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Working Paper

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

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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.
Topics
Financial stability
05.31.2013ISSN 2573-7953 WP 13-09DOI 10.26509/frbc-wp-201309
Keywords financial stability, regulation, macroprudential, policy instrument,early warning system, systemic risk, financial stress, imbalance
JEL Classification Codes G01, G18, G28, E32, E37

Working Papers of the Federal Reserve Bank of Cleveland are preliminary materials circulated to stimulate discussion and critical comment on research in progress. They may not have been subject to the formal editorial review accorded official Federal Reserve Bank of Cleveland publications. The views expressed in this paper are those of the authors and do not represent the views of the Federal Reserve Bank of Cleveland or the Federal Reserve System.

Suggested Citation

Oet, Mikhail V., Stephen J. Ong, and Dieter Gramlich. 2013. “Policy in Adaptive Financial Markets—The Use of Systemic Risk Early Warning Tools .” Federal Reserve Bank of Cleveland, Working Paper No. 13-09. https://doi.org/10.26509/frbc-wp-201309