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Business & Marketing
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Essay
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English (U.S.)
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Topic:
Systemic Risks
Essay Instructions:
According to the OECD 2001 working definition "Systemic financial risk is the risk that an event will trigger a loss of economic value or confidence in, and attendant increases in uncertainly [sic] about, a substantial portion of the financial system that is serious enough to quite probably have significant adverse effects on the real economy."
The readings in this last week point to the interconnections within our financial systems, and how quickly a stable market can turn volatile and freeze up, as it did recently in March 2020. The Federal Reserve’s quick intervention in providing liquidity calmed markets and signified to Fed commitment to maintaining financial stability.
Review your readings and share with us your perspectives on systemic risks and, from a broader perspective, the continued susceptibility of financial markets and institutions to strong headwinds.
Of course, I personally,would like to hear from regarding the course content and your learning. Your feedback is valuable in improving the course for future students. Thanks
Essay Sample Content Preview:
Systemic Risks and Financial Stability: Lessons from the COVID-19 Crisis
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Systemic Risks and Financial Stability: Lessons from the COVID-19 Crisis
The COVID-19 pandemic, its impact on the economy, and the subsequent disruption of financial institutions highlighted the interdependencies and the possibility of systemic threats emerging. The class readings are informative, showing the experiences of financial institutions, regulators, and policymakers in a crisis. They underscore the need for sound risk management practices and solid regulatory systems.
This paper shows that one of the main insights to be gained from the March 2020 market stress was how easily the financial system can be disrupted by shocks, in this case, in the US Treasury market, which is considered safe and liquid. As the pandemic progressed, investors had to panic sell to deleverage, increasing demand for safe-haven assets such as Treasuries (Heo et al., 2020). However, this unprecedented demand and lack of market depth led to some disruptions in the Treasury market, wherein bid-ask spreads and transaction costs increased sharply.
The Federal Reserve’s timely and forceful action to resume market operations and initiate a range of lending and asset purchase programs was instrumental in normalizing market functioning and avoiding a systemic financial crisis. The readings focus on the fact that the Fed cares about economic stability and will not hesitate to use extra measures. Nevertheless, the COVID-19 crisis also revealed weaknesses in the banking sector, focusing on liquidity risk management. The article by Elliot (2014) made it clear that effective and robust rules of liquidity and risk management should be the main objectives of banks and other financial institutions.
Elliot (2014) continues the overview of bank liquidity requirements, describing the LCR and the NSFR, designed to ensure that banks can meet their liquidity needs during periods of stress. Elliot (2014) also elaborates on how such standardization is regulated since setting very high standards may lead to less credit and, in turn, slow economic development, while setting low standards may increase systemic risk. In his article on exchange-traded and over-the-counter (OTC) markets, Dodd (2012) does a great job explaining the various structures of the mar...
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