Linda, can you please tell the Risk Insights’ audience about yourself and your professional experiences?
We thoroughly appreciated you joining us at the New Generation Operational Risk: Americas Congress where you discussed systemic risk. What are the causes of systemic risk and how may they be tackled?
- Interbank Linkages – Chain reaction failures flowing through interconnected institutions.
- Dependence of international, national and economic systems on the financial sector.
- Common shock or reassessment failure – i.e. failure or near failure of one or several institutions from losses originating elsewhere and the reassessment by investors, creditors, and shareholders of other institutions.
- Scarcity of data to capture international dimensions of systematic operational risk.
- Different organizational structures
- Central banks and supervisory agencies differences.
Why is it a high priority to review the regulation and requirements of systemic operational risks?
For chain reaction failures flowing through interconnected institutions it is important that regulation not undermine banks’ incentives to manage and monitor direct causation.
You discussed case studies and past experiences in your presentation, how can we learn from these to better overcome further risks?
- Secure and confidential instant messaging platforms per organization should have been used to drive the market based benchmarks.
- Both big and small (less market dominant) market players must be given an opportunity to contribute by providing data.
- The need for strong regulation and monitoring to prevent collusion is necessary, no room for complacency.
- Initial hints showing manipulation should have been investigated sooner.
2. The 2008 Credit Crisis was a result of banks creating too much money through loans which in turn raised demand for homes causing home prices to go up and eventually homeowners could not pay their loans the banks were at risk of going bankrupt. This further caused a drop in house prices meaning those with loans were overpaying compared to current prices. Those who had borrowed for speculation purposes could no longer pay and had to dispose at lower prices if they were not already repossessed – the bubble burst. In response, the banks limited their lending which caused the economy to spiral down hence the recession. A few lessons learnt are:
- There is no bank that is too big to fail.
- Sometimes it is necessary to allow banks to fail as a disciplinary measure. Rescuing banks is a cost to the public (just as failure is).
- Some regulation is necessary, but not to the extent that banks fail to be free to trade.
- Have a well-defined contingency plan for a crisis as a bank and broader as an economy.
- New regulation comes at a cost – higher capital requirements, implementation of new regulatory requirements, cost of formulating the regulations for supervisory bodies, movement of business to shadow banking which becomes more attractive when formal channels are more regulated.
- Transparency must increase – relating to resiliency plans and soundness as well as products and services offered by financial institutions.
How do you see the role of the operational risk manager changing over the next 6-12 months?