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Systemic Risk
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The global financial crisis has brought home to many—particularly in the central banking community—the urgent need for a substantial reassessment of the fundamental workings of financial systems, their interactions with the real economy, and the circumstances that tip such systems from stability to instability. The crisis revealed how rapid financial innovation during an era of prolonged macroeconomic stability had resulted in a highly complex and interconnected system that was inadequately understood by regulators. The derisory investment over the years by central banks in analytical tools for financial stability analysis was also cruelly exposed, as policymakers realized that their existing macroeconomic models were incapable of characterizing the abrupt non-linear adjustments and spillover effects being witnessed at the system level.
In his call for new thinking on financial stability, Trichet (2011) belatedly recognizes these failings, noting how ‘the combination of complexity, inter- connectedness, payments promises in debt contracts, limits of information and basic human behaviour—“animal spirits”—can lead to the violent feed- back and amplification mechanisms that are so typical for the transition from stability to instability’.
Prasanna Gai - Personal Name
1st Edtion
978–0–19–954449–3
NONE
Systemic Risk
Management
English
Oxford University Press Inc
2013
New York
1-147
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