FIN4040 Financial Systems and MarketsSemester 1/2012
Individual Assignment #2 Systemic Risks and Industry Participants Background
Following Individual Assignment #1 that emphasizes a link between financial-market participants and systematic risksas well as how they have utilized all sorts of financial intelligence and technology to deal with them, this assignmentfocuses on another set of interrelations between financial-industry participants (e.g., banks and financial services) andsystemic risks together with the uses of financial regulation and governance mechanisms to cope with those exposures.Financial industries, described functionally as financial intermediaries and organizationally as financial institutions, areboth benefactors and beneficiaries in a financial system in terms of value-added products or services they have provided.However, not only are they exposed to systematic risks just like other market participants have been, but their fiduciaryfunctions and agency-type organizations are also prone to idiosyncratic risks engendered by informational asymmetries(non-transparent adverse selection and non-disclosed moral hazard), making it more crucial for them to be scrutinizedby the markets or monitored by their governors (e.g., regulators, supervisors, overseers, public insurers). Idiosyncraticrisks originated by one of the industry participants could inadvertently lead to extensive or protracted systemic risks thatexacerbates the existing systematic risks and destabilizes the whole financial system.Such interwoven economic-financial-business (EFB) cycles that all financial systems experience and encounter remainthe recurring challenges to be dealt with by industry and regulatory practitioners alike. This assignment is yet anotherimportant issue toward which financial-economic students like us should be observant and offer our intelligent...