Policy in Adaptive Financial Markets — The Use of Systemic Risk Early Warning Tools

72 Pages Posted: 31 Mar 2013

See all articles by Mikhail V. Oet

Mikhail V. Oet

Case Western Reserve University - Weatherhead School of Management; Federal Reserve Banks - Federal Reserve Bank of Cleveland

Stephen J. Ong

Federal Reserve Banks - Federal Reserve Bank of Cleveland

Dieter Gramlich

Baden-Wuerttemberg Cooperative State University Mosbach (DHBW)

Multiple version iconThere are 2 versions of this paper

Date Written: March 18, 2013

Abstract

How can a systemic risk early warning system (EWS) facilitate the financial stability work of policymakers? In the context of evolving financial market dynamics and limitations of microprudential policy, this study examines new directions for financial macroprudential policy. A flexible macroprudential approach is anchored in strategic capacities of systemic risk EWSs. Tactically, macroprudential applications are founded on information about the level, structure, and institutional drivers of systemic financial stress and aim to manage the financial system risk and imbalances in two dimensions: across time and institutions. Time related EWS policy applications are analyzed in pursuit of prevention and mitigation. EWS applications across institutions are considered via common exposures and interconnectedness. Care must be taken in the calibration of macroprudential applications, given their reliance on quality of the underlying systemic risk-modeling framework.

Keywords: financial stability, regulation, macroprudential, policy instrument, early warning system, systemic risk, financial stress, imbalance

JEL Classification: G01, G18, G28, E32, E37

Suggested Citation

Oet, Mikhail V. and Ong, Stephen J. and Gramlich, Dieter, Policy in Adaptive Financial Markets — The Use of Systemic Risk Early Warning Tools (March 18, 2013). Systemic Risk: Liquidity Risk, Governance and Financial Stability. Available at SSRN: https://ssrn.com/abstract=2242234 or http://dx.doi.org/10.2139/ssrn.2242234

Mikhail V. Oet (Contact Author)

Case Western Reserve University - Weatherhead School of Management ( email )

364 PBL Building
Cleveland, OH 44106
United States

Federal Reserve Banks - Federal Reserve Bank of Cleveland ( email )

East 6th & Superior
Cleveland, OH 44101-1387
United States
216.774.2684 (Phone)
216.579.2932 (Fax)

Stephen J. Ong

Federal Reserve Banks - Federal Reserve Bank of Cleveland ( email )

East 6th & Superior
Cleveland, OH 44101-1387
United States

Dieter Gramlich

Baden-Wuerttemberg Cooperative State University Mosbach (DHBW) ( email )

Lohrtalweg 10
Mosbach, 74821
Germany

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