For Immediate Release

Date:           September 2, 2009

Contact:      Shaun Wang, 678-524-9222;            Wayne Fisher, 239-207-2025

Research Workshop on
“Systemic Risks: Regulatory and Policy Responses”

Atlanta - The ERM-II Research Workshop on “Systemic Risks: Regulatory and Policy Responses” successfully took place on August 18th & 19th at Georgia State University. Professor Shaun Wang initiated this conference, and he was joined by Wayne Fisher (Executive Director, ERM-II), Dave Ingram (Senior Vice President, Willis Re) and Dave Sandberg (Vice President, Allianz Life of North America) as co-organizers.

This was a multi-disciplinary gathering. It drew 35 participants from banking, insurance, and other economic sectors, including leading academics, regulators and risk management professionals. Through prepared presentations and interactive discussions, workshop participants jointly developed several key policy recommendations addressing three topics. Below is a summary.

 I) Structural Problems and Issues in the Financial System

1. The recent financial crisis is a manifestation of accumulated structural imbalances over the past decades in the financial system. To move forward, we must address such structural issues. We cannot simply go back to where we were. There are also major forces (international competition, technology developments, etc.) that call for changes in American businesses. Now is an opportunistic time to take a hard look at these structural issues and make positive adjustments.
2. Capitalism works best when it facilitates fair market discovery of price. However, many accumulated structural build-ups hinder price discovery or distort market prices; for instance, hidden subsidies, forum shopping, liabilities hidden off-balance sheet. Sharing the same goal with free capital markets, effective government policies and regulation need to be in place to facilitate market mechanisms for price discovery and to arrest unfair distortions.
3. Current practices have led to excessive risk-taking, out-of-balance compensation and misplaced incentives. The financial system now rewards short-term performance rather than long-term value creation in part, due to accounting systems that may be subject to distortions. The distortion is not necessarily due to unethical actions, but rather due to inadequate processes to capture the costs and impact of remote, but plausible risks.
4. In the past, there have been only isolated attempts to study the financial “system” as a whole. Instead, most firms and professions have focused on their own interests and local concerns.

 II) Thought-Leadership Recommendations

1. We are in favor of appointing a designated Chief Risk Supervisor (or Council), who can lead efforts in developing an agreed upon conceptual framework, data infrastructure and tools for dealing with systemic risks. The overwhelming size and complexity of the financial system will require regulators to adopt a Risk Intelligence Framework, as discussed in a paper written by Dr. Wang for this conference (see online link below).
2. We concur with a proposed conceptual framework for sound risk systems stemming from discussions at both this Research Workshop and the July 2009 American Academy of Actuaries’ Financial Summit.
3. To address various structural issues, regulators need a suite of tools to identify and arrest structural imbalances. Regulators should encourage more transparency and accountability, which can better align compensation with long-term performance, and encourage firms to improve their business models.

III)  Next Steps for ERM-II Conference Participants

1. The recent financial crisis calls for advancement of the discipline of studying the financial system as a whole, and how it interacts with the general economy. A big question is when and how the financial system helps or hinders economic development through appropriate risk taking.
2. Systemic risk regulation requires a generation of intelligent risk managers working toward the good for the financial system as a whole. The financial engineering community, the actuarial profession, the accounting profession, and the legal profession should jointly promote studies of the financial system as a whole. 
3. To this end, ERM-II will be coordinating with the Society of Actuaries, the American Academy of Actuaries, the Casualty Actuarial Society, other risk professionals and interested/affected regulators on a prioritized research and conference agenda to contribute to this ongoing need in a systematic manner.

Reference: Wang, Shaun S., Building Toward a Resilient Financial System (2009).

Available at SSRN: http://ssrn.com/abstract=1456345.

About ERM-II: The ERM Institute International, Ltd is a non-profit educational and research organization, initiated by an international group of universities and professional organizations with a focus on education, research, and training within an ERM conceptual framework, quantitative methods and tools, and best practices. Further information can be found online at www.ermii.org