Written evidence submitted by Peter Bonisch,
Managing Director, Paradigm Risk, and PJ Di Giammarino, CEO, JWG
EXECUTIVE SUMMARY
1. We have recently completed a major, independent
review of systemic risk. Our comments are informed by that review
activity.
2. Although not addressed by our recent
review, we believe Treasury Committee can and should play a vital
role by ensuring the relevant agencies, principally HM Treasury,
the Bank of England and the Financial Services Authority, identify
appropriately their respective functions and objectives for supervisory
control of systemic risk and that any preconceptions are identified
and, if necessary, challenged.
3. The focus of the Treasury Committee on
this area in the domestic policy agenda is also critical to ensure
it receives, at official level, the attention it needs and deserves.
While European oversight of systemic risk is under development,
each European Member State must translate European law and Level
2 guidance to domestic law. Also, as Europe's largest financial
centre, London's contribution, officially and from its financial
firms, will be vital to ensuring Europe adopts a robust, effective
and internationally compatible framework for systemic risk supervision.
4. In its consultation paper, HM Treasury does
not distinguish systemic risk from other macroprudential issues.
However, we believe there are substantial issues that pertain
uniquely to systemic risk (as opposed to macroprudential issues
more broadly) that makes its separate and active consideration
vital for effective policy formulation.
5. Whilst we have not had the opportunity to
discuss these matters with HM Treasury (despite repeated attempts
to do so), we are confident that the issues we raise in this submission—and
the distinction between systemic risk and other macroprudential
issues—are understood in some functions at the Bank of England
and Financial Services Authority.
6. Without active and separate attention to
systemic risk issues by Parliament (through the Treasury Select
Committee) and HM Treasury, it is possible that the Bank of England
will not be afforded the latitude, priority or resources to put
in place the range of activities, modelling approaches and other
solutions it will require to supervise and attempt to control
systemic risk.
7. A roadmap for development of a global or
globally compatible approach to systemic risk supervision is urgently
required at international, regional and national level. In the
UK, the regulator should, after consultation and collaboration
with financial firms, develop and promulgate a regulatory data
architecture to improve firms' regulatory data management and
its own use of supervisory data. This should include mandating
the development of a standard regulatory data taxonomy for the
UK; we also advocate this for other jurisdictions.
8. Considerable and potentially divergent research
is required on the problems of systemic risk. This will need to
be inter-disciplinary and involve an unprecedented level of cooperation
and collaboration between financial firms, regulators, supervisors
and academics of different `stripes'.
9. At present, firms and representative trade
bodies have not been engaged in the debate on systemic risk issues.
Their understanding and engagement will be essential. Unlike monetary
policy interventions, systemic risk interventions will not treat
all firms equally and evidential standards for intervention will
be considerably greater. If the regulatory logic on systemic risk
is not sound and communicated effectively, firms are likely actively
to challenge supervisory action.
10. Structural solutions, which are at the heart
of the HM Treasury's consultation paper, are less important than
conceiving and describing realistically the challenges of systemic
risk supervision and developing suitable information sources to
inform supervisory decision-making (whoever undertakes the role).
It is more important that this be done well than quickly.
BACKGROUND
11. In May 2010, Paradigm Risk and JWG began
a project to research the practical issues of systemic risk. The
research, part-funded by an award from the Technology Strategy
Board, was undertaken in collaboration with the Financial Services
Knowledge Transfer Network who commissioned the project at our
suggestion.
12. In this submission, we are representing
only the views of the authors of the report: Peter Bonisch of
Paradigm Risk and PJ Di Giammarino of JWG only. We do not represent,
nor do we wish to appear to represent, the views of any other
party.
13. Our research, which will be published
this week, has involved dozens of interviews with officials from
the UK, Europe, the US and some other jurisdictions, international
regulators, academics, trade bodies and financial sector firms.
We have reviewed hundreds of official and academic papers and
validated our findings with officials and firms.
14. The focus of our work was initially
purely practical: what "pipes and plumbing" would be
required to develop and implement a robust and effective platform
(ie system, infrastructure and capabilities) for supervisory control
of systemic risk. However, as we have gone through the exercise
of our review, we have found that there are more fundamental issues
that are yet to be resolved, or in some cases even to be properly
identified and addressed, before an effective supervisory solution
can be described.
15. Our work has borne extensively on the
issues discussed by the July 2010 Consultation Paper by HM Treasury
titled A New Approach to Financial Regulation: judgement, focus
and stability. Accordingly, and in the interests of promoting
effective public discourse on these vital issues, we have sought
to present our ideas to your Committee.
16. Our views are not without contention
or controversy. Many of the issues we raise are well accepted
by academics and officials alike. However, by no means all of
our views have been accepted universally. One of the more noteworthy
aspects of our review has been that, in the interviews and extensive
review we have conducted, we have found very little alignment
of views on any of the key issues of systemic risk other than
the necessity of addressing it.
17. A significant part of our representation
to your Committee is that, in the field of systemic risk, the
notion of a single, accepted solution is both illusory and dangerous;
we will be better off allowing and accepting both disagreement
and debate about systemic risk and creating supervisory structures
which allow and encourage such debate to be open, transparent
and participatory. We are not convinced that the proposals of
HM Treasury achieve these objectives. But nor do they preclude
achieving them.
18. While we have views on the aspects on
the HM Treasury's consultation outside financial stability, it
is on those that our recent, extensive research has been undertaken.
In our submission, we will limit ourselves to comments on that
area (largely in chapter 2 of the HM Treasury Consultation Paper).
A SERIES OF
QUESTIONS
19. We have structured this submission as
a series of questions to assist the Committee to understand the
challenges we are raising.
What is systemic risk and why is its definition
important?
20. It is clear that the focus of government
agencies prior to the financial crisis was in the wrong place.
The consultation paper by HM Treasury (hereafter HMT) concedes
that:
"... one important lesson from the financial
crisis has been that insufficient attention was paid to the systemic
or aggregate risks that built up in the financial sector. Regulation
was excessively focused on individual institutions, and recent
experience has exposed the limits of this approach—because
of the intricate linkages within the financial sector, even institutions
that seemed to be in good health came close to collapse."
(HMT, para 2.5)
21. This draws a clear distinction between
supervising financial sector firms and supervising the financial
system. The problem created by financial institutions, and the
logic of intensive and invasive regulation of the financial sector
(ignoring consumer protection), is the externality caused by the
potential contagion effect of the failure of a highly levered
financial firm. The focus on reducing the probability of individual
firms' failure was misplaced, as the only valid concern to regulators
(other than consumer protection) was the broader impact of the
failure on the financial system. It is apparent that the regulator
and supervisor—the Financial Services Authority (FSA)—substantially
lost sight of this key objective.
22. There is an extensive definition of
systemic risk in our report, and we will not cover it in detail
here. However, in considered systemic risk, we consider it essential
to differentiate the following:
— Systemic focus relating to the financial
network and interconnectedness of financial firms; and
— Resolution focus (at firm level).
We reproduce the distinction in an Attachment
to this submission, for your reference.
23. The key insight is the distinction between
macroprudential focus, which includes counter-cyclical capital
buffers, lending limits, collateral requirements and other tools
indicated by HMT in Box 2.C, and systemic focus which considers
the interconnectedness of the financial network and behaviours
of firms in that network. Importantly, firms' behaviours may give
rise to properties which emerge unpredictably from their interaction
and create supervisory challenges entirely separate from those
which may be considered macroprudential issues (using our narrower
definition thereof).
What has HM Treasury proposed?
24. The HMT proposal advocates a Financial
Policy Committee (FPC) as a committee of the Court of Directors
of the Bank of England, with representation from the CEO of the
Prudential Regulatory Agency (PRA) and HM Treasury. The FPC will
four have external representatives.
25. The HMT proposal assigns the following
objective to the Financial Policy Committee:
— to protect financial stability by:
— improving the resilience of the financial
system by identifying and addressing aggregate risks and vulnerabilities
across the system; and
— enhancing macroeconomic stability by
addressing imbalances through the financial system, eg by damping
the credit cycle (HMT para 2.24).
26. The HMT paper advocates a range of policy
tools that are macroprudential in focus (relating to the latter
objective). However, the HMT paper is silent on interconnectedness
and does not discuss systemic or network characteristics of financial
firms. This is a surprising and unhelpful omission.
27. The key difficulty with the omission
is that much of the uncertainty in the official and academic communities
over the future direction of financial system regulation relates
to interconnectedness rather than macroprudential elements. By
failing to address interconnectedness, the HMT paper:
— fails to address a critical area of the
debate on financial sector regulation;
— represents the state of that debate as
far more settled than, in reality, it is or should be; and
— fails to address, and thus to prioritise,
the essential building blocks of any viable solution to the supervisory
control of systemic risk as distinct from other macroprudential
challenges.
28. There remain significant areas of uncertainty
at all levels of the debate over systemic risk—at official,
academic and regional and international regulatory levels. Key
to these are:
— the appropriate approach to understanding
the risks posed by the interconnectedness of financial institutions
and their behaviour—the methodological question;
— how the various international supervisors
can or will collaborate—the governance question; and
— how to create an environment in which
information required to be consolidated analytically can be brought
together comparably—the data standards question.
29. None of these issues is addressed, or
even raised, by the HMT paper, except to refer to the need for
international collaboration at para 1.12. All (and many more)
must be resolved before a satisfactory supervisory solution to
the systemic risk problem will be possible.
How do the HM Treasury proposals differ from what
was there before? What has changed?
30. The proposed structure differs very
little from its ineffective predecessor, the Tripartite Agreement.
The same institutions will be represented, often by the same people.
While there will be a lead responsibility assigned to the Bank
of England, the machinery will be fed by the same information
sources.
31. However, the more important message:
the Government believes a regulatory structure
is needed in which both aspects of regulation—monitoring
firms on a collective and an individual basis—are brought
together (HMT para 2.16)...
...is undeniably true. Also, the salience of
the issue of system failure suggests that the individuals and
institutions that were not properly attentive to the issue previously
(by their own admission) are unlikely to make the same mistake
again, at least for some years. However, the approach applied
must be robust and also adapt over time to changing conditions
and knowledge.
Will the HM Treasury proposals be effective? If
not, why not?
32. In its paper, HM Treasury states:
The Government believes that abolishing the tripartite
system, and placing a single authority, the Bank, at the centre
of the framework for preserving financial stability is the single
most important reform needed to the UK financial regulatory system.
(HMT para 2.25)
If that is the case, "the Government"
is emphasising organisational arrangements ahead of the substantive
conceptual and analytical challenges of financial stability and
systemic risk; our emphasis would differ. For the reasons suggested,
this organisational reform, while valuable, is far from being
the most important that can, or should, be made. Far more important
substantive reforms are needed, as noted above, around methodology,
international governance and data standards. The substantial commitment
in the US Dodd-Frank Act of the funding and development of an
Office of Financial Research to address systemic risk indicates
that international approaches are already diverging. Once established,
divergent supervisory data structures and data compiled with different
underlying standards will be difficult to reconcile.
33. In terms of what the FPC can and will
do, the HMT paper acknowledges:
These macroprudential tools will be relatively
untested, and there will inevitably need to be an initial learning
process to adapt and fine-tune them.
It then continues:
Setting out the tools in secondary legislation
will allow the Treasury, in consultation with the FPC, to easily
adapt the tools to any lessons learnt in this initial period,
as well as periodically assess the suitability of the macroprudential
toolkit, and to incorporate any international developments in
macroprudential regulation. (HMT para 2.36)
34. The lack of concession of the uncertainty
of efficacy of systemic risk supervision specifically and macroprudential
supervision more generally is unsurprising but disquieting. The
reality is that, especially in the area of systemic risk supervision
and control, there is no certainty that a solution can or will
be found that will be operable. Certainly, without considerable,
focused and explicit attention to the issues, limited progress
is likely. The HMT paper does not offer such attention nor does
it explain how it will arise. While officials of HM Treasury may
have determined a suitable course of action, that is not evident
from their consultation paper.
35. The HMT paper states:
The majority of the macroprudential tools that
are being considered involve the use of classic microprudential
levers (such as capital requirements and leverage limits) for
a macroprudential purpose. Therefore the legislation will stipulate
that the PRA will be required to implement the FPC's decisions
on the use of its macroprudential tools by applying them across
all relevant firms. (HMT para 2.37)
36. While this may be true of macroprudential
tools (as we have narrowly defined them), the HMT paper is silent
on systemic risk tools. As yet, it is far from clear that precluding
supervisory direction at individual firm level to reduce systemic
interconnectedness is wise.
37. The HMT paper states:
The transparency and accountability mechanisms
for the MPC are considered a critical part of its success and
credibility. The Government intends to recreate, as far as possible,
these mechanisms for the FPC. (HMT para 2.52)
There is a clear need for the FPC to deliberate
behind closed doors. However, by publishing the Financial Stability
Review (as it has, under one title or another, for more than a
decade), the Bank of England already acknowledges the need to
discuss openly and frankly issues of financial stability and systemic
risk openly and frankly. In terms of methodology, there is a need
for considerably greater transparency than is afforded under the
current MPC arrangements. Indeed, there is unlikely to be one
model or a single set of inter-operable models that will afford
the official deliberative and decision body (we continue to refer
to it as the "FPC" for convenience) sufficient insight—there
will be no one "right answer" or, as we refer to it,
no single-point solution.
38. We believe there is a need to design
model plurality into the systemic risk supervisory framework through
the FPC—recognition that multiple, contending models will
be required and that there will need to be a basis for selecting
potential models (or modelling exercises driven by empirical data),
sourcing and accessing relevant data, validating results, assessing
their utility, and comparing their results. The HMT paper is silent
on all these issues, which our research suggests are essential
for an effective systemic risk supervisory solution.
39. By itself that is not a concern. The
Bank of England officials to whom these tasks will be assigned
are all, as far as we have been able to ascertain, capable and
diligent and would probably approach the task in the way we advocate.
However, unless these considerations are "baked in"
to their mandate, they may not be given the latitude, priority
or resources to pursue them.
40. More concerningly, unless Parliament,
through your Committee, understands these challenges, the Bank
of England officials will not have the resources or encouragement
to pursue actively, with financial sector firms and relevant academics,
potentially divergent solutions to the challenge of systemic risk.
Without an appreciation by your Committee and HM Treasury of the
methodological difficulties involved, they will not enjoy the
patience of your Committee and HM Treasury to debate these complexities
openly with policy makers, academics and sector firms.
What would we propose that differs from HM Treasury's
proposal?
41. In our report, we propose actions for
all parts of the puzzle:
— for politicians, regulators and supervisors,
which are shown below;
— for investment firms, their suppliers,
trade bodies and technical associations; and
— for the research community, academics
and funding agencies.
We attach the summary of the report from our
recent review for your reference.
42. However, there are five themes we would
like to bring out that deserve the attention of the Committee:
— Multi-disciplinary solutions are needed.
— Supervisory collaboration with firms
is essential.
— Focus of funding of research must reflect
the need for sector engagement and multi-disciplinary research
efforts.
— Attention to international standards
for reference data is an essential building-block of effective
systemic risk control.
— Resources need urgently to be applied
to development of a regulatory data architecture and a blueprint
for systemic risk control.
We address each of these briefly.
Multi-disciplinary solutions
43. At present, many economic commentators,
including leading members of the international academic economics
"orthodoxy", contend or acknowledge that orthodox economics
has not provided a satisfactory path for policy-making or supervision
in systemic risk. Her Majesty, The Queen, received partial acknowledgement
of this in response to a visit to one of the UK homes of economic
orthodoxy, the London School of Economics. There is a need for
extension of economic models and disciplines to acknowledge variously
complexity, model agent behaviour and feedback systems in financial
markets—the model pluralism we advocate, and to place data
(observed reality) before models (which greatly simplify that
reality). As a UK statistician, George Box, once observed: "all
models are wrong but some are useful". Far greater emphasis,
from a range of disciplines, needs to be paid to conditions of
model utility and to the data which is needed to define and test
those models.
Sector engagement
44. To date, financial sector firms have
been left out of the debate on systemic risk. While there is no
usual organisational home for systemic risk (ie no clear function
responsible for it—it is the result of an externality),
engagement of firms is not a luxury but a necessity. First, any
additional data will be required to be sourced from either from
sector firms, data aggregators or market operators. Secondly,
an entirely conceivable approach to systemic risk—one under
active consideration by international regulators—is the
application of an additional capital charge or "add-on"
relating to a firm's contribution to systemic risk. The standards
of evidence for this will be—or should be, anyway—far
higher than for economy-wide measures (this same evidential point
holds true for macroprudential intervention also). Firms will
be impacted differentially by such measures and their collaboration
and co-operation will be essential to avoid dissent, conflict
and the possibility of litigation.
The focus of funding
45. Much funding for academic research focuses
on ranking of research based on venue of publication. We have
heard considerable criticism of this approach both from with the
academic economics and from the financial services sector. Although
we have not reviewed funding formulae, we believe that there is
insufficient engagement between firms and academics, academic
and regulators, and regulators and firms. Also, where such engagement
occurs, multi-disciplinary or inter-disciplinary research is rare.
All sector participants have impressed upon us the need for incentives
for research and for participation in research initiatives to
be refocused towards greater interaction between sectors and disciplines.
International data standards
46. At present, there are no uniform international
standards for reference data. As a result, a counterparty (say,
Vodafone plc, just as an example) may mean different things to
Barclays Bank (Sao Paolo) Limited and Mitsubishi UFJ Financial
Group's Singapore subsidiary. Furthermore, even within financial
groups, one of our firms, JWG, has found in a recent survey of
data standards that there are considerable discrepancies in reference
data standards among major financial sector firms. For data to
be comparable between regulated entities and internationally—an
essential component of any internationally integrated systemic
risk supervisory regime—these data standards must be aligned.
Regulatory data architecture and systemic risk
blueprint
47. Despite the enormous information and
reporting loads placed on UK firms (and firms in all comparable
jurisdictions), the regulator and supervisors have developed no
coherent model of its data requirements or its data uses. This
results in fragmented and often repetitious data requirements
from firms and increases the cost of data provision to the sector.
It also reduces the analytical efficiency of supervisors. While
this lack of data coherence has persisted and been tolerated to
date by politicians, policy-makers, regulators, central bankers,
supervisors and sector firms, it adds costs and impedes (and may
inhibit) the development of a robust international financial supervisory
capability for systemic risk. Technologies (such as XBRL—a
data tagging taxonomy or framework) that are in development elsewhere
have been overlooked in the UK.
48. The UK supervisor should, we believe,
as a matter of priority, define a robust and comprehensive data
architecture that it can communicate to and validate with the
financial services sector. It must be adaptable, extensible and
support unified data standards. Once this has been achieved, it
will be practicable to develop a blueprint for data to support
more meaningful analysis of interconnectedness, feedback systems
in financial markets and systemic risk. Without such a blueprint,
these ambitions appear unachievable.
RECOMMENDATIONS FOR
ACTION
49. In our report, we recommend a series
of actions for all relevant participants in the sector. Those
findings relating to politicians, regulators and supervisors are
shown here:
Key problems:
— understanding systemic risk is a complex,
multi-faceted problem. There are no single-point solutions;
— there is presently considerable political
will to address the problem, but objectives of the national and
supranational control organisations are not sufficiently aligned;
— given the volume of market, technology
and regulatory innovation, the requirements for a control infrastructure
are getting more difficult quickly and will continue to change;
— the practical implications of the quantum
of regulatory change is impossible for any one body to interpret
for the whole industry;
— SR control is not a problem solved by
edict from the "centre". A collaborative approach inclusive
of all facets of the industry is required;
— there is a "guilty knowledge"
dilemma that disincentivises supervisors from collecting data
that they are not able to process and draw conclusions from;
— an efficient systemic risk supervisory
structure requires global supraordination but approaches have
already begun fragmenting in 2010;
— incentives for collaboration with the
firms who have the expertise, and the resources to help, have
not been established;
— vendor profit incentives are leading
to the generation of multiple fragmented "quick fixes"
that will not address the holistic problem—which is yet
to be understood;
— costs can be in tens or hundreds of billions
without certainty of benefit; and
— milestones which are currently in the
G20's action plan are unlikely to be met.
What the problems mean to you:
— the problem will continue to distract
supervisors from attending to the risks they are meant to be controlling;
— consequences of moving too slowly, or
in the wrong direction, are high as an incorrect analytical approach
may do more damage than good;
— whatever solutions do get developed are
likely to be costly, late and inefficient as mandates for decision-making
are not clearly articulated;
— more resources will be required at supranational,
regional and member State levels;
— a clear roadmap of "what good SR
oversight looks like" as described in Chapter 6 is required
now; and
— if you want to return to "crisis
as usual" stop reading now.
Your action checklist:
— articulate clear mandates at international,
regional and national levels;
— increase resourcing levels to do the
job properly;
— set a date by which a roadmap is required
in order to catalyse new, ongoing requirements, design and standards
discussions;
— understand control requirements though
practical, multidisciplinary and focused research;
— make a realistic statement about the
information capabilities that are truly required;
— establish the incentives for the appropriate
participation of the firms and their suppliers; and
— mandate the development of standard regulatory
data taxonomy in each jurisdiction now, or accept the risks, costs
and consequences of building a regulatory tower of Babel.
ATTACHMENTS
1. Framework for the regulatory toolkit
defining and differentiating systemic risk focus from macroprudential
focus (see paras 12 and 13 of this submission).
2. Response to questions posed by the Treasury
Committee.
3. Summary material from our research: Achieving
Supervisory Control of Systemic Risk.
ATTACHMENT 1
FRAMEWORK OF THE REGULATORY TOOLKIT
| Focus | Terminology
| Additional coverage required | Development state
|
| Firm-level aspects | Microprudential
| — Adding to existing firm-level prudential and control rules
— Enhancements to governance of risk—per Walker
— Liquidity enhancement
— Prudential capital requirements
| Under development or implemented at local and BIS level
|
| Micro and macroprudential
| — Stress testing
— Reverse stress testing
— Firm and sector liquidity exercises
| Under development or implemented at local and ECB level
|
| Macroprudential | — Counter-cyclical buffers
— Instrument or counterparty class risk weights for capital requirements
— Collateral requirements
— Prospective cyclical loss provisioning
— Lending limits / credit controls
— Reserve policy
| Under development or development under consideration
|
| Resolution measures |
— Living wills and data requirements of the special resolution regime
— Contingent capital measures
| Under development |
| Network aspects | Systemic |
— Interconnectedness
— Capital adjustments for highly interconnected firms
— Transmission mechanisms
— Amplification mechanisms
— Emergence mechanisms
| Under discussion at academic level |
| Economy aspects | Macroeconomic
| — Linkage of macroeconomic variables to financial system risk
— Fiscal policy
— Monetary policy settings
| Extensive commentary emerging academically and at policy level
|
| |
| |
ATTACHMENT 2
RESPONSE TO QUESTIONS POSED BY THE TREASURY COMMITTEE
50. In this section, we answer briefly the questions
posed by the Treasury Committee in its press release dated 28
July 2010 announcing the consultation on the HM Treasury Consultation
Paper.
OVERALL
Will the Government's financial regulation proposals improve
the framework for financial stability in the UK? Will they work
in a crisis?
All sophisticated analyses of the financial crisis, including
many offered by the Bank of England, have emphasised financial
system interconnectedness, "network effects" or "systemic
risk" as a contributory factor. HM Treasury analysis is silent
on this point; its policy prescription is similarly silent. Without
a clearer picture of the proposed approaches to systemic risk,
it is not possible to know whether the approach described in the
HMT paper will be effective. There can be no certainty that any
framework that allows leverage by financial firms and interconnectedness
between them will avoid crises in future.
Do the Government's proposals get the balance right between
tackling the problems of the last crisis and preparing the UK
financial system for the next one?
We do not believe so, for reasons we explain in the body
of our submission.
How do the Government's proposals dovetail with initiatives
currently being undertaken at European and the global level?
In relation to systemic risk, they are largely compatible
but offer no leadership. As the major financial centre in Europe,
we believe this represents a lost opportunity to steer the debate
on and suggest solutions for systemic risk. If the UK official
sector does not improve its coherence and co-ordination on the
topic of systemic risk and represent this effectively to ESRB
/ ECB and decision-makers at European Commission and EU Parliament
level, any opportunity for such leadership or recovering such
leadership may be squandered. We do not believe that is necessary
or in the UK's interest.
What costs will the regulatory structure place on consumers?
We have not reviewed this issue in relation to systemic risk.
POWER, ROLES
AND RESPONSIBILITIES
Do the Government's proposals appropriately assign roles and
responsibilities between the different regulatory institutions?
We consider this issue less important than defining the appropriate
requirements for systemic risk, which we have attempted to address
in our report, a summary of which is attached. Without defining
requirements or even objectives in relation to systemic risk,
assignment of proposed roles and responsibilities appears premature.
Will there be unintended consequences of the Government's proposals
for regulation on the prospects for non-bank financial institutions?
Inevitably. We have not attempted a robust analysis of this
issue, but have highlighted several such "unintended consequences"
in our substantive submission.
THE FINANCIAL
POLICY COMMITTEE
(FPC)
— Should the FPC have a statutory remit? If so, what
should that remit be?
We have not reviewed this issue robustly.
How should the success of the FPC, both in and out of crisis,
be measured?
It is not possible to measure the success of something the
purpose of which is to avoid an event, except by experiencing
the event and finding it a failure. This is a key epistemological
dilemma of supervisory control of systemic risk. We discuss this
issue further in our report at section 3.3.
— Given the international regulatory framework, what
macro-prudential tools should be granted to the FPC?
We have not reviewed robustly the alternatives for macroprudential
tools for the FPC. Our chief concern is that those indicated in
the HMT paper do not cover detecting, measuring or responding
to interconnectedness in financial markets.
Has enough been done to mitigate the risk of conflict between
the FPC and the Monetary Policy Committee (MPC)? Is the FPC appropriately
structured in terms of:
— the balance between internal and external members?
— the size of the Committee?
Although we have not reviewed this matter closely, we have
made some comments on it substantive submission (see paras 19
and 20, above)
What characteristics, experience and qualities should the Government
look for when appointing external members of the FPC?
We did not review the requirements or capabilities of members
of the FPC as it is currently proposed. However, based on our
review of the requirements for supervisory control of systemic
risk, we believe:
— First, they should be experienced bankers.
— Secondly, they should be experienced policy makers.
— Thirdly, they should have regulatory and/or supervisory
experience.
— Fourthly, they should have experience as economists,
econometricians or social scientists.
— Fifthly, they should have extensive experience at
data mining, "statistical physics", complex systems
analysis and/or agent-based modelling.
— Finally, they should not want the job.
That seems an unlikely combination of attributes.
ATTACHMENT 3
SUMMARY INFORMATION FROM ACHIEVING SUPERVISORY CONTROL
OF SYSTEMIC RISK
The summary information from our report Achieving Supervisory
Control of Systemic Risk is attached separately.
The full report is available at www.jwg-it.eu/library.php?typeId=11
and www.paradigmrisk.com
22 September 2010
| 
