Handbook of Central Banking, Financial Regulation and Supervision
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Handbook of Central Banking, Financial Regulation and Supervision

After the Financial Crisis

Edited by Sylvester Eijffinger and Donato Masciandaro

This stimulating and original Handbook offers an updated and systematic discussion of the relationship between central banks, financial regulation and supervision after the global financial crisis.
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Chapter 11: Defining and Measuring Systemic Risk

Sylvester Eijffinger


Sylvester Eijffinger1 Introduction With the planned implementation of the European Systemic Risk Board (ESRB) in 2010, European authorities are trying to identify and avoid future financial crises before they start. This board, under the lead of the European Central Bank (ECB) will have to deal with the macro-prudential supervision of the financial sector in Europe and is mandated to detect ‘systemic risks’. However, the ECB does not have a clear concept of systemic risk itself and even in academia there exists no generally accepted definition. Moreover, in his speech at the CEPR/ESI 13th Annual Conference on ‘Financial Supervision in an Uncertain World’ on 25–26 September 2009 in Venice, ECB Executive Board Member Mr. Lorenzo Bini Smaghi pointed out that ‘firm-level data [...] have been recognized as essential for more accurate assessments of the potential impact of risks materializing. [...]. It should include better data coverage of non-regulated financial sectors, as well as more granular information on key node-institutions in the financial system and on potential inter-linkages between them.’ Bini Smaghi (2009) first stressed the conceptual issues of systemic risk, after which he stressed the tasks of the ESRB being risk detection, risk assessment and ultimately issuing risk warnings. This briefing chapter will be structured in the same way. First, the different definitions of systemic risk will be discussed, to be able to pinpoint 1 The author gratefully acknowledges the very helpful comments of Mr. Edin Mujagic, MSc and the excellent research assistance of Mr. Rob Nijskens, MSc. 315 316 The Architecture...

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