Financial Stability MonitoringTobiasAdrianDaniel CovitzNellieLiangDiscussion byHong Yan
Financial Stability Monitoring Tobias Adrian Daniel Covitz Nellie Liang Discussion by Hong Yan
What Does This Paper Do?Identifies sources of systemic risk that could destabilize the financialsystemAframeworkthatdistinguishes shocks(exogenous)andvulnerabilities(endogenous)- Vulnerabilities include leverage, maturity mismatch, interconnections,complexity and riskprices.SIFIs, shadow banking, asset markets and nonfinancial sectorsDevelops preemptive policies to promote financial stability- Focusing on mitigating vulnerabilitiesBuilds on a solid foundation of voluminous research, including theirown
What Does This Paper Do? • Identifies sources of systemic risk that could destabilize the financial system – A framework that distinguishes shocks (exogenous) and vulnerabilities (endogenous) – Vulnerabilities include leverage, maturity mismatch, interconnections, complexity and risk prices • SIFIs, shadow banking, asset markets and nonfinancial sectors • Develops preemptive policies to promote financial stability – Focusing on mitigating vulnerabilities • Builds on a solid foundation of voluminous research, including their own
ImportanceoftheSubject: The global financial crisis revealed multiple vulnerabilities inthe financial systems worldwide, with the one in the US mostdominant.The Dodd-Frank Act and other reform measures still leavemuch to be desired. There need to be a systematic and logic assessment that is basedon objective research and free of political influence The relevance of the findings is found not only in the US, butalso in other economies, including China
Importance of the Subject • The global financial crisis revealed multiple vulnerabilities in the financial systems worldwide, with the one in the US most dominant. • The Dodd-Frank Act and other reform measures still leave much to be desired. • There need to be a systematic and logic assessment that is based on objective research and free of political influence • The relevance of the findings is found not only in the US, but also in other economies, including China
Comment l: The Role of the Price of Risk: While other measures of vulnerabilities are essentially firmlevel choices, the price of risk is not.The price of risk is a barometer of the macroeconomic andmarket conditions, and an indicator of the level of the systemicrisk.It is endogenously determined by the marketIt is time varying, has multiple components and are measuredwith a varied degree of precision.I am not sure if it should be part of vulnerabilities
Comment I: The Role of the Price of Risk • While other measures of vulnerabilities are essentially firmlevel choices, the price of risk is not. • The price of risk is a barometer of the macroeconomic and market conditions, and an indicator of the level of the systemic risk. • It is endogenously determined by the market. • It is time varying, has multiple components and are measured with a varied degree of precision. • I am not sure if it should be part of vulnerabilities
Commentll:PreemptivePolicies: Preemptive policies should be dynamic, not static Think of option hedging-Inefficiencies of static policies- Difficulty in implementing dynamic policiesUnintended consequences of policies- Example: CDS and bank risk taking (Shan, Tang and Yan2014)
Comment II: Preemptive Policies • Preemptive policies should be dynamic, not static. – Think of option hedging – Inefficiencies of static policies – Difficulty in implementing dynamic policies • Unintended consequences of policies – Example: CDS and bank risk taking (Shan, Tang and Yan, 2014)