Old and New Methods of Risk Measurements for Financial Stability Amid the Great Outbreak
63 Pages Posted: 28 Apr 2020
Date Written: April 27, 2020
Increasing financial and political turmoil in the 1970s and 1980s coupled with oil shock prompted Governors of the G-10 countries to engage in cooperation and financial collaboration that eventually paved the road for the establishment of the Basel Committee on Banking Supervision in 1974. After over a decade of relentless work, the Basel Committee released Basel I Accord in July 1988 which had the primary objective of “International Convergence of Capital Measurement and Capital Standards”. In the U.S., the savings and loan (S&L) crisis in the 1980s and the stock market crash of 1987 (Black Monday) resulted in the emergence of VaR model in risk management. The homegrown Asian crisis of 1997-98 forced the Basel Committee to introduce a Revised Framework commonly known as Basel II and prompted the International Monetary Fund and the World Bank to launch a joint Financial Sector Assessment Program (FSAP), the goal of which was “to gauge the stability and soundness of the financial sector and to assess its potential contribution to growth and development”. Stress testing became the mainstay when the Basel Committee required banks to use VaR and stress testing while calculating capital adequacy. With the subprime crisis and the ensuing unprecedented global financial crisis in 2007-08 gave birth to the use of macro stress testing as a crisis management tool. Farfetched implications of the GFC also triggered overhauling of Basel I and II, and overly hyped Basel III with higher capital and tighter liquidity regulation promised to strengthen the resilience of the global financial system as a whole. Unfortunately, none of these measures has made the global financial system any more stable; on the contrary, these reactionary steps have inflicted more instability. As the world is hit by the coronavirus pandemic, many are curiously waiting to see what measures and aid packages governments (the U.S. in particular) will rush to announce; however, as antecedents, just promising to give trillions of dollars to restore confidence will only make the rich get richer, but the unresolved issues (i.e. capitalism and dollar as its weapon) will cause even greater pandemics as well as economic and financial crises in the near future.
Keywords: COVID-19; Coronavirus; Risk Management; Financial Stability; Dollar Hegemony
JEL Classification: O31, G12, E42, C40, Q32, Q54, H23
Suggested Citation: Suggested Citation