The IMF has released a working paper on Systemic Risk Monitoring detailing the policy options and methodologies available to regulators to accurately measure systemic risk. The problem is that, although touted as being a practical guide, none of the options given are a solution to the problem of “how can we measure systemic risk?”
“The toolkit “provides “how-to” guidance to select and interpret monitoring tools; a continuously updated inventory of key categories of tools (“Tools Binder”); and suggestions on how to operationalize systemic risk monitoring, including through a systemic risk “Dashboard.” In doing so, the project cuts across various country-specific circumstances and makes a preliminary assessment of the adequacy and limitations of the current toolkit.”
However, the IMF admits to such in the conclusion “The incomplete nature of the toolkit highlights the need to avoid mechanistic, or narrow, approaches to systemic risk monitoring…policymakers should not be led to believe that some quantitative approaches (e.g., stress tests or crisis prediction models) are all in one tools for systemic risk assessment”
Whilst such a critique of systemic risk analysis options is no doubt necessary, it is unhelpful. The key problem remains that systemic risk models can only function when they have access to data that is both adequately complete and also comparable. Regulators still don’t have this information.
Despite the thousands of data points collected by regulators across the globe today, there is no agreed regulatory data architecture in place. Financial and technological innovation continually shifts the goal posts on what information is required. As big market infrastructure changes and hundreds of new data intensive rules are implemented, there is little time for the development of appropriate standards that allow information to be aggregated and compared.
While new capital and liquidity buffers have been built into the system (Basel III) and control points have been mandated (e.g., OTC derivatives clearing on exchange), risk reporting requirements have been defined by country without the definition of standards that are required to make the information mutually intelligible across borders.
The IMF mentions that “Longstanding data gaps remain an obstacle to assessing key systemic risk components, including interlinkages and common exposures, which is increasingly problematic in light of the growing complexity of financial crises.”
Efforts by the Financial Stability Board and the BCBS have been directed at filling these data gaps (such as the common data template and the LEI), but they need the IMF’s help in defining the optimal path forward. We have yet to see, for example, the IMF recommendations on the application of the Legal Entity Identifier (LEI) in systemic risk analysis (which is one of its main reasons for existing).
The IMF toolkit, without providing clear directions on a path forward, will distract firms and their supervisors from controlling new risks and leads to the development of a fragmented control infrastructure that incurs the risk of Garbage In, Gospel Out’ (GIGO) – creating the illusion, but not the reality, of control.
Emphasis needs to be placed on the alignment of objectives, measures, tools and data collection efforts between national supervisors and supranational entities mandated to monitor systemic risk across the global system. Providing more options for regulators to pick and choose, as the IMF seems to be doing, is not the answer.