SYSTEMIC RISKS FOR INVESTMENT ACTIVITY IN CONDITIONS OF GLOBAL UNCERTAINTY. PART 1

In modern scientific discourse, scientists have not been able to achieve a common definition of systemic risk. The European Central Bank defines systemic risk as "the risk that financial instability becomes so large as to impede the functioning of the financial system, economic growth and prosperity". The G10 within the Bank for International Settlements defines systemic risk as follows: "systemic financial risk is the risk that an event / shock will cause loss of economic value or confidence in a significant part of the financial system and is likely to have significant adverse effects on the real sector." G. Kaufman gives the following definition: "systemic risk refers to the risk or probability of adverse events throughout the system, not just in parts." O. de Bandt and P. Hartmann point out in a study under the auspices of the ECB that "systemic risk is the risk of a systemic event that will affect financial institutions or markets, which will lead to the disruption of the financial system." S. Schwartz proposes the following definition of systemic risk: "the risk that an economic shock ... will cause the collapse of a number of markets or institutions or lead to significant losses of financial institutions, which will increase the cost of capital or reduce its availability." L. Hansen points out that "systemic risk refers to the risks of falling financial markets or significant violations in their work." S. Choi defines systemic risk as follows: "risk that causes disorders in the functioning of the financial system, which begin with one component of the system and then cover the entire system." K. Giseke and B. Kim propose to define systemic risk as a "conditional possibility of the fall of a significant part of financial institutions." V. Akarya defines systemic risk as "the risk of large-scale failures of financial institutions or the freezing of capital markets, which can significantly reduce capital flows to the real sector of the economy." P. Smaga proposes to understand systemic risk as "the risk of spreading the problems of one financial institution to another financial institution (or the entire system)." The Financial Stability Board defines systemic risk as "the risk of destruction of financial services, which is caused by disturbances in the entire financial system or its parts and has the ability to cause serious negative consequences for the real sector of the economy." The International Monetary Fund defines systemic risk as "significant losses caused to financial institutions by the collapse of another financial institution due to their interconnectedness." The Bank for International Settlements defines systemic risk as "the risk that a participant's failure to meet its contractual obligations may result in the default of other participants, with the domino effect causing significant financial difficulties." BIS further clarifies the concept and points out that “first, economic shocks can become systemic due to the existence of negative externalities associated with serious disturbances in the financial system ... systemic risk is usually associated with the effect of infection for other parts financial system ... Secondly, systemic financial events cause undesirable consequences for the real sector of the economy, such as a significant reduction in production and employment ... ".

Despite in-depth research, there is still no conceptual coherence regarding systemic risk. Mr Schwartz notes that "there are no specific criteria for determining which types of risks are systemic and which ones need to be addressed". The scientist points out that "the only common feature of most concepts is that a certain event causes a chain reaction of negative consequences." L. Hansen notes that "the term" systemic risk "has become a mixture of multidirectional concepts that are not compatible with each other." According to the scientist, this theoretical uncertainty complicates the regulation of financial markets. Moreover, L. Hansen notes that there are no quantitatively sound models that link systemic risks to financial markets. It should be noted that the role of financial markets is considered one of the most complex elements of systemic risk analysis. We can support the opinion of P. Smaga, who, after analyzing a number of definitions, proposes to identify the following features of systemic risk:

· Randomness, unpredictability;

· Dysfunction of the financial system;

· Large-scale (systemic) impact;

· Infection effect / chain effect / domino effect;

· Impact on the real sector of the economy;

· Significant risk of default;

· The relationship between the various elements of the financial system.

Moreover, apart from the uncertainty regarding the concept of systemic risk, the scientific literature still does not define a single methodology for measuring systemic risks. There are currently about thirty different measurement models that are quite different from each other. K. Giseke and B. Kim came to the conclusion that "when measuring systemic risk, we face two problems: the measure of quantitative expression of systemic risk as a unit and the distribution of systemic risk between individual institutions." C. Eifinger points out that two components need to be considered to measure systemic risk: the detection of early manifestations of asset bubbles and the assessment of each institution's share of systemic risk. Most systemic risk researchers rely on the following aspects. First, the need to assess the share of each individual financial institution in systemic risk. Secondly, the influence of factors of violations in financial markets on the general condition of market participants.

It is worth noting that in the past, systemic risks were often not given enough attention. Systemic risk research began to be actively pursued after a series of crises in the 1990s, such as the Mexican peso crisis and the crisis in Asian markets. In general, one of the reasons for the existence of a modern system of regulation of financial markets, in particular prudential financial supervision, is the presence of systemic risks. As K. Kubica and G. Grundl emphasize, "after the global financial crisis of 2007-2008, regulatory policy bodies began to pay considerable attention to the stability of individual financial institutions and their role in crisis phenomena, ie systemic risk." A number of supranational institutions have been established to ensure financial stability and control over systemic risks, and systemically important financial institutions have been identified. For example, in 2010, in order to prevent future financial crises, the ECB established the European Systemic Risk Board, which provides macro-prudential supervision of European financial markets and identifies systemic risks. At the present stage, specialized institutions for the study of systemic risks, in addition to the USSR, are, in particular, the Financial Stability Board, as well as some universal institutions such as the International Monetary Fund and the Bank for International Settlements.

It is important to emphasize the difference between systemic and systemic risk. One of the differences between systemic and systemic risks is that systemic risks are already well studied and quantified in models. In 1990, William Sharp received the Alfred Nobel Prize from the Swedish Central Bank for Economic Sciences for developing the foundations of the Capital Asset Valuation Model (CAPM). In the capital asset valuation model, it was first identified that there are two different types of risk: systematic and non-systematic. The model states that with ideal diversification, an investor can eliminate the unsystematic risk associated with an individual company. Unsystematic risk between companies arises due to differences in corporate financial management. Examples of unsystematic risk may be a failed marketing strategy, the loss of key customers - individual events for the company that affect its financial condition. Diversification provides a significant reduction in the overall level of risk if the components of the portfolio have a low level of correlation. In fact, if the portfolio is diversified properly, taking advantage of, in particular, all the benefits of international diversification, the overall risk of the portfolio will be almost zero. As noted above, despite diversification, there is still a small part of the risk that cannot be eliminated, namely systemic risk. General uncertainty in the economy, macroeconomic conditions such as the business cycle phase, inflation, interest rates, exchange rates, etc. determine the level of systematic risk. K. Kubica and G. Grundl point out another difference, which is that systemic risk is a measure of how market risk affects an individual financial institution, and systemic risk examines how an individual financial institution can be a risk factor. In addition, systemic risk lacks the domino effect or the contagion effect, which is key to systemic risk when an event in one market segment affects other segments. On the other hand, S. Schwartz draws attention to the fact that systemic risk should be distinguished from economic downturns caused by normal market fluctuations and represent a systematic risk that cannot be diversified. Despite the differences with systemic risk, systemic risk is equally important for investment activities and financial markets. The case of Long-Term Capital Management illustrates well the dangers of systemic risk in financial markets. Although the company used well-diversified hedging strategies that had an extremely low level of correlation with the stock market, systemic risk in the debt securities market put Long-Term Capital Management on the verge of bankruptcy.

Of course, in terms of definitions, systemic and systematic risks are different. However, some researchers point to a closer relationship between the two types of risks than previously thought. L. Hansen points out that the effects of macroeconomic policy can be a source of systematic risks. In other words, systemic risk can be a source of systemic risks. S. Choi, K. Kim and S. Park in a study on the relationship between systemic and systemic risks, empirically prove that systemic risk factors are reflected in the price of stock market instruments, ie systemic risk is offset by higher returns. in terms of definitions, systemic and systematic risks are different. However, some researchers point to a closer relationship between the two types of risks than previously thought. L. Hansen points out that the effects of macroeconomic policy can be a source of systematic risks. In other words, systemic risk can be a source of systemic risks. S. Choi, K. Kim and S. Park in a study on the relationship between systemic and systemic risks, empirically prove that systemic risk factors are reflected in the price of stock market instruments, ie systemic risk is offset by higher returns.

It is worth noting that the regulation of systemic risks has faced a number of new challenges. Global uncertainty in financial markets reaffirms the importance of identifying systemic risks in a timely manner and responding to them effectively. Financial supervisors and central banks are constantly looking for new tools to identify systemic risks and improve existing models to identify and assess potential threats to the stability of the financial system. It should be noted that the regulation of systemic risks has faced a number of new challenges. Global uncertainty in financial markets reaffirms the importance of identifying systemic risks in a timely manner and responding to them effectively. Financial supervisors and central banks are constantly looking for new tools to identify systemic risks and improve existing models to identify and assess potential threats to the stability of the financial system.

The report of the European Systemic Risk Board for the period from April 1, 2019 to June 1, 2020 states that the COVID-19 pandemic as an extraordinary macroeconomic shock has led to the emergence of new systemic risks. COVID-19 and measures taken by countries around the world to contain it have caused an unpredictable downturn in the world economy. Although the global financial system has shown significant resilience compared to the global financial crisis of 2007-2008, the downturn has led to a new period of global uncertainty, increased risk and increased financial instability. For these reasons, the European Systemic Risk Board is currently reviewing approaches to systemic risk assessment to take into account new factors arising from the pandemic. The Unified state register of court decisions identifies four new types of risks:

· Large-scale defaults in the private sector as a result of the deep global recession;

· Complex macroeconomic environment for banks, insurance companies and pension funds;

· Return of sovereign financing risks;

· Instability and lack of liquidity in financial markets.

However, the The Unified state register of court decisions notes that systemic risk assessments remain important long-term threats, such as large-scale cyber incidents, damage to important financial infrastructure, climate change and transition risks. The Unified state register of court decisions also made recommendations and took action on the following issues, including:

· Effects of guarantee schemes and other fiscal measures to protect the real sector of the economy for the financial system;

· Changes in the financial strategies of investment and insurance managers due to the lack of liquidity in the markets;

· The impact of pro-cyclical downgrades of bonds and other securities throughout the financial system, in particular an increase in the cost of debt financing;

· Large-scale restrictions on dividend payments, share repurchases and other payments;

· Liquidity risks arising from margin requirements.

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Analysts: Victoria Karp