Systemic risk’s starring role

An overview of systemic risk.

The failure of Lehman Brothers and other financial institutions in the fall of 2008 helped propel the phrase “systemic risk” into the general lexicon of the public. This chart of monthly Google searches for systemic risk, indexed against all search traffic, shows that interest in this subject has gradually fallen since a peak in the first quarter of 2009.

However, do not be surprised if systemic risk makes a comeback as Occupy Wall Street protests reignite news coverage of the financial services industry and the movie Margin Call introduces many to the role of the Chief Risk Officer – a character played by Demi Moore.

If you are preparing to discuss emerging trends in systemic risk with clients, peers or even compare yourself to Demi Moore with family and friends, you should be aware of the following online conversations happening about the subject:

  • Risk modeling – On Risk.net there is an interesting summary of a new model the International Monetary Fund is planning to use to assess liquidity risk. The article explains

“Using data from 13 large US commercial and investment banks, the model implies a potential 5% increase in the share of total capital that most firms would need to devote to liquidity risk. This number, however, exceeds 25% for the worst bank in the sample, and could more than triple for all banks if stress periods were included in the historical estimation.”

  • Analysis focus – Over at the Sungard blog, Jeffrey Wallis suggests we should turn our attention to behavioral incentives instead of mulling over historical data. Specifically Jeffrey argues

“Data collection and analysis is not a futile effort, but it may be the wrong primary effort.  Incentives, on the other hand, are the key driver of risk, and analyzing those is more likely to detect patterns and trends showing where the behaviors are likely to create high risk scenarios and ultimately the next the next risk hotspot.  Looking at incentives with predictive analysis techniques has a better chance of heading off the next major event.”

  • Impact of Europe – On Twitter, many users are commenting on a recent speech by Jean-Claude Trichet, President of the European Central Bank, who called the debt crisis “now systemic.”

Back at the Society of Actuaries, we will be hosting a panel discussion, System Risk: Early Warning Indicators, at our Annual Meeting later today. There are two primary questions we will be covering. Provide your opinions in the comments section and we will let you know what answers participates put forth.

  • Is financial reform working?
  • Does the United States need a chief risk officer?
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