Risks That Hedge Funds Pose To The Banking System

The current financial crisis has highlighted the growing importance of the ¿shadow banking system,¿ which grew out of the securitization of assets and the integration of banking with capital market developments. This trend has been most pronounced in the U.S., but it has had a profound influence on the global financial system. Securitization was intended as a way to transfer credit risk to those better able to absorb losses, but instead it increased the fragility of the entire financial system by allowing banks and other intermediaries to ¿leverage up¿by buying one another¿s securities. In the new, post-crisis financial system, the role of securitization will likely be held in check by more stringent financial regulation. Charts and tables.

This report explores the extent to which hedge funds create or contribute to systemic risk, the role they played in the financial crisis, and whether and how the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 addresses the potential systemic risks posed by hedge funds.

This comparative study explores how shadow banking differs from the traditional banking system. It discusses the origins, history, purposes, risks, regulatory constraints, and projected future evolution of both financial sectors of the world economy. This thorough examination of non-bank financial intermediaries follows the migration of services from traditional banks to less-regulated alternative banking products, as well as the evolution of regulations and the Financial Stability Oversight Council to monitor these new entities. Three chapters explore in depth the major financial structures newly designated as systemically important financial institutions (SIFIs), with particular attention to insurance companies such as MetLife, which seek exemption from the designation. Finally, the focus shifts to international financial institutions' efforts to protect consumers and curtail irresponsible shadow banks, with an eye toward the effects of these actions on future banking practices.

An accessible and detailed overview of the risks posed by financial institutions Understanding Systemic Risk in Global Financial Markets offers an accessible yet detailed overview of the risks to financial stability posed by financial institutions designated as systemically important. The types of firms covered are primarily systemically important banks, non-banks, and financial market utilities such as central counterparties. Written by Aron Gottesman and Michael Leibrock, experts on the topic of systemic risk, this vital resource puts the spotlight on coherency, practitioner relevance, conceptual explanations, and practical exposition. Step by step, the authors explore the specific regulations enacted before and after the credit crisis of 2007-2009 to promote financial stability. The text also examines the criteria used by financial regulators to designate firms as systemically important. The quantitative and qualitative methods to measure the ongoing risks posed by systemically important financial institutions are surveyed. A review of the regulations that identify systemically important financial institutions The tools to use to detect early warning indications of default A review of historical systemic events their common causes Techniques to measure interconnectedness Approaches for ranking the order the institutions which pose the greatest degree of default risk to the industry Understanding Systemic Risk in Global Financial Markets offers a must-have guide to the fundamentals of systemic risk and the key critical policies that work to reduce systemic risk and promoting financial stability.

These proceedings summarize the key themes and issues raised during a symposium on September 24, 2012, hosted by the RAND Center for Corporate Ethics and Governance. Discussion focused on the ways in which hedge funds might contribute to systemic risk and the extent to which recent financial reforms address these potential risks. Participants included thought leaders from industry, government, and academia.