Edited by Iwan J. Aziz and Hyun S. Shin
Chapter 8: Implications of global financial and regulatory policies on systemic risk in Asia
The global financial crisis provided many insights into issues left unaddressed in previous reforms. One of the most significant insights was the role of systemic risk in destabilizing financial markets. Systemic risk does not refer to a sudden massive financial shock. It is better understood as a process – the buildup of fragilities in a financial system over a period of many years, that comes unstuck through a normal shock. Systemic risks originate from two primary causes – common exposures to aggregate risks, such as common exposures to the real estate market built up through the propagation of subprime mortgage related assets through the US financial system in the years leading up to the 2007–08 financial crisis, and/or the distress or failure of any large/complicated/ highly interconnected financial institution that may lead to runs on other solvent institutions, fire-sale liquidations and heightened counterparty risk. These insights into systemic risk have underpinned global attempts to redress regulatory failures that allowed them to build up in the first place. Under the aegis of the G20, the Financial Stability Board has coordinated international standard-setters to address issues underlying systemic risks.
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