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Value, Vulnerability and Resilience of the Financial Market Infrastructure

SIBOS Conference, Geneva, 30 September 2002, 30.09.2002

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Today’s globalized financial industry shows impressive long-term value growth. This growth is due to market integration and technological progress. Together they led to sizable reductions in transaction costs and to expanding markets.

Every transaction eventually leads to a transfer of money. From trade to settlement, usually at least one system of financial market infrastructure is involved. Overseers care for the safety of these systems.

The events of September 11, 2001 made the industry, the regulators and the overseers rethink their approach to safety. Consequently, the vulnerability of the financial system and its resilience are currently being reevaluated. Three major sources of vulnerability have been identified: economic concentration, geographic clustering and connectivity, and interdependency. Networks by their very nature can act as channels as well as origins of systemic crises.

The awareness of vulnerability leads to new and substantial demands for investment in resilience. For instance, crisis management is a demanding activity. It involves private firms, financial market infrastructures, public supervisors, and oversight institutions. Without the cooperation of all of them, crisis management cannot succeed. Investment in resilience is costly. The benefits of the financial sector’s value growth cannot be enjoyed without paying this price. Should the price not be paid, value growth would turn out to be unsustainable. There are no stable financial systems that are not at the same time highly resilient under crisis conditions.

Resilience of financial service providers in general and of the financial market infrastructure in particular has been placed at the top of regulatory authorities' agendas. As much as public bodies are contributing to the resilience of the financial system as a whole, they will make demands of the private sector. As much as public bodies are willing to step in as coordinators before and during times of crisis and eventually as lenders of last resort, they also want to see private sector entities involved and actively participating in shaping resilience and resolving crises. The responsibility for financial stability is a shared responsibility.