Prevention of systematic risks and countermeasures

By Liu Ming
0 Comment(s)Print E-mail Cfbond, September 17, 2018
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The degree and range of systematic risks are varied. There are not only industry systematic risks and national systematic risks, but also cross-border systematic risks and global systematic risks. The triggering mechanism of these risks is also highly complicated. Either at the macro and micro level, or at their interconnected level, the root cause of possible risks exists.

In the practice of international financial regulations, it is necessary to follow and assess whether a certain "situation" is of systematic importance and dispose accordingly, rather than focus on a particular "institution." a This basic understanding demands more ability of regulators to handle dynamically, assess the situation, make scientific decisions and allocate regulatory resources reasonably in the market with complexity and uncertainty.

In the current financial crisis, in terms of particular situations, to intervene (the crisis of Glitnir in Iceland) or not (the bankruptcy of Lehman Brothers), to intervene in depth (the quasi-nationalization of the American automobile giants) or to intervene under certain conditions (the progressive bailout for the Greek debt crisis), etc., all sparked intense controversy, which manifested the difficulty and complexity of accurately assessing systematic risks and scientifically making disposal decisions.

On the whole, a prominent problem Europe and America are facing is that regulators become more tolerant out of concern about systematic risks, and they even showed considerable restraint when commenting negatively on SIFIs. In face of the crisis, it seemed there was no better alternative but to provide "bailout" constantly. As a result, the discovering and solving of problems were continuously postponed, which put more public resources at risk and helped accumulate greater systematic risks until a systematic collapse broke out. A typical case is the US. The American economy had kept "drinking poison to quench thirst," which led to the forming and accumulation of economic bubbles; after the phased punctures, the economic bubbles instead re-formed and re-accumulated in wider range and at higher level until the largest financial and economic crisis since the Great Depression formed and spread all over the world.

What happened in the international financial crisis has proved that in order to timely discover and effectively prevent systematic risks, it is essential to be adept in identifying various internal and external factors which could possibly trigger systematic risks; and the emphasis is to timely assess the contagion channels which could generate chain reactions and to further enhance and comprehensively strengthen the financial regulation. It is particularly important to utilize system design to solve moral hazard problems like "too big to fail" and similar ones as "too complicated to deal with," "too nontransparent to dispose" and "too huge to rescue." Otherwise, regulators worldwide would find it difficult to get out of their passive roles and the awkward situation when they could only handle the issue afterwards.

Liu Ming, deputy chief editor of the Outlook Weekly, a magazine under the Xinhua News Agency, probes into the relationship between Systematically Important Financial Institutions (SIFIs) and their regulators.

Opinion articles reflect the views of their authors, not necessarily those of

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