Topic and Objectives
Since the outbreak of the financial crisis, the macro-prudential policy paradigm has gained increasing prominence. However, this paradigm shift in financial regulation has not been accompanied by a consensus on the appropriate measures and policy instruments. Indeed, the conceptual identification of systemic risk, its measurement and corresponding regulatory instruments have been at the forefront of academic and technocratic debates. In the meantime, policy makers have been implementing first macro-prudential measures in Basel III and the Dodd-Frank Act. The goal of this research project is to understand how the measures adopted relate to the discussion in the academic literature. Given that the latter is still in flux, to which extent do the adopted measures correspond to the level of consensus and structure of disagreement in the academic literature? Using a set of bibliometric techniques, we will seek to quantitatively measure the level of consensus and disagreement in the academic and technocratic literature concerning three subjects of analysis, namely, i) the concept of systemic risk, ii) its measurement and iii) appropriate macro-prudential regulatory instruments. We will then analyze Basel III and the Dodd-Frank Act to categorize their underlying positions on our subjects of analysis. In a last step, we will then map the different regulatory measures onto the academic and technocratic debate, thus making visible whether and how regulatory policies map onto the academic literature.
- Despite some insights into the concept of systemic risk, first by economic historians, later in a more formalized way by researchers at central banks and the IMF, and even despite the boom of the topic after the financial crisis, the field is still dispersed. A bibliometric analysis of the most cited academic literature on systemic risk measures was able to identify (through co-citation measures) only one common cluster, focusing on contagion in inter-bank networks. Clique analysis was able to discern 12 schools of thought centered around particularly prestigious academic hubs, such as NYU Stern School of Business and Princeton/LSE, and around central banks and international organizations.
- Analyzing the proposed risk measures and anti-cyclical proposals by these schools, we found that most of them use market data and, in particular, value at risk models to identify systemic risks. Of these measures, the regulatory community mainly used those acknowledging endogeneity and limitations of market data, rather than measures based on simple axioms of financial economics and contemporaneous market data (such as the ones proposed by the NYU clique).
- Interviews among central bankers revealed that central bank researchers have come to the forefront of the academic debate with respect to early measurement systems as well as the development of DSGE models able to capture the macro-economic impact of financial crises. In contrast, cutting edge academic research was perceived as difficult to implement at the practical level with the translation into regulatory practices requiring a considerable time lag.
- Particular areas of interest for the regulatory community that lack academic attention include the regulation of liquidity in macro-prudential regulation and the question of modelling the endogenous build-up of risks.