Academic contributes to France’s Financial Stability Review

19 April 2017

Colchester Campus

Economics, Department of

Professor Sheri Markose from our Department of Economics, worked with PhD graduates from the Centre for Computational Finance and Economic Agents on research that contributed to the Banque de France 2017 Financial Stability Review (FSR).

Sheri, who is renowned as an expert on financial stability, was invited to contribute to the FSR by Laurent Clerc, Director of Financial Stability at the Banque de France. She carried out the research with Simone Giansante and Ali Rais Shaghagi. Other eminent academic economists who have contributed to FSR include Gary Gorton (Yale University), Rama Cont (Imperial College London) and Bruno Parigi (University of Padova).

Launching in April at a conference in Washington, the review analyses the impact of financial reforms eight years after the adoption of the G10 action plan in 2009. With most of the reforms now in the process of being finalised, concerns are being raised as to their potential negative effects and questions about the need for robust regulations at the global level. One of the areas that was implicated in the 2007 Great Financial Crisis was the over-the-counter (OTC) financial derivatives markets.

Sheri said: “The global derivatives markets that aim to provide risk management services had become part of the problem because of their size at over $700 trillion in 2007. Also, their clearing process involving a few large banks was too opaque and had made these banks vulnerable to failure. Hence, the G10 reforms aimed to introduce central clearing parties (CCPs) as a means of increasing transparency of the clearing process. But then the question is how vulnerable are CCPs and do they have sufficient capital, called skin-in-the-game? Otherwise, CCPs have to rely on others, including tax payer bailouts during a crisis. In the 2017 FSR, we provide proof of concept for quantifying this.”

Sheri’s study for the International Monetary Fund (IMF) in 2012 on systemic risk from the global derivatives markets had led to her appointment as an academic advisor to the Basel Committee for Banking Supervision and (BCBS) and Financial Stability Board Report on the macroeconomic implications of the G10 reforms for the global derivatives. In the 2017 FSR, Sheri and her co-authors, continue this research to assess CCPs for their capacity to withstand stresses.

Sheri said: “Essex is one of the few economics departments that trains students to use these cutting-edge network models for macro-economics and macro-prudential policy. This is taught in MSc Computational Economics, Financial Markets and Policy.”

The Financial Stability Review is being launched by the Banque de France Governor, François Villeroy de Galhau, at the International Monetary Fund 2017 World Economic Conference.

The panel includes Mark Carney, Governor of the Bank of England and Chair of the Financial Stability Board, Axel Weber, Chairman of UBS, Tobias Adrian, Director of the Monetary and Capital Markets Department of the IMF, and Avinash Persaud, Emeritus Professor of Gresham College.

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