Financial regulation and Systemic Risk: 10 years after Lehman?

6 février 2019

This one-day event bring together leading researchers to get their perspectives on these important issues and present  their outlook on financial regulation and systemic risk.

10 years after the Lehman collapse and the financial crisis of 2008, what have we learned about monitoring and regulation of systemic risk in the financial system? What is the major impact of the financial reforms undertaken since 2008 on the stability of the financial system? Is the financial system currently safer than in 2008


TOPICS discussed during the conference:


10 years ago, the worst financial and economic crisis of the post-war period erupted, fueled by the Lehman Brothers collapse. The excesses in US real estate markets, which had become increasingly apparent during the preceding months, triggered the collapse of the US mortgage market and culminated in the international financial crisis. During the following years many other markets went toxic: there was the Irish real estate and banking crisis, the Spanish real estate and banking crisis, the turbulence in the European financial system, the crises in corporate lending by Greek and Italian banks, the sovereign debt crises in Southern Europe, the crisis in the shipping sector and among the banks specializing in the ship finance.

The first part of the presentation started with the analyses of Prof. Darrell Duffie (Stanford University) with his speech concerning the companies «No longer too Big to Fail»

He presented his report with a brief assessment of the post crisis regulatory reform of the financial system.

In the United States, the most toxic systemic financial firms were investment banks that relied heavily on run-prone wholesale short-term financing of their securities inventories. A large fraction of this funding was obtained from unstable money market mutual funds. A substantial amount of this money-fund liquidity was arranged in the overnight repo market, which was discovered by regulators to rely precariously on two U.S. clearing banks for trillions of dollars of intra-day credit. The core plumbing of American securities financing markets was a model of disrepair.

One of the main target of the regulatory reform is to improve the competitiveness of financial markets, with a focus on off-exchange trading. The legacy structure of over-the-counter (OTC) markets has represented an inefficiently low degree of competition.

So as Prof. Duffie aligned, for each member of the G20 nations, the FSB summarized progress within “four core elements” of financial-stability regulation:

  1. Making financial institutions more resilient.
  2. Ending “too-big-to-fail.”
  3. Making derivatives markets safer.
  4. Transforming shadow banking


I will sum-up all 4 ideas presented:

  1. In order to make the financial institutions more resilient, few regulations were put in place. For example thanks to Basel III the capital and liquidity cushions of the largest financial institutions are significantly higher than their pre-crisis levels. As an example the average Common Equity Tier 1 (CET1) capital ratios of the six largest U.S. bank holding companies (BHCs) has been introduced by D.D. It has increased from typical pre-crisis levels of 7% to 7.5% of risk-weighted assets to over 12% during 2015. In addition to conventional requirements governing capital relative to risk weighted assets, Basel III includes a minimum “leverage ratio,” of capital to total (not risk-weighted) assets.
  2. In order to end the “too big to fail” matter, Governments have therefore asked their regulators to be in a position to safely resolve a systemically important firm’s impending failure without deploying government capital.
  3. The big work on reducing the systemic risk of derivative markets were done recently to make this market safer, and some part of it is still in process. In the U.S., the majority of standard over-the-counter (OTC) derivatives are now centrally cleared by regulated clearing houses.


As per D.D., the FSB has designated over-the-counter derivatives as one of the priority areas for implementation monitoring. Some progress continues to be made in enhancing the regulatory frameworks for TRs (Trade Repositories) and CCPs (Central Counterparties), including in cross-border aspects such as deference decisions in relation to CCPs, and in setting expectations for their sound design and operation consistent with the Principles for Financial Market Infrastructures (PFMI) by the Committee on Payments and Market Infrastructures (CPMI) and International Organization of Securities Commissions (IOSCO).

These specific areas concern also  the identification of potentially duplicative or conflicting requirements regarding the clearing obligation, reporting obligation, non-financial counterparties and risk-mitigation techniques for OTC derivative contracts not cleared by a CCP.

Also trade reporting requirements are most prevalent for interest rate and foreign exchange derivatives transactions. There were 34 TRs (or similar infrastructures) operating in FSB jurisdictions as of September 2018, 9 of which were authorized in multiple jurisdictions.

  1. A financial-stability transformation of shadow banking is hampered by the complexity of non-bank financial intermediation and by the patchwork quilt of prudential regulatory coverage of the non-bank financial sector.

Prof. Duffie also insisted, that In order to have a high level of competition, market needs to improve the post-trade transaction to make it more comprehensive for the market participants. Post-trade price transparency was mandated for the U.S. corporate bond market in the form of the Transaction Reporting and Compliance Engine (TRACE). Until post-trade transactions reporting is more effectively amplified by the full implementation of MiFID, buy-side participants in Europe’s OTC markets will not have effective post-trade price transparency.

In 2011, Prof. Duffie proposed a new method to assess the systemic risk using stress test results. While not strictly a systemic risk model, this method is described in a recent publication from the Office of Financial Research (OFR), and an earlier version of his paper was included in a bibliography published in 2011 by the OFR.

In the proposed method, more properly called the N × M × K approach, a regulator identifies N as a financial institution deemed systemically important and applies M stress tests to each. These institutions then report their total gain or loss for each test, together with their K largest (in magnitude) gains and losses with respect to particular counterparties, which they must name.

During the conference we have the general presentation on what is the stress testing, defined generally as an analysis conducted under hypothetical unfavorable economic scenarios, such as a deep recession or financial crisis, designed to determine whether a bank has enough capital to withstand the impact of adverse economic developments. We have discussed 2 types of stress tests and the impact of its results.

The advent of mandatory daily initial and variation margin requirements for non-cleared over-the-counter derivatives transactions has raised many questions regarding the methodology which should be used for computing these margin requirements. Regulatory guidelines require initial margin levels for non-cleared contracts to cover a 99% loss quantile of the netting set over a horizon of 10 days, as opposed to 3 to 5 days for cleared OTC contracts. During the conference, we discussed the rationale behind this and other features of the proposed framework for bilateral margin requirements and advocate an approach which better reflects the actual exposure during closeout in case of the default of a counter party.


Regulators worldwide are working to reduce risk in financial markets, and banks are at the center of these efforts. As banks work on managing priorities, there will be a ripple effect from the new regulations into the corporate treasurer’s office which will redefine its banking relationships

Two new regulatory requirements aimed at the banking industry, but ultimately affecting corporate banking relationships, are the Supplementary Leverage Ratio (SLR) and the Liquidity Coverage Ratio (LCR). Both introduced by the Basel Committee on Banking Supervision (BCBS), these ratios will have an impact on a bank’s decision to take on assets (i.e., loans) and manage liabilities (i.e., cash deposits).

On my opinion, this conference is a good way to look at the past via the “prisme” of the different analyses, reforms and regulations adopted due to world crises.


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