ECB Gertrude Tumpel-Gugerell: recent advances in modelling systemic risk using network analysis
08 October 2009
The European Systemic Risk Board will be established with the mandate to map financial risks and their concentration at the system level for the macro-prudential supervision of systemic stability.
She pointed out that the recent financial crisis has underscored the need for policy-makers and regulators worldwide to track systemic linkages. Network analysis offers a highly relevant tool for addressing this challenge. Its focus on interconnectedness and on systemically important market players makes it especially relevant for the assessment of the fragility or resilience of the financial system as a whole. By applying network theories we can benefit from the important progress made in other sciences to monitor and assess systemic risks, direct and indirect linkages, vulnerabilities and contagion. This is because networks allow us to look beyond the immediate “point of impact” of a shock, hence, also to the spillovers likely to arise from interlinkages in the system. Thus, network analysis can undoubtedly provide useful guidance for the analysis of systemic risk and can be a key tool for the future analysis of such risk.
The European Systemic Risk Board will be established with the mandate to map financial risks and their concentration at the system level for the macro-prudential supervision of systemic stability. The mandates of other supranational institutions and fora, such as the IMF and the Financial Stability Board, also refer to network aspects of the financial system that have become apparent during the current crisis and which should be taken into account in order to obtain new measures of financial fragility.
Interlinkages within the financial system are nothing fundamentally new. However, business strategies developed by financial institutions over the last 20 years and financial innovations have made the system much more interconnected, complex and opaque than it was in the past.
Policy-makers and regulators of today will be judged in the future on the basis of the regulatory measures and analytical tools they have applied to address the root causes of the crisis. A key challenge is to transcend a purely national or sector-specific perspective and to take an approach that matches the global nature of financial networks. A key prerequisite for network analysis as a surveillance tool remains, however, the availability of relevant data. This holds true especially on a cross-border basis, but also at bank level. Going forward, regulators and overseers should continue to develop ways to systematically collect and analyze data. The crisis has clearly demonstrated that data confidentiality must not stand in the way of improvements in systemic risk analysis and assessment by policy-makers.
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