Systemic Risk and Banking Sector

COURSE DESCRIPTION: The course aims to provide participants with a deep understanding of the nature of systemic risk and the potential impact on the sovereign and the banking system. Regulators and governments have various support options, to which they recently shifted attitude to. Attendees will explore those changes and understand why the banking system is particularly vulnerable to systemic risk. Thanks to the underlying economic context, participants will analyse why there have been numerous banking crisis and why the last one was particularly severe. The course will provide an outlook of the key regulatory initiative to reduce systemic risk, in addition to the recognition of the importance of sovereign credit in the support of financial institutions.

COURSE SUMMARY:

Historical context and review of current crisis
• Economic theory: why banks periodically fall into crisis: Market Failure: efficient markets vs. market failure, Adam Smith and why banks are an exception, Market failure: Pigou's concept of "spillovers", Leverage and the credit cycle, Hyman Minsky: 3 stages of the credit cycle
• History of system-wide failures and their causes, Tulips to Lehman
Nature of systemic risk
• "Touch points"
• Domino effect: diminution of asset value in one financial institution causes capital erosion in the next
• Roubini's "transmission" channels of crisis
• How the crisis spread from US sub-prime to French mutual funds, German commercial lenders and beyond
• Pre-crisis distribution theory of systemic risk vs. high correlation reality
• Bank systemic risk indicators

Identification of systemically important financial institutions (SIFI)
• Official recognition of international systemically important banks
• Identification of national champions
• Will these be moving targets?

Drivers of banks' Issuer default ratings
• Viability vs. support ratings

Early warning signs of bank failure
• Financial and non-financial indicators of distress
• Market indicators; equity, CDS and bond indicators
Getting too big to fail
• Purchases and disposals - an acquisition too far or selling the family silver?

REGULATION
• Emergence of deregulation in the late 1980s and its progression around the globe
• Light touch regulation vs. proactive regulation
• New mood in regulation following 2008 crisis
• The commissioning of reports and enquiries; Walker report, Turner review, Sir John Vickers Independent Commission on Banking
• Changing regulation; Dodd Frank and the Volcker rule, living wills, bank resolution
• Response: increase regulatory oversight
• Basel 2.5 and Basel III: global initiative to discourage or mitigate systemic risk: Market Risk Rules, Counterparty Risk, Liquidity Proposals, All deductions from CET 1, Pillars 2 and 3
• Impact on banks' profits and the economic implications of deleveraging

SOVEREIGN CREDITWORTHINESS
• Sovereign ratings
• Size of banking system v. size of economy
• Sovereign ability and willingness to support banking system
• Moral hazard

SUPPORT AND REDUCING THE SUPPORT BURDEN
Review the different techniques for supporting a banking system, when these have been used and to what effect
• Depositor insurance
• Nationalisation
• Recapitalisation
• Bad bank
• Insurance
Measures to reduce the necessity for tax payer funded bail outs
• Ring fencing
• Bail in vs. bail out
• The identification of and commitment to systemically important banks.
The role of Supernational and non-sovereign bodies
• IMF
• World Bank
• Multilateral and regional development banks
• EFSF and ESM
• Foreign Parent banks.

TARGET AUDIENCE: Analysts, investors, bankers, risk and compliance managers and other professionals who need to understand the correlation between systemic risk and the banking system and the implications for support. This course is pitched at an intermediate level and assumes participants have a reasonable understanding of bank financials and analysis.

Course reviews:

“The course was delivered at a very high standard: my expectations were fulfilled and now I have a better understanding of systemic risk.”
Sarah McGyll
Analyst, ABC Telecom

“It was very useful for me to explore the correlations between systemic risk and the banking sector: it opened up a new perspective which has helped me to gain insights I had never thought of. I would highly recommend the course.”
Stephane Rugman
Investment banker, Praxis Corporation

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