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Financial Stability Work Continues

The third annual Financial Stability Conference highlights research and advances in data requirements for macroprudential policy, systemic risk measurement, and forecasting tools.

Approximately 160 attendees from around the world convened on December 3-4 in Washington DC to attend the third annual Financial Stability Conference, co-sponsored by the Federal Reserve Bank of Cleveland, the Office of Financial Research, and the Journal of Financial Stability.

The conference brought together a variety of speakers, panelists, and participants, including members of academia, economists, and banking supervisors. The program organizers reviewed nearly 140 submissions, and these submissions came from researchers in Europe, Africa, Asia, and North and South America.

The theme for this year’s conference was “Financial Stability: Policy Analysis and Data Needs.” The event highlighted research and advances in data requirements for macroprudential policy, systemic risk measurement, and forecasting tools.

Several topics came to the forefront this year that have been discussed in past conferences, and topics had enhanced depth and sharpened focus. One such topic related to the global implementation of LEI, or Legal Entity Identifier, which is used to uniquely identify entities that engage in financial transactions. Richard Berner, Director, Office of Financial Research (OFR), reinforced the need for the global implementation of LEI in his welcome speech, and also elaborated on ways in which the OFR is looking across financial systems to measure and to analyze risks. Some of that work, including related papers, is featured on their website.

Communication between researchers and banking supervisors is growing. This dialogue and information sharing is expected to improve policy recommendations and banking supervision. Federal Reserve Bank of Cleveland President and CEO Loretta J. Mester thanked the audience in her welcome remarks, letting them know that their participation in the discussion of papers and panel presentations was crucial to the success of moving the dialogue on financial stability forward.

President Mester reflected on the theme of the conference, and said that “the field of financial stability is actually a relatively new one in terms of microeconomic and macroeconomic foundations and modeling, yet policymakers, regulators, and supervisors have had to devise and implement tools for monitoring and mitigating risks, even as the models and theories are being developed.”

Mester discussed how this work came alive as she participated in a tabletop exercise undertaken by the financial stability subcommittee of the Fed’s Conference of Presidents, the group representing the heads of the 12 Reserve Banks. “The idea of the exercise was to investigate the use of various macroprudential policy tools, as well as monetary policy, in a macroeconomic-financial scenario that incorporated financial stability risks.” Mester elaborated that the exercise underscored the need for the work that is being done by the authors, presenters, and discussants participating in the conference.

Stanley Fischer, Vice Chairman, Board of Governors of the Federal Reserve System, spoke of how financial-system vulnerabilities have been greatly reduced from a decade ago. That being said, he noted that regulators still lack the data that is needed to illuminate important segments of the financial system, such as activities by asset managers and other nonbanking areas.

Fischer noted that better models and data are needed, both by policymakers and researchers, to understand the interconnections between the banking system and nonbanking institutions. He felt that these linkages are critical to continue oversight and regulation of all areas of the financial system.

“The essential element of that infrastructure is learning the lessons of history – both the lessons of what happened, and the fact that supervisors and regulators will on occasion be surprised.” Fischer felt that learning those lessons was “certainly a far more important task than it sounds.”

Stephen J. Ong, Cleveland Fed Vice President, Supervision, thought that Vice Chairman Fischer’s perspective has a relevancy that is current. “One of the Cleveland Fed’s focus areas in 2016 will be on risks to the banking sector and financial system from nonbank financial firms, so Vice Chairman Fischer’s remarks are a very timely precursor.”

Trent Reasons, Director of Analysis, Financial Stability Oversight Council, US Department of the Treasury, spoke about “Financial Stability and Improvements in Risk Analysis: Lessons for Cybersecurity.” Reasons talked about the lessons learned about cyber risks, and was encouraged that cyber legislation is currently working its way through Congress. He noted that there is no anonymized central repository for capturing all information regarding cyber breaches (for example, customers will be notified by their institution but the federal government may or may not be notified). Reasons stated that the benefits of a central repository would be huge, and that modeling the data could cascade into information on how to prevent breaches and/or mitigate risks.

Attendees walked away from this year’s conference with insights into the progress that has been made in developing models to identify and measure risks to the financial system and financial stability, despite the data needs that still are present.

Watch Vice Chairman Stanley Fischer’s December 3 luncheon keynote speech.

Video and papers from the presenters are posted here. In addition, a special issue of the Journal of Financial Stability will be published with research papers from this conference.

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