August 11, 2010

Systemic Risk

In the aftermath of the Global Financial Crisis, the IAA has expanded its work in the area of Systemic Risk. The IAA believes that more focus is needed on counter cyclical requirements and behavioural issues when reforming the regulation of finance to address systemic risk.

Systemic risk often arises when financial services firms (and their regulators) fail to consider the issue of how firms will behave when entire markets are under pressure. Ideally, if suitable counter cyclical capital adequacy requirements were introduced this could help offset both behavioural and related systemic risks.

In the IAA’s view, the Counter Cyclical Capital Buffer proposal paper published by BCBS in July 2010 is an important step forward towards addressing such risks. In this paper, the BCBS has put forward, for the first time, a practical proposal to increase bank capital requirements when excess credit growth is judged to be associated with a build-up of system wide risk. This should ensure that banks build a buffer of capital at such times to protect against future potential losses. Whilst there is much detail still to be resolved, the IAA supports the BCBS proposal in principle and believes it is a useful step towards better management of systemic risk and business cycles.

Through its Committees on Insurance Regulation and Enterprise and Financial Risk, the IAA has actively cooperated with international organizations to develop systemic risk regulation. In this respect, the IAA has presented recently at meetings of the Joint Forum, of the International Association of Insurance Supervisors (IAIS) and of the Organization for Economic Co-operation and Development (OECD). It has also initiated relevant discussions with the International Monetary Fund (IMF) and with the World Bank on this important topic.

As stated by the President of the IAA, Paul Thornton, "The IAA appreciates the opportunity to contribute to and cooperate with international organizations on systemic risk and financial stability issues. The IAA has been working continuously on systemic risk issues ever since the emergence of the global financial crisis and believes that actuarial expertise will contribute directly to future improvements in global financial systemic risk regulation."

To learn more about the work of the IAA in this area, contact:

Tony Coleman, Chairperson, Enterprise and Financial Risk Committee
Toshihiro Kawano, Chairperson, Insurance Regulation Committee

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The International Actuarial Association (IAA) is the worldwide association of professional actuarial associations, with a number of special interest sections for individual actuaries. The IAA exists to promote and support the development of a global profession, acknowledged as technically competent and professionally reliable, which will ensure that the public interest is served.
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