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Understanding Systemic Risk in Global Financial Markets

Book Description

An accessible and detailed overview of the risks posed by financial institutions

Understanding Systemic Risk in Global Financial Markets offers an accessible yet detailed overview of the risks to financial stability posed by financial institutions designated as systemically important. The types of firms covered are primarily systemically important banks, non-banks, and financial market utilities such as central counterparties. Written by Aron Gottesman and Michael Leibrock, experts on the topic of systemic risk, this vital resource puts the spotlight on coherency, practitioner relevance, conceptual explanations, and practical exposition.

Step by step, the authors explore the specific regulations enacted before and after the credit crisis of 2007-2009 to promote financial stability. The text also examines the criteria used by financial regulators to designate firms as systemically important. The quantitative and qualitative methods to measure the ongoing risks posed by systemically important financial institutions are surveyed.

  • A review of the regulations that identify systemically important financial institutions
  • The tools to use to detect early warning indications of default
  • A review of historical systemic events their common causes
  • Techniques to measure interconnectedness
  • Approaches for ranking the order the institutions which pose the greatest degree of default risk to the industry

Understanding Systemic Risk in Global Financial Markets offers a must-have guide to the fundamentals of systemic risk and the key critical policies that work to reduce systemic risk and promoting financial stability.

Table of Contents

  1. Cover
  2. Title Page
  3. Preface
  4. Acknowledgments
  5. About the Authors
  6. CHAPTER 1: Introduction to Systemic Risk
    1. WHAT IS SYSTEMIC RISK?
    2. SYSTEMIC RISK DRIVERS
    3. WHY SYSTEMIC RISK MUST BE UNDERSTOOD, MONITORED, AND MANAGED
    4. KEY POINTS
    5. KNOWLEDGE CHECK
    6. NOTES
  7. CHAPTER 2: How We Got Here: A History of Financial Crises
    1. INTRODUCTION
    2. COMMON DRIVERS OF HISTORICAL CRISES
    3. INTERNATIONAL CONTAGION
    4. KEY POINTS
    5. KNOWLEDGE CHECK
    6. NOTES
  8. CHAPTER 3: The Credit Crisis of 2007–2009
    1. INTRODUCTION
    2. PLANTING THE SEEDS OF A BUBBLE: THE EARLY 2000s
    3. WALL STREET'S ROLE
    4. THE U.S. GOVERNMENT TAKEOVER OF THE GSEs
    5. THE TIPPING POINT: LEHMAN BROTHERS' FAILURE
    6. AFTERMATH OF THE CREDIT CRISIS
    7. COST OF GOVERNMENT BAILOUTS
    8. KEY POINTS
    9. KNOWLEDGE CHECK
    10. NOTES
  9. CHAPTER 4: Systemic Risk, Economic and Behavioral Theories: What Can We Learn?
    1. INTRODUCTION
    2. MINSKY THREE-PART MODEL
    3. DEBT DEFLATION CYCLE
    4. BENIGN NEGLECT
    5. BEHAVIORAL THEORIES
    6. RISK AVERSION BIAS
    7. ASSET PRICES
    8. HOMOGENEOUS EXPECTATIONS VERSUS HETEROGENEITY
    9. KEY POINTS
    10. KNOWLEDGE CHECK
    11. NOTES
  10. CHAPTER 5: Systemic Risk Data
    1. INTRODUCTION
    2. KEY DATA ATTRIBUTES
    3. KEY POLICY CHANGES TO ADDRESS DATA GAPS
    4. DATA SOURCES
    5. DATA COLLECTION CHALLENGES AND REMAINING GAPS
    6. MOVE TOWARD STANDARDIZATION: LEGAL ENTITY IDENTIFIER INITIATIVE
    7. KEY POINTS
    8. KNOWLEDGE CHECK
    9. NOTES
  11. CHAPTER 6: Macroprudential versus Microprudential Oversight
    1. INTRODUCTION
    2. A COMPARISON OF MACROPRUDENTIAL VERSUS MICROPRUDENTIAL
    3. MICROPRUDENTIAL POLICIES
    4. MACROPRUDENTIAL POLICIES
    5. A HISTORICAL PERSPECTIVE ON MACROPRUDENTIAL TOOLS
    6. CHOICE OF MACROPRUDENTIAL POLICY TOOLS
    7. KEY POINTS
    8. KNOWLEDGE CHECK
    9. NOTES
  12. CHAPTER 7: Introduction to the U.S. Regulatory Regime
    1. INTRODUCTION
    2. WHO ARE THE REGULATORS?
    3. U.S. REGULATORY APPROACHES
    4. COMPARISON OF U.S. VERSUS INTERNATIONAL FINANCIAL REGULATORY REGIMES
    5. INTRODUCTION TO THE DODD-FRANK ACT
    6. KEY POINTS
    7. KNOWLEDGE CHECK
    8. NOTES
  13. CHAPTER 8: Introduction to International Regulatory Regimes
    1. INTRODUCTION
    2. THE FINANCIAL STABILITY BOARD
    3. THE BASEL ACCORDS
    4. THE EUROPEAN SYSTEMIC RISK BOARD
    5. PRINCIPLES FOR FINANCIAL MARKET INFRASTRUCTURES
    6. KEY POINTS
    7. KNOWLEDGE CHECK
    8. NOTES
  14. CHAPTER 9: Systemically Important Entities
    1. INTRODUCTION
    2. INTRODUCTION TO SYSTEMICALLY IMPORTANT ENTITIES
    3. CLASSIFICATION OF ENTITIES AS SYSTEMICALLY IMPORTANT BY THE FSOC
    4. GLOBALLY SYSTEMICALLY IMPORTANT BANKS
    5. BROAD IMPACT OF FINANCIAL STABILITY REQUIREMENTS
    6. KEY POINTS
    7. KNOWLEDGE CHECK
    8. NOTES
  15. CHAPTER 10: The Volcker Rule
    1. INTRODUCTION
    2. INTRODUCTION TO THE VOLCKER RULE
    3. THE VOLCKER RULE: DETAILS
    4. IMPLEMENTATION OF THE VOLCKER RULE
    5. VOLCKER RULE: CRITICISM
    6. KEY POINTS
    7. KNOWLEDGE CHECK
    8. NOTES
  16. CHAPTER 11: Counterparty Credit Risk
    1. INTRODUCTION
    2. OVERVIEW OF DERIVATIVE SECURITIES
    3. COUNTERPARTY EXPOSURE
    4. HOW COUNTERPARTY CREDIT RISK IS MANAGED
    5. COUNTERPARTY CREDIT RISK AND SYSTEMIC RISK
    6. KEY POINTS
    7. KNOWLEDGE CHECK
    8. NOTES
  17. CHAPTER 12: The Dodd-Frank Act and Counterparty Credit Risk
    1. INTRODUCTION
    2. MEASURING COUNTERPARTY EXPOSURE IN THE OTC DERIVATIVES MARKET
    3. OVERVIEW OF HISTORICAL DATA
    4. THE EVOLUTION OF THE U.S. REGULATORY APPROACH TOWARD OTC DERIVATIVES
    5. KEY PROVISIONS OF TITLE VII OF THE DODD-FRANK ACT
    6. CRITICISM OF TITLE VII OF THE DODD-FRANK ACT
    7. KEY POINTS
    8. KNOWLEDGE CHECK
    9. NOTES
  18. CHAPTER 13: The Basel Accords
    1. INTRODUCTION
    2. WHAT ARE THE BASEL ACCORDS?
    3. THE APPROACH OF THE BASEL ACCORDS
    4. BASEL I
    5. BASEL II
    6. BASEL III
    7. THE CONTINUING EVOLUTION OF THE BASEL ACCORDS
    8. KEY POINTS
    9. KNOWLEDGE CHECK
    10. NOTES
  19. CHAPTER 14: Lender of Last Resort
    1. INTRODUCTION
    2. LENDER OF LAST RESORT CONCEPT
    3. HENRY THORNTON, WALTER BAGEHOT, AND ALTERNATIVE VIEWS
    4. THE FED'S ROLE IN THE GREAT DEPRESSION
    5. THE CREDIT CRISIS OF 2007–2009
    6. KEY POINTS
    7. KNOWLEDGE CHECK
    8. NOTES
  20. CHAPTER 15: Interconnectedness Risk
    1. INTRODUCTION
    2. A CASE STUDY OF INTERCONNECTEDNESS
    3. INTERCONNECTEDNESS CATEGORIES
    4. POST-CRISIS REGULATORY VIEW OF INTERCONNECTEDNESS
    5. AN APPROACH TO ANALYZING INTERCONNECTEDNESS RISK
    6. KEY POINTS
    7. KNOWLEDGE CHECK
    8. NOTES
  21. CHAPTER 16: Conclusion: Looking Ahead
    1. IT'S NOT A QUESTION OF IF, BUT WHEN, WHERE, AND HOW
    2. A SUMMARY OF GLOBAL SURVEYS
    3. PREPARING FOR THE NEXT CRISIS
    4. NOTES
  22. APPENDIX: Systemic Risk Models
    1. INTRODUCTION
    2. STRUCTURAL VERSUS REDUCED-FORM CREDIT MODELS
    3. CONTINGENT CLAIMS AND DEFAULT MODELS
    4. MACROECONOMIC MEASURES
    5. PROBABILITY DISTRIBUTION MEASURES
    6. ILLIQUIDITY MEASURES
    7. COUNTERPARTY RISK MEASURES
    8. BEHAVIORAL MODELS
  23. Solutions to the Knowledge Check Questions
  24. Index
  25. End User License Agreement