New Models of Systemic Risk
New Models of Systemic Risk
Introduction
Operational Risk: Basel II Regulation
New Models of Systemic Risk
Systemic Operational Risk – Extreme Operational Losses
Universal Banking, Universal Cultures
Macro-Cultures
Innovation and Complexity
A Seismic Model of Systemic Operational Risk
Systemic People Risks: Product Mis-selling
Market Manipulation
Legal Risks
Systemic Technology Risks
Regulation of Systemic Risk
Macroprudential Regulation
Microprudential Regulation
Overview
This chapter will provide an introduction to the topic of systemic risk and its regulation. Since the global financial crisis (GFC), banking regulators and academics have extended the traditional, narrow definition of systemic risk to encompass concepts such as interconnectedness and complexity. However, a definition of systemic risk that covers all of the factors that precipitated the crisis is still emerging. This chapter will also describe the debate around the emerging definition(s) of systemic risk and the need for international regulators to address systemic risk.
THE GLOBAL FINANCIAL CRISIS
As demonstrated by the economic hardship following the GFC, systemic risk is especially important in the financial industry because of the knock-on effect on the general economy. In the lead-up to the crisis, however, neither regulators nor the industry appear to have given much consideration to the potential for a systemic banking crisis, possibly lulled into a false sense of security by the newly promulgated Basel II capital regulations, especially those related to credit risk (Friedman and Kraus 2011). However, the systemic crisis did not arise in the traditional credit sector
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