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DISCUSSION PAPER PI-0912

Systemic Risk in Financial Services

D. Besar, P. Booth, K. K. Chan, A. Milne and J. Pickles

The current banking crisis has reminded us of how risks materialising in one part of the financial system can have a widespread impact, affecting other financial markets and institutions and the broader economy. This paper, prepared on behalf of the Actuarial Profession, examines how such events have an impact on the entire financial system and explores whether such disturbances may arise within the insurance and pensions sectors as well as within banking. The paper seeks to provide an overview of a number of banking and other financial crises which have occurred in the past, illustrated by four cases studies. It discusses what constitutes a systemic event and what distinguishes it from a large aggregate system wide shock. Finally, it discusses how policy makers can respond to the risk of such systemic financial failures.

Key words:- Banking Crisis; Financial Crisis; Global Financial Crisis; Financial Deregulation; Credit Cycle; Governance; Control Mechanisms; Systemic Risk; Financial Infrastructure; Payment Systems; Short Term Funding Markets; Collateral Exposure; Securities; Derivatives; Counterparty Risk; Recession; Pension System