The Federal Reserve Bank of New York released a report -- New Directions for Understanding
Systemic Risk -- that presents key findings from a cross-disciplinary conference
that it cosponsored in May 2006 with the National Academy of Sciences' Board on Mathematical
Sciences and Their Applications. The pace of financial innovation over the past
decade has increased the complexity and interconnectedness of the financial system.
This development is important to central banks, such as the Federal Reserve, because
of their traditional role in addressing systemic risks to the financial system.
To encourage innovative thinking about systemic issues, the New York Fed partnered
with the National Academy of Sciences to bring together more than 100 experts on
systemic risk from 22 countries to compare cross-disciplinary perspectives on monitoring,
addressing and preventing this type of risk. This report, released as part of the
Bank's Economic Policy Review series, outlines some of the key points concerning
systemic risk made by the various disciplines represented - including economic research,
ecology, physics and engineering - as well as presentations on market-oriented models
of financial crises, and systemic risk in the payments system and the interbank funds
market. The report concludes with observations gathered from the sessions and a discussion
of potential applications to policy. The three papers presented in this conference
session highlighted the positive feedback effects that produce herdlike behavior
in markets, and the subsequent discussion focused in part on means of encouraging
heterogeneous investment strategies to counter such behavior. Participants in the
session also discussed the types of models used to study systemic risk and commented
on the challenges and trade-offs researchers face in developing their models.