Scientists and practitioners discuss different approaches: This year’s Research Conference of the Frankfurt Institute for Risk Management and Regulation (FIRM) has focused on approaches to identify and measure systemic risks. More than 50 representatives from the domain of science and practice discussed new models from the research community on June 22nd in Mainz and tested these against the requirements of everyday application within the Banks.
Prof. Dr. Günter Franke, Chairman of the FIRM Advisory Board, organised the conference and invited professors from various universities and academic disciplines to Mainz. Franke explains: “Our intention with this conference was to give practitioners an insight into current research approaches, some of which are still in the development phase, and to provide researchers with direct feedback from experienced practitioners about the feasibility of their models.”
Prof. Dr. Günter Franke: “Presenting new scientific insights and being able to discuss them with practitioners is the objective of the research conference.”
Günter Franke, the research conference organiser
Prof. Dr. Gunter Löffler from the University of Ulm started off the event. His formulation: can reliable information be derived from systemic risk measurements? He outlined his approach with two examples – CoVaR and MES (Marginal Expected Shortfall) – two common risk measures among experts where there are several pitfalls to be taken into account. One of them: the dimensions occasionally tend towards excessive simplification. In the estimation model the risk of the financial system is partly only traced back to the bank. Nor is there an analysis of who actually triggers a risk in a system. Both of these can lead to misinterpretations, which must be taken into account during application in the risk measurement and management, as Löffler told the practitioners.
Prof. Dr. Gunter Löffler: “Systemic risk factors can’t simply be applied without thought, but they’re for example a sensible addition to stress tests.”
Prof. Dr. Thilo Meyer-Brandis, a mathematics professor at the Ludwig Maximilian University of Munich, developed a network-based measure that maps the risk-bearing capacity of large financial systems with regards to contagious effects. He asked whether depending on the network structure capital requirements can be placed in such a way that a resistance of the system to risks can be derived. His model analysis assumes an initial shock and calculates what effects will arise for which bank in the network and how the shock will spread throughout the system. One of his findings: when a system is not robust, even a small shock is enough to trigger a collapse. On the basis of the model, however, every bank can understand for itself which capital requirement it has to meet to make the network resistant, Meyer-Brandis explained.
Prof. Dr. Thilo Meyer-Brandis: “We can derive explicit criteria that demonstrate the resilience of a network.”
Scientists in dialogue: Gunter Löffler, Thilo Meyer-Brandis and Simon Rother
All lectures were subsequently discussed by a practitioner and a scientist. For instance, Prof. Dr. Christian Koziol from the Eberhard Karls University of Tübingen explained how the mathematical approach from Meyer-Brandis can be complemented by the addition of an economic perspective. Jochen Peppel from the consultancy Oliver Wyman showed on the basis of the Meyer-Brandis dependencies model which factors can be applied for the stability of networks besides the directly financial factors, and how such factors can be linked. “This dialogue between science and practice is proving to be highly productive because it illustrates the wide range of different perspectives. That makes it easier for those taking part to inform their banking management with the new findings from the research community,” Franke maintained.
When talking about systemic risks, the impact of so-called asset price bubbles is also important. An empirical analysis presented by Simon Rother (Friedrich-Wilhelm University of Bonn) discussed the question of how price bubbles can become systemic risks. The subsequent discussion made it clear that the systemic risk already occurs during the development of such a bubble and that most players are also aware of this. The analysis can help to make a gut feeling quantifiable.
Prof. Dr. Jan Pieter Krahnen from the Goethe University in Frankfurt devoted his lecture to interbank intermediation in Germany. He built up a picture of interbank receivables and liabilities, broken down according to different deadlines. There’s no doubt, he insisted, that the interbank market could serve as an instrument for managing the interest rate risks of a bank. Prof. Lutz Johanning from the WHU – Otto Beisheim School of Management engaged in an intensive discussion about what role the interbank market can play for risk management in future. Michael Rab from the Raiffeisen Regional Bank Lower Austria-Vienna pointed out that interbank intermediation in Austria has been largely characterised by repo transactions since the last crisis.
Prof. Dr. Jan Pieter Krahnen: “We want to take a microscopic view of the interbank markets in Germany. Do they still have any meaning in the future – and if so, what are they?”
Jan Pieter Krahnen on the role of the interbank market
The event was rounded off by a lecture from practice. With the example of his own bank, Florian Roßwog from the DZ Bank concerned himself with liquidity control in extreme market situations. His analysis showed that liabilities to non-banks have gained in importance, unsecured financing in bank balances – apart from customer deposits – have been eliminated, and contractually agreed terms on the liabilities side have been shortened.
Florian Roßwog talked about liquidity management in practice.
Franke drew a positive conclusion at the end of the research conference: “The lectures on systemic risk have very clearly elaborated the different approaches to measurement, as well as their strengths and weaknesses. In addition, new insights were conveyed into the drivers of the interbank business.” In short, a real gain in insight for the participants.