Objective

The overall goal of this two-day workshop is for participants to gain a solid grounding in the causes of systemic risk, underlying economic theory, the correlation of banking system and sovereign risk, and appreciation of the shift in regulators’ attitude to the provision of support. Specifically, the workshop will equip participants to:

• Understand the nature of systemic risk and why the banking system is particularly vulnerable to systemic risk
• Understand the economic context and why there have been numerous banking crises and why the last one was particularly severe
• Overview of key regulatory initiatives to reduce systemic risk
• Recognise the importance of sovereign credit in the support of financial institutions.

Analytical Overview

A structured approach to assessing a company’s cash flow and identifying trade finance requirements

Historical context and review of current crisis.

• Economic theory: why banks periodically fall into crisis

• Market Failure: efficient markets vs. market failure
• Adam Smith and why banks are an exception
• Market failure: Pigou’s concept of “spillovers”
• Leverage and the credit cycle
• Hyman Minsky: 3 stages of the credit cycle

History of system-wide failures and their causes, Tulips to Lehman

Exercise: Analysis of systemic collapse in Argentina Indonesia and Ireland.

Nature of systemic risk

Interconnectedness of banks and other elements of the global financial system

• “Touch points”
• Domino effect: diminution of asset value in one financial institution causes capital erosion in the next
• Roubini’s “transmission” channels of crisis
• How the crisis spread from US sub-prime to French mutual funds, German commercial lenders and beyond
• Pre-crisis distribution theory of systemic risk vs. high correlation reality
• Bank systemic risk indicators
• Exercise: Identifying countries with significant systemic risk.

Identification of systemically important financial institutions (SIFI)

• Official recognition of international systemically important banks
• Identification of national champions
• Will these be moving targets?
• Case study: Risk assessment of a SIFI and the implications of insolvency.

Drivers of banks’ Issuer default ratings

• Viability vs. support ratings
• Exercise: Review of various banking systems ratings - driven by viability or support?

Early warning signs of bank failure

• Financial and non-financial indicators of distress
• Market indicators; equity, CDS and bond indicators
• Exercise: Financial and market indicators of weakening credit in banks.

Getting too big to fail

• Purchases and disposals - an acquisition too far or selling the family silver?
• Case study: Non-financial lessons learned from systemically important failed banks.