Managing Systemic Exposure: A Risk Management Framework for SIFIs and their Markets

Federico Galizia

This article was first published as a chapter in Managing Systemic Exposure, by Risk Books.

For most of the post-war period, exposure to systemically important financial institutions (SIFIs) was assumed to be risk-free, and the wholesale financial markets thrived on the large volumes of unsecured bilateral activity between SIFIs. This system started to break down at the beginning of the financial crisis of 2007–09; secured lending and collateralised trading became the dominant paradigm, even among institutions that used to share trust as part of an elite club. This trend has been supported by policymakers through regulations that focus on minimising the adverse externalities caused by SIFI distress or failure. Academic research is also developing models to gauge SIFIs contribution to systemic risk.

This book adopts the point of view of an institution wishing to manage its exposure to systemic risk and, more specifically, to other SIFIs. Based on both history and accepted risk management principles, we think there are obvious steps that can make a financial firm’s business model more resilient. Some of the contributions presented here distill lessons from the events leading up to