MIT Center for Finance and Policy and the Harvard Crowd Innovation Laboratory launch contest to generate new proposals for criteria to quantify systemic importance of financial institutions

02 Dec, 2015, 07:30 ET from MIT Center for Finance and Policy

CAMBRIDGE, Mass., Dec. 2, 2015 /PRNewswire-USNewswire/ -- The MIT Center for Finance and Policy (CFP) and the Harvard Crowd Innovation Laboratory (CIL) are launching a contest to generate new proposals for criteria that regulators should use in designating financial institutions as "systemically important." A prize pool of $10,000 will be distributed to the winners who propose the most well-reasoned, comprehensive and implementable definitions. Everyone is eligible to participate. Submissions from financial economists, regulators, and practitioners, as well as from experts in systemic risk assessment from other fields are particularly welcome.

The financial crisis of 2008 has brought vastly increased attention to risk spillovers in the financial sector. As part of addressing systemic risk, financial regulators such as the Financial Stability Oversight Council have been tasked with identifying Systemically Important Financial Institutions (SIFIs). Institutions designated as SIFIs are subject to additional oversight and regulation.

There is not yet a globally agreed-upon definition of a SIFI, although regulators have proposed and are applying a variety of criteria to designate some institutions as systemically risky. Financial entities whose failure or disruption could severely impact the financial system and broader economy are typically considered candidates for SIFI designation. Large banks, insurance companies, exchanges, clearing houses, finance companies and investment funds have all been identified as potentially or actually systemically important. Large government-controlled financial institutions—such as Fannie Mae and Freddie Mac, development banks, and sovereign wealth funds—are likely candidates as well, and criteria need to be developed for which ones should be classified as SIFIs.

The lack of a comprehensive, conceptually coherent, and globally accepted set of criteria for quantifying the systemic importance of individual institutions and for designating SIFIs raises difficulties for financial institutions and regulators alike. The designation comes with significant regulatory costs and administrative burdens for affected institutions. Those costs must be weighed against the potential benefits of increased financial stability. A more transparent designation process that avoids a one-size-fits-all approach would improve fairness and efficacy and make it easier for firms to take preemptive actions to reduce their contributions to systemic risk and thus avoid SIFI designation. 

The mission of the MIT Center for Finance and Policy (CFP) is to serve as a catalyst for innovative, cross-disciplinary and non-partisan research and educational initiatives that address the unique challenges facing governments in their role as financial institutions and as regulators of the financial system. Research initiatives supported by the CFP are organized into three main tracks: (1) Evaluation and Management of Government Financial Institutions; (2) Regulation of Financial Markets and Institutions; and (3) Measurement and Control of Systemic Risk.

The CIL's mission is to work closely with partner organizations to solve their real-world innovation problems and simultaneously make progress towards understanding the foundational economic, managerial and organizational issues that predict success in working with crowds. Since its founding, the CIL has collaborated on and completed over 700 discrete innovation challenges for a range of scientific and technical tasks.

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SOURCE MIT Center for Finance and Policy