MANAGING

SYSTEMIC RISK
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Baby Nina Alfonso

What is Systemic risk?
Following the work of the IMF, FSB
and BIS for the G20, 1 systemic risk
can be defined as
"a risk of disruption to financial
services that is caused by an
impairment of all or parts of the
financial system and has the
potential to have serious negative
consequences for the real
economy."
Systemic Risk vs. Systematic Risk

War Hacked payment system

Systemic Risk vs. Systematic Risk
Systemic risk is generally used in reference to an event that can trigger a collapse in a certain
industry or economy, whereas systematic risk refers to overall market risk.

Systemic risk does not have an exact definition, many have used systemic risk to describe
narrow problems, such as problems in the payments system, while others have used it to
describe an economic crisis that was triggered by failures in the financial system. Generally,
systemic risk can be described as a risk caused by an event at the firm level that is severe
enough to cause instability in the financial system.
On the other hand, systematic risk does have a more recognized and universal definition.
Sometimes plainly called market risk, systematic risk is the risk inherent in the aggregate
market that cannot be solved by diversification. Some common sources of market risk
are recessions, wars, interest rates and others that cannot be avoided through a diversified
portfolio.

Read more: What is the difference between systemic risk and systematic risk? | Investopedia http://www.investopedia.com/ask/answers/09/systemic-systematic-risk.asp#ixzz4cvYhI47P
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Managing Systemic Risk
Six Aspects of Risk Management
Risk forecasting
Communicating risk information
Economic incentives
Private-public partnerships
Reinsurance and other financial instruments
Resilience and sustainability
Managing Systemic Risk
Lesson 1: Promote resilience and sustainability: geography and accounting
Public and private leaders should be aware of the increasing unpredictability of risk and
prepare to face unforeseen challenges with organizational forms.

In practice this means that geography and location of activities need to be given much
greater attention in government and business decision making. The concentation of
economic activity in a small number of critical nodes is raising the prospect of systemic
risk

Ex: Financial institutions backup systems should be distant to each other.

Managing Systemic Risk
Lesson 2: Foster the transparent communication of choices, risks and uncertainties about
policy alternatives to address political and attribution challenges
Transparency is being reduced by the increasing complexity and speed of transactions.
Private and public leaders need to understand this and respond by increasing
transparency.
Communication can also help awareness why resources need to be aside for unlikely
events and unknown risks.

Ex: Higher allocation of funds to military while less than a hundred of the amount to
preventing a pandemic
Managing Systemic Risk
Lesson 3: Improve risk measurement
Double the effort of assessing the cross-sector and cross-border risks.
Improving risk management also implies acknowledging the uncertainties that surround
our calculations. We have to be careful not to be over-reliant on sophisticated risk
measurement and to acknowledge that some risks may still escape our attention.
Managing Systemic Risk
Lesson 4: Rectify Economic Incentives
Government needs to invest in understanding how the incentive and legal frameworks
that they provide shape the decisions not only their electorates but also of citizen around
the world. They need to combine this understanding with the knowledge obtained in
medical research, environmental research or risk measurement and seek to design
incentive schemes that align private incentives with those of the public.

Example: Too low carbon tax may increase the problem rather than providing a
solution
Managing Systemic Risk
Lesson 5: Prepare for contingencies
Design contingency plan and the capacity to respond to unforeseen risks. This includes:
Setting aside resources
Educating risk and disaster management experts
Define contingencies when global political coordination is suddenly required
Managing Systemic Risk
Lesson 6: Define and enforce unified legal responsibilities
Every firm whether it operates from Taiwan, the Cayman Islands or the United States
be held to the same standards in terms of its impact on the global stage. A unified global
legal system would be one way of achieving this.

Example: European competition law, and this could inspire other international rules and
jurisdiction in trade, fax, finance, cyber, and other areas.