Containing systemic risk

Systemic risk refers to the risk of financial system breakdown due to linkages
between institutions. This risk cannot be assessed by looking at how individual
institutions manage risks but instead requires a full understanding of how the
system as a whole operates. At present, the data available to central banks and
financial regulators are not at all adequate for the task of assessing systemic
risk and the new European Systemic Risk Board needs to address this issue.
There is a lot of exciting ongoing research devoted to measuring systemic risk
and providing signals to regulators as to when and where they should intervene.
However, the tools being developed are still limited in their usefulness. Perhaps
more pressing than the development of these tools is the implementation of
policy measures to make the financial system more robust. These measures
should include higher capital ratios, limits on non-core funding and redesigning
financial systems to be less complex.