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A-Team Insight Blogs

Independent Report Recommends Rethink of Information Highway to Spot the Next Financial Crisis

Two years after Lehman slipped into bankruptcy, the Achieving Supervisory Control of Systemic Risk report, released today by JWG and Paradigm Risk, has found that, while regulatory progress has been made, the infrastructure required to spot the next financial crisis has yet to be effectively implemented. The report, which was commissioned by the Financial Services Knowledge Transfer Network and funded by the UK’s Technology Strategy Board, concludes that in order to tackle systemic risk, improved engagement is required between regulators, the industry and academia.

Following over 30 interviews with representatives from central banks, regulators, supervisors, major investment firms and their trade bodies, standards organisations, technology suppliers and academics, the report identifies sizable barriers and constraints to controlling systemic risk that have yet to be prioritised and resourced by both the regulatory community and the financial institutions that it oversees. This means that the new systemic risk control infrastructure, that would prevent another Lehman-like event, is far from a reality.

Sally Scutt, deputy chief executive of the British Bankers’ Association, commented: “The need to enhance supervisory understanding of systemic risk is one of the big lessons to come from the financial crisis. This report provides a careful evaluation of what went wrong and an invaluable analysis of the much overlooked need to establish efficient and flexible mechanisms to collect and analyse data for systemic risk purposes.”

The report identifies the requirements to secure an appropriate mandate, resource, forum and funding mechanisms for an effective global systemic risk ‘information highway’, which will need to be in place for both the US Office of Financial Research, signed into law 15 July 2010, and the European Financial Services Act, due to pass later this month, to be effective.

David Bennett, chairman of the UK’s Financial Services Knowledge Transfer Network, commented: “To succeed, approaches must be inclusive of the views of central bankers, regulators, international agencies and the academic community. Equally, they must also be capable of being implemented in practice.”

The report proposes a complete rethink, redesign and retooling of the way both supervisors and industry manage and share their risk information and advocates a blueprint for good systemic risk control including:

? The design principles required for a new information road system

? A supervisory information inventory and gap assessment

? An adaptable and future-proof target operating model

? A clear migration path, timeline and governance models

? A transparent assessment of costs, commercial models and tariff measures.

PJ Di Giammarino, CEO of the regulatory think-tank JWG, added: “The central regulatory bodies that are operating with limited resource have not yet been able to engage meaningfully with firm practitioners who face limited incentives to devote the resources required to participate effectively. Not only will the current situation cost billions and distract firms and their supervisors from controlling new risks, it will lead to the development of a control infrastructure that incurs the risk of ‘Garbage In, Gospel Out’ – creating the illusion, but not the reality, of control.”

Peter Bonisch, MD of Paradigm Risk, concluded: “While there is a lot of attention at the moment on the topic of systemic risk following the UK Treasury’s proposals for regulatory reform, the critical issues around information infrastructure are being brought to the table late and there is a risk they will be left behind. Academics, policy makers and supervisors need to engage in meaningful strategy and action planning discussions now – before disconnected approaches are too far down the track to integrate at a global level.”

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