THE SYSTEMIC RISK CENTRE AT LSE The Systemic Risk Centre (SRC) focuses on the fundamental question of how to balance economic prosperity and the stability of the financial system. SRC researchers work closely with key institutions in the public and private sectors to define the emerging field of ‘systemic risk’ and to develop practical policy tools for crisis prevention and management.
THE MISSION OF SRC RESEARCH
IMPACT
Credible policy analysis must be underpinned by strong multi-disciplinary research. SRC researchers study risk and liquidity; limits to the measurability of risk; the pitfalls of using statistical risk models for policy-making; the impact of financial regulations on the economy; and the determinants of financial crises.
The SRC picks its policy objectives carefully and aims to achieve long-term impact well beyond academia.
Most research on systemic risk is done within the world’s policy authorities, reflecting political priorities and carrying the risk of ‘groupthink’. While there are several independent academic institutions and think tanks in the domain of systemic risk, they tend to focus on systemic risk forecasting or on day-to-day policy commentaries. By contrast, the SRC studies the fundamental nature of systemic risk and the economic implications of current and proposed regulations for the health of the financial system. The SRC takes an entrepreneurial view of research and allows its staff considerable flexibility in pursuing their research agendas.
Our working papers and commentaries have broad and influential readerships; and our research is welcomed by key policy institutions, including the Bank of England and the European Central Bank, achieving real impact on policy design. SRC research on the future of computer-based trading resulted in significant changes to overall financial regulations. Our report for the UK’s Government Office for Science formed the basis for rethinking the approach to high frequency trading in the European Union’s Markets in Financial Instruments Directive.
ORIGINS OF SYSTEMIC RISK Changes included the dropping of minimum-resting times in favour of tick size regimes, the requirement of synchronised clocks and the rephrasing of market-making obligations. This research formed the basis of the LSE’s impact case study submitted to the Research Excellence Framework 2014, earning LSE Finance the top spot and unlocking new government research grants. The SRC has a long-standing research programme on the danger of relying on statistical risk forecast models for regulatory purposes, work that is conducted with colleagues at the US Federal Reserve and at the Central Bank of the Netherlands.
Our view is that systemic risk is ‘endogenous’, created by the interaction of financial market participants, not dropped exogenously onto markets like an asteroid hitting the earth – as is assumed by so many models and regulations. This view dramatically changes the way that the financial system should be analysed, taking the focus away from trigger events towards hidden mechanisms that may create instability via vicious feedback loops. Such hidden systemic risk does leave footprints and with better analytical approaches, the potential for destructive feedback can be identified and avoided. Stability is destabilising: low market volatility warns of crises
A new SRC paper, written jointly with a researcher at the US Federal Reserve, uses novel statistical techniques to establish that low volatility increases the likelihood of financial crises half a decade or more into the future. One implication of the SRC study is that the current regulatory emphasis on reducing artificial risk may be misplaced and could even make future crises more likely.
SRC IN THE FINANCIAL COMMUNITY
FUNDING
The SRC provides independent advice and analysis on systemic risk, maintaining close connections with key policy institutions including all the major European central banks, the US Federal Reserve and the UK’s FCA, as well as international policy authorities such as the BIS, the IMF, the FSB, the ESMA and the EBA.
The SRC’s many valuable activities naturally come at a cost. The SRC’s current support from the UK’s Economic and Social Research Council (ESRC) of £1 million a year comes to an end in October 2017 and we are looking for a partner who shares our vision and objectives and would like to be associated with the SRC.
EVENTS
The SRC has hosted many high profile public and private events with key policy-makers, including the Governor of the Bank of Japan, the President of the Dallas Fed, vice presidents of the ECB, the Chairman of the Basel Committee, the head of the EBA, members of the FSB and senior officials from the BIS and the IMF. Forthcoming ones include events with the European Commissioner, Financial Stability, Financial Services and Capital Markets Union, and the Chief Economist of the IMF.
BREAKFAST MEETINGS
The SRC holds regular high-level business breakfast briefings under the Chatham House Rule. These are anchored by a keynote presentation by a senior policy-maker followed by a Q&A session with a small number of key London private sector decision-makers.
We believe that such a partnership will not only facilitate the study of how best to understand systemic risk, but it will also enable the SRC and our partner to be – and to be perceived to be – part of the solution, influencing future policy-making in a constructive and effective way.
COMMUNICATIONS
The SRC provides a unique and highly valued forum for senior market participants and policy-makers to discuss financial regulations and macroprudential policy. Individuals working in private financial firms have detailed understanding of the intricate workings and vulnerabilities of the financial system, but without such a forum, it is often difficult for their valuable insights to influence policy-making.
www.systemicrisk.ac.uk Published by Systemic Risk Centre The London School of Economics and Political Science Houghton Street London WC2A 2AE © Systemic Risk Centre 2015 2016