1. Definition of systemic risk and the importance of monitoring it
1.1 Definition of systemic risk
According to Oxford dictionary, systemic risk means a risk of a failure in a whole system, the collapse of certain big banks or financial institutions will cause a systemic risk to the financial system as a whole (Law, 2014).
Systemic risk related to bank failure. In detail, it has three perspectives. First refer to a chain of events, like domino effect(Schwarcz, 2008). Second is loss of confidence in domestic payments system and reduce business activity. Third is the reduction of saving caused by suspect about the liability of financial institutions. The forth is small saver will lose of saving, this …show more content…
Even though preserving stability can avoid the breakdown that could result in health and safety worries. Based on finding from DHS, industries sectors breakdown will causing a weakening impact. Thus it is significant to preserve the stability of these industry sectors when facing pandemic. The goals of regulating systemic risk thus should include both efficiency and stability (Schwarcz, 2008).
The lack of supervision during GFC is its deep-rooted weaknesses. One of the most significant lessons must be learned is systemic risk to the financial system can arise from outside the regular banking system, it is called ‘shadow banking’ (Manalo, et al., 2015)
Based on the definition of shadow bank from Financial Stability Board is credit intermediation involving entities and activities (fully or partially) outside the regular banking system (Manalo, et al., 2015). This banking system cover a wide range of institutions that engage in credit intermediation and maturity transformation outside the insured depository system (Tarullo, 2013). if banks evading regulation by shifting activities to shadow banking. Like in the period to GFC, eventhough banks maintain high leverage, but they still transforming assets into highly rated …show more content…
Shadow banks can broadens access to credit, especially in emerging market economies and improve the efficiency of the financial system (International Monetary Fund, 2014).
However, Shadow banking act similarly to regular banks by taking money from investors and lending it to borrowers, but are not governed by the same rules or supervised (International Monetary Fund, 2014). In addition, their strong interconnectedness with regulated banking sectors. This will rise risks to financial stability, which become clear during the global financial crisis (Manalo, et al., 2015).
While shadow banking is both a boon and a bane for countries, it has strong growth in emerging markets and can reflects stronger economic growth (Manalo, et al., 2015). In the United States, shadow banking represent more than a third of total systemic risk (International Monetary Fund,