Systemic Risk

Malcolm Kemp is Founder and Managing Director of Nematrian Ltd, a consulting firm delivering services to the quantitative finance and actuarial communities. Previously, he was Director and Head of the Quantitative Research Team at Threadneedle Asset Management, responsible for its portfolio risk measurement and management activities. He is a leading expert on derivatives, performance measurement, risk measurement, liability driven investment and other quantitative investment techniques. Malcolm is a Fellow of the Institute of Actuaries, a Chartered Enterprise Risk Actuary, an Adjunct Professor at Imperial College Business School and a member of the Advisory Scientific Committee of the European Systemic Risk Board.

1.Introduction
2.Systemic risk and the financial system2.1Reasons for adopting broader definitions of systemic risk2.2Reasons for narrowing the definition2.3Interconnectedness and domino effects2.4Hidden vulnerabilities and tsunamis2.5Systemic risk and political risk2.6Systemic risk and societal change2.7Financial stability2.8Procyclicality2.9Macroprudential policy2.10Key takeaways3.Overall features of the financial system3.1What predisposes the financial system to suffer from systemic risk?3.2Financial sector regulation3.3Regulatory capital and economic capital3.4Accounting3.5Tranching3.6Rational and irrational behaviours3.7Key takeaways4.Individual elements of the financial system4.1Banks4.2Insurers4.3Pension funds4.4Investment funds4.5Asset managers4.6Shadow banks4.7Securities financing4.8Central counterparties and other market infrastructure elements4.9Governments / sovereigns4.10Sovereign wealth funds and other long-term unconstrained investors4.11Credit rating agencies etc.4.12The physical ecosphere4.13Non-financial firms and the rest of the real economy4.14Key takeaways5.Measuring systemic risk5.1Conceptual components5.2Risk analytics proposed by academics5.3The cloning property5.4Risk analytics used by policymakers5.5Data and IT system requirements5.6Key takeaways6.Designing and implementing macroprudential policy6.1The history of macroprudential policy making6.2Longer-term implications of increased focus on macroprudential policy6.3Differentiating between macroprudential, microprudential and monetary policy6.4Banking sector macroprudential policies6.5Identifying systemically important firms6.6Central clearing6.7Key takeaways7.Network effects and societal shift7.1Cyber risk7.2Entrepreneurialism versus conservatism7.3Interconnectivity and knowledge sharing7.4Can advances in IT `solve' systemic risk?7.5Interpreting the concept of `fairness'7.6Key takeaways8.Responding to systemic risk8.1Broad regulatory trends8.2Managing the interaction with regulators and supervisors8.3Data management activities8.4Risk modelling8.5Risk management and governance8.6Systemic risk officers8.7Responding to changes in market structure8.8Key takeaways