Chapters 7 and 8 introduce regulatory regimes in various jurisdictions. Chapter 7 provides an introduction to U.S. financial regulation and the approaches of the various U.S. regulators and introduces the Dodd-Frank Act of 2010. Chapter 8 turns to international regulatory regimes, providing an introduction to several key international regulators and standards that facilitate international approaches and coordination.
Chapters 9–14 explore in detail many elements of how systemic financial risk is managed. Chapter 9 delves into the designation of entities as systemically important, including Systemically Important Financial Institutions (SIFIs), Systemically Important Financial Market Utilities (SIFMUs), and Globally Systemically Important Banks (G-SIBs). Chapter 10 explores the Volcker Rule of the Dodd-Frank Act, which sets prohibitions, requirements, and limitations in relation to the trading and private fund activities of banking entities and systemically risky non-bank financial companies. Chapter 11 provides an introduction to counterparty credit risk, and studies sources of counterparty credit risk and how counterparty credit risk is managed. Chapter 12 explores Title VII of the Dodd-Frank Act, which works to reduce the counterparty exposure faced by participants in the OTC derivatives market through setting mandatory clearing and other requirements. Chapter 13 explores the Basel Accords – multinational accords that set minimum capital requirements for banks – that were established in order to strengthen the soundness and stability of the international banking system. Chapter 14 studies the concept of “lender of last resort,” including its benefits, risks, various views of its function, and its application.
Chapters 15 and 16 tie together the concepts explored throughout this book. Chapter 15 introduces the topic of interconnectedness, explains how this risk manifested itself during the Credit Crisis of 2007–2009, and illustrates the ways in which interconnectedness has become a key consideration in several post-crisis regulatory developments. Chapter 16 looks ahead to the outlook and likelihood of future systemic events and includes a number of recent examples of top systemic concerns as published by several large financial institutions and regulatory bodies.
This book also includes an appendix that provides a detailed taxonomy and literature review of some of the key quantitative models that are used to measure systemic risk in different ways.
To allow you to test your understanding, each chapter concludes with a number of Knowledge Check questions, the solutions to which are provided in the appendix. The Knowledge Check questions can be used to ensure absorption of the material both when you learn the material for the first time and also when you review.
We hope this book provides you with a comprehensive understanding of systemic risk!
Acknowledgments
ML
I'm grateful to my former professors at Pace University's Lubin School of Business for providing me the foundation of scientific research I relied upon when completing this book. A special thanks to my co-author and doctoral advisor, Aron Gottesman, whose guidance and vision was critical to the success of this book. I'm also grateful to many former industry colleagues from whom I learned so much over the years, particularly while working together through some of the financial crises covered in this book. Finally, this book would not have been possible without the tremendous support of my wife, Roseann, and the patience of my children, Jaclyn, Victoria, and Michael.
AG
I am delighted to have had the opportunity to coauthor this book with Michael Leibrock. I have benefited tremendously from Mike's deep practitioner and academic knowledge. Thank you to the team at Wiley. Thank you to my colleagues at Pace University, including Niso Abuaf, Lew Altfest, Neil Braun, Arthur Centonze, Burcin Col, Ron Filante, Natalia Gershun, Elena Goldman, Iuliana Ismailescu, Padma Kadiyala, Maurice Larraine, Sophia Longman, Ed Mantell, Jouahn Nam, Joe Salerno, Carmen Urma, PV Viswanath, Tom Webster, Berry Wilson, and Kevin Wynne, and a special thank-you to Matt Morey. I also wish to thank Niall Darby, Stephen Feline, Allegra Kettelkamp, John O'Toole, Patrick Pancoast, Carlos Remigio, Lisa Ryan, and the entire team at Intuition. Thank you to Moshe Milevsky, Eli Prisman, and Gordon Roberts of York University and Gady Jacoby of the University of Manitoba, who helped spark my career. Thank you to my many students, from whom I've learned tremendously. Finally, thank you to my wife, Ronit, and our children, Moshe and Libby, Yakov, Raphi, Tzipora, and Kayla, for providing so much love and support.
About the Authors
Aron Gottesman is Professor of Finance and the Chair of the Department of Finance and Economics at the Lubin School of Business at Pace University in Manhattan. He holds a PhD in Finance, an MBA in Finance, and a BA in Psychology, all from York University. He has published articles in academic journals including the Journal of Financial Intermediation, Journal of Banking and Finance, Journal of Empirical Finance, and the Journal of Financial Markets, among others. He has also previously authored or co-authored several books including, most recently, Derivatives Essentials: An Introduction to Forwards, Futures, Options, and Swaps (Wiley Finance, 2016). Aron Gottesman's research has been cited in newspapers and popular magazines, including the Wall Street Journal, the New York Times, Forbes magazine, and Business Week. He teaches courses on derivative securities, financial markets, and asset management. Aron Gottesman also presents workshops to financial institutions. His website can be accessed at www.arongottesman.com.
Michael Leibrock is managing director, chief systemic risk officer, and head of Counterparty Credit Risk for the Depository Trust & Clearing Corporation (DTCC). Michael Leibrock currently serves as co-chair of DTCC's Systemic Risk Council and as chair of the Model Risk Governance Committee. He has conducted numerous newspaper and magazine interviews on risk topics, as well as several video interviews on TabbForum.com, which include “Building an Interconnectedness Risk Program” (Dec. 2016), “Unintended Risks of Regulations” (Dec. 2014), and “The Top Systemic Threats to the Capital Markets” (Aug. 2013). Michael Leibrock holds an MBA in Finance from Fordham University and a doctorate in Finance and International Economics from Pace University's Lubin School of Business. He has previously served as an adjunct professor at New Jersey City University and Monmouth University. Michael Leibrock's prior academic research has covered topics such as predictors of bank defaults, sovereign default analysis, and a doctoral dissertation titled “Systemic Risk and an Extension of the Black Scholes Merton Option Pricing Model for U.S. Banks.”