Systemic Risk provides readers with a wide-ranging practical guide to systemic risk in the financial system. It challenges the notion that systemic risk is exclusively about interconnectivities within the financial system, showing that past systemic risk crises have often involved a broader range of vulnerabilities.

It describes how regulators and governments are seeking to manage systemic risk, and how their concerns are driving change in regulatory and business environments across the financial sector. It sets out how firms and practitioners can effectively respond to these changes (covering topics such as data needs, quantification of risk exposures, management disciplines and skillset requirements etc.). It highlights the sources and characteristics of systemic risk and the concentrations of exposures to this risk. It also links systemic risk with other risk disciplines including exploring how systemic risk ties in with liquidity risk and credit risk and how it interacts with central clearing, collateralisation and pricing of derivatives.

Malcolm Kemp is Founder and Managing Director of Nematrian Ltd, a consulting firm delivering services to the quantitative finance and actuarial communities. Previously, he was Director and Head of the Quantitative Research Team at Threadneedle Asset Management, responsible for its portfolio risk measurement and management activities. He is a leading expert on derivatives, performance measurement, risk measurement, liability driven investment and other quantitative investment techniques. Malcolm is a Fellow of the Institute of Actuaries, a Chartered Enterprise Risk Actuary, an Adjunct Professor at Imperial College Business School and a member of the Advisory Scientific Committee of the European Systemic Risk Board.

1. Introduction

2. Systemic risk and the financial system

2.1 Reasons for adopting broader definitions of systemic risk

2.2 Reasons for narrowing the definition

2.3 Interconnectedness and domino effects

2.4 Hidden vulnerabilities and tsunamis

2.5 Systemic risk and political risk

2.6 Systemic risk and societal change

2.7 Financial stability

2.8 Procyclicality

2.9 Macroprudential policy

2.10 Key takeaways

3. Overall features of the financial system

3.1 What predisposes the financial system to suffer from systemic risk?

3.2 Financial sector regulation

3.3 Regulatory capital and economic capital

3.4 Accounting

3.5 Tranching

3.6 Rational and irrational behaviours

3.7 Key takeaways

4. Individual elements of the financial system

4.1 Banks

4.2 Insurers

4.3 Pension funds

4.4 Investment funds

4.5 Asset managers

4.6 Shadow banks

4.7 Securities financing

4.8 Central counterparties and other market infrastructure elements

4.9 Governments / sovereigns

4.10 Sovereign wealth funds and other long-term unconstrained investors

4.11 Credit rating agencies etc.

4.12 The physical ecosphere

4.13 Non-financial firms and the rest of the real economy

4.14 Key takeaways

5. Measuring systemic risk

5.1 Conceptual components

5.2 Risk analytics proposed by academics

5.3 The cloning property

5.4 Risk analytics used by policymakers

5.5 Data and IT system requirements

5.6 Key takeaways

6. Designing and implementing macroprudential policy

6.1 The history of macroprudential policy making

6.2 Longer-term implications of increased focus on macroprudential policy

6.3 Differentiating between macroprudential, microprudential and monetary policy

6.4 Banking sector macroprudential policies

6.5 Identifying systemically important firms

6.6 Central clearing

6.7 Key takeaways

7. Network effects and societal shift

7.1 Cyber risk

7.2 Entrepreneurialism versus conservatism

7.3 Interconnectivity and knowledge sharing

7.4 Can advances in IT 'solve' systemic risk?

7.5 Interpreting the concept of 'fairness'

7.6 Key takeaways

8. Responding to systemic risk

8.1 Broad regulatory trends

8.2 Managing the interaction with regulators and supervisors

8.3 Data management activities

8.4 Risk modelling

8.5 Risk management and governance

8.6 Systemic risk officers

8.7 Responding to changes in market structure 8.8 Key takeaways