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Independent report recommends rethink of information highway to spot the next financial crisis


Independent report recommends rethink of information highway to spot the next financial crisis

New blueprint required to describe how supervisors and industry manage systemic risk data

London: 21 September, 2010.  Two years after Lehman slipped into bankruptcy, the “Achieving supervisory control of systemic risk” report, released today by JWG and Paradigm Risk, has found that, while regulatory progress has been made, the infrastructure required to spot the next financial crisis has yet to be effectively implemented.  The report, which was commissioned by the Financial Services Knowledge Transfer Network and funded by the UK’s Technology Strategy Board, concludes that in order to tackle systemic risk, improved engagement is required between regulators, the industry and academia.

Following over 30 interviews with representatives from central banks, regulators, supervisors, major investment firms and their trade bodies, standards organisations, technology suppliers and academics, the report identifies sizable barriers and constraints to controlling systemic risk that have yet to be prioritised and resourced by both the regulatory community and the financial institutions that it oversees.  This means that the new systemic risk control infrastructure, that would prevent another Lehman-like event, is far from a reality. 

Sally Scutt, Deputy Chief Executive of the British Bankers' Association, commented: "The need to enhance supervisory understanding of systemic risk is one of the big lessons to come from the financial crisis.  This report provides a careful evaluation of what went wrong and an invaluable analysis of the much overlooked need to establish efficient and flexible mechanisms to collect and analyse data for systemic risk purposes."

The report identifies the requirements to secure an appropriate mandate, resource, forum and funding mechanisms for an effective global systemic risk ‘information highway’, which will need to be in place for both the US Office of Financial Research, signed into law 15 July 2010, and the European Financial Services Act, due to pass later this month, to be effective.

David Bennett, Chairman of the UK’s Financial Services Knowledge Transfer Network, commented:  “To succeed, approaches must be inclusive of the views of central bankers, regulators, international agencies and the academic community.  Equally, they must also be capable of being implemented in practice.”

The report proposes a complete rethink, redesign and retooling of the way both supervisors and industry manage and share their risk information and advocates a blueprint for good systemic risk control including:

  • The design principles required for a new information road system
  • A supervisory information inventory and gap assessment
  • An adaptable and future-proof target operating model 
  • A clear migration path, timeline and governance models
  • A transparent assessment of costs, commercial models and tariff measures.

PJ Di Giammarino, CEO of the regulatory think-tank JWG, added: “The central regulatory bodies that are operating with limited resource have not yet been able to engage meaningfully with firm practitioners who face limited incentives to devote the resources required to participate effectively.  Not only will the current situation cost billions and distract firms and their supervisors from controlling new risks, it will lead to the development of a control infrastructure that incurs the risk of ‘Garbage In, Gospel Out’ - creating the illusion, but not the reality, of control.”

Peter Bonisch, MD of Paradigm Risk, concluded: “While there is a lot of attention at the moment on the topic of systemic risk following the UK Treasury’s proposals for regulatory reform, the critical issues around information infrastructure are being brought to the table late and there is a risk they will be left behind.  Academics, policy makers and supervisors need to engage in meaningful strategy and action planning discussions now – before disconnected approaches are too far down the track to integrate at a global level.”   

To download the report please visit: http://www.jwg-it.eu/library.php?typeId=11

ENDS

For press enquiries and to schedule briefings with JWG, Paradigm Risk, the Financial Services Knowledge Transfer Network and the Technology Strategy Board please contact:

Louisa Excell, Hotwire on behalf of JWG
Louisa.excell@hotwirepr.com +44 (0) 20 7608 8350

For further information in relation to the Achieving Supervisory Control of Systemic Risk report please contact:

            PJ Di Giammarino, JWG
            pj@jwg-it.eu +44 (0) 7811 430 503

            Peter Bonisch, Paradigm Risk
            peter.bonisch@paradigmrisk.com +44 (0) 7974 168 559

About participants:

JWG seeks to be recognised by regulators, financial institutions and technology firms as the independent analysts to help determine how the right regulations can be implemented in the right way.  Its status as an independent think-tank focusing on financial services regulation permits collaboration across the industry without serving the interests of any constituent over another.  For more information see www.jwg-it.eu

Paradigm Risk is a London-based, multi-disciplinary risk consulting firm specialising in financial services.  It brings together expert consultants and practitioners in the fields of governance, risk and assurance to offer experience-based and thought-led advisory services to financial institutions.  Paradigm Risk focuses on leading insights into improving firm behaviour and effectiveness in governance and management of risk and assurance.

The Financial Services Knowledge Transfer Network is funded by the Technology Strategy Board to harness research to support and protect innovation, competitiveness and market stability in the UK financial services sectors.  The FS KTN maps the landscape of challenges and resources, both in firms and in academia, and provides independent reviews and suggestions for strategic R&D initiatives.  Networking events bring together industry insight and research-based knowledge to identify major challenges and build teams to pursue research and development into products and processes to enhance sector performance.  For more information see https://ktn.innovateuk.org/web/financialservicesktn

The Technology Strategy Board is an executive non-departmental public body (NDPB), established by the Government in 2007 and sponsored by the Department for Business, Innovation and Skills (BIS).  Its role is to stimulate technology-enabled innovation in the areas which offer the greatest scope for boosting UK growth and productivity.  It advises Government on how to remove barriers to innovation and accelerate the exploitation of new technologies.  For more information see www.innovateuk.org



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