Prof. Jayanth R. Varma’s Financial Markets Blog

A blog on financial markets and their regulation

Financial stability, financial resilience and systemic risk

Last week, I found myself involved in a discussion arguing that systemic risk regulation is not the same as the pursuit of financial stability. This discussion helped to clarify my own thoughts on the subject.

There is no doubt that financial stability is currently a highly politically correct term: according to a working paper published by the International Monetary Fund (IMF) a year ago, the number of countries publishing financial stability reports increased from 1 in the mid 1990s to 50 by the mid 2000s and rose further to 80 in 2011. India and the United States have been among those that joined the bandwagon after the global financial crisis. Meanwhile the Financial Stability Board (which was first set up under a slightly different name after the Asian Crisis) has now been transformed into the apex forum for governing global financial regulation.

Yet, there has been a strong view that the pursuit of financial stability is a mistake. The best known proponent of this view was Hyman Minsky who was fond of saying that financial stability is inherently destabilizing. Post crisis, there has also been a great deal of interest in resilience as opposed to stability. The Macroeconomic Resilience blog has become particularly well known for arguing this case eloquently.

Rather than repeat what has been well articulated by these people, I have chosen to put together a totally politically incorrect table highlighting the contrast between financial stability and financial resilience.

Financial Stability Financial Resilience
Rigidity and resistance to change Adaptability and survival amidst change
Stasis and Stagnation Dynamism and progress
Pro-incumbent Pro-competition
Too big to fail Too big to exist
Great Moderation New normal
Alan Greenspan Hyman Minsky

To my mind, systemic risk regulation is the pursuit not of
financial stability but of financial resilience.


2 responses to “Financial stability, financial resilience and systemic risk

  1. tangentstyle January 20, 2013 at 11:29 pm

    Would you be willing to draw an analogue between “resilience” and Taleb’s idea of “anti-fragility?”

  2. Jayanth Varma January 21, 2013 at 10:56 am

    I have read the Anti Fragility book, but I am sure NNT and his fans would be convinced that I have misunderstood it completely! Anti fragility as I understand it from an option pricing perspective is about being positive gamma and vega. In an option context, this usually means being negative theta – lack of change or too slow pace of change becomes painful. Resilience is about being able to withstand both slow and fast rates of change.

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