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Systemic Risks in Global Banking

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Document TypeGeneral
Publish Date09/04/2011
Author
Published ByInternational Monetary Fund
Edited ByTabassum Rahmani
Uncategorized

Systemic Risks in Global Banking

The recent financial crisis has shown how interconnected the financial world has become. Shocks in one location or asset class can have a sizable impact on the stability of institutions and markets around the world. But systemic risk analysis is severely hampered by the lack of consistent data that captures the international dimensions of finance. While currently available data can be used more effectively, supervisors and other agencies need more and better data to construct even rudimentary measures of risks in the international financial system. Similarly, market participants need better information on aggregate positions and linkages to appropriately monitor and price risks. Ongoing initiatives that will help in closing data gaps include the G20 Data Gaps Initiative, which recommends the collection of consistent bank-level data for joint analyses and enhancements to existing sets of aggregate statistics, and the enhancement to the BIS international banking statistics. The global crisis has shown how a shock that originates in one country or asset class can quickly propagate to other markets and across borders. As in the domestic, closed-economy case, the nature of the balance sheet linkages between financial institutions and markets will affect the size of spillovers and their direction of propagation. At the global level, however, financial linkages and channels of propagation are more complex. Much of the data needed for identifying and tracking international linkages, even at a rudimentary level, is not (yet) available, and the institutional infrastructure for global systemic risk management is inadequate or simply non-existent.

This paper highlights some of the unique challenges to global systemic risk measurement with an eye toward identifying those high-priority areas where enhancements to data are most needed. The starting point of systemic risk analysis in a single-country is typically the banking system.2 This is due to banks significant role in financial intermediation and maturity transformation, and their highly leveraged operations. The approach often taken at central banks and supervisory agencies is to identify systemic risks using disaggregated data, including information on the composition of banks’ asset and liabilities, maturity and currency mismatches, and other balance sheet and income metrics. These analyses attempt to capture systemic risks stemming from common exposures, interbank linkages, funding concentrations, and other factors that may have a bearing on income, liquidity and capital adequacy conditions.3 This approach does not, however, directly extend to the multi-country level. At least three additional challenges arise.

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