80 likes | 89 Views
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)
E N D
Financial Stability MonitoringTobias AdrianDaniel CovitzNellie 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) • 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
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.
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
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)
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.
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
Thank you! Email: hyan@saif.sjtu.edu.cn