Regulatory Tools Too Focused on Individual Company Risks

Regulatory tools to assess risk in the financial sector focus too much on individual companies, according to a new report from HEC Paris business school.

While regulators have been working to identify systemically important financial institutions, they should be focusing more globally, the researchers say, as resilience of the financial system as a whole is what matters.

Reviewing academic papers on systemic risk, the report identifies a gap between methodologies of risk assessment:

• The first studies different sources of systemic risk in isolation, using confidential data and targeted regulatory tools.
• The second approach uses market data to produce global measures not directly connected to any particular theory but which could support more efficient regulation.

The researchers recommend regulators collaborate with academics to create risk measures that combine various sources of information—including balance-sheet data, proprietary data on positions and market data—as well as regulators’ assessments of banks’ interconnectedness and riskiness.

For the full report, see “Does danger still lurk in the banking system?“