnerabilities • Builds on a solid foundation of voluminous research, including their own

  3. Importance of the Subject • The global financial crisis revealed multiple vulnerabilities in the financial systems worldwide, with the one in the US most dominant. • The Dodd-Frank Act and other reform measures still leave much to be desired. • There need to be a systematic and logic assessment that is based on objective research and free of political influence • The relevance of the findings is found not only in the US, but also in other economies, including China.

  4. Comment I: The Role of the Price of Risk • While other measures of vulnerabilities are essentially firm-level choices, the price of risk is not. • The price of risk is a barometer of the macroeconomic and market conditions, and an indicator of the level of the systemic risk. • It is endogenously determined by the market. • It is time varying, has multiple components and are measured with a varied degree of precision. • I am not sure if it should be part of vulnerabilities

  5. Comment II: Preemptive Policies • Preemptive policies should be dynamic, not static. • Think of option hedging • Inefficiencies of static policies • Difficulty in implementing dynamic policies • Unintended consequences of policies • Example: CDS and bank risk taking (Shan, Tang and Yan, 2014)

  6. Comment III: Regulatory Frictions • Who is doing the monitoring? • Who is writing the preemptive policies? • Regulatory segmentation is still the fact of life, and will not go away any time soon in the US and in China.

  7. Summary • An interesting and solid proposal for monitoring sources of systemic risk in financial systems • Policy suggestions focus on mitigating vulnerabilities • More to think about: • Dynamic nature of policies • Mitigating private incentives and unintended consequences • Feasibility of implementation due to regulatory frictions and segmentation

  8. Thank you! Email: hyan@saif.sjtu.edu.cn

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