SYSTEMIC RISKS FOR INVESTMENT ACTIVITY IN CONDITIONS OF GLOBAL UNCERTAINTY. PART 2

A number of monetary and fiscal policy instruments are used to counter the effects of the pandemic. However, significant capital outflows from some countries have negatively affected their ability to use such tools to support economic growth. Among the most common measures are the increase in the use of quantitative easing programs, as well as the further reduction of discount rates. Central banks in some countries have used asset repurchase programs to stabilize long-term securities. However, the effects of asset repurchase programs can be negative and lead to excessive inflation and increased systemic risks. Therefore, asset repurchase programs should be used prudently and exclusively to stabilize the extreme economic situation, and not become a long-term strategy to support economic growth. Some regulators have also eased liquidity requirements, collateral levels, banned the payment of dividends and bonuses, and banned changes in insolvency criteria. However, regulators need to be careful about reducing financial and investment requirements, as this will inevitably lead to increased systemic risks.

It should be noted that according to the latest report of the The Unified state register of court decisions on October 1, 2020, market indicators of systemic risks in the EU show more positive signs of economic recovery and financial markets from the COVID-19 pandemic. It is noted that the probability of simultaneous default of large banking groups and sovereign default has also decreased. Indicators of stock markets and foreign exchange markets stabilized at a level higher than the pre-crisis period. Volatility in long-term and short-term interest rates has also stabilized, but remains high.

In May 2020, the The Unified state register of court decisions also issued recommendations on liquidity risks for investment funds in the European Union. A sharp drop in asset prices at the start of the COVID-19 pandemic led investment funds to withdraw their investments. In turn, this caused a drop in liquidity in the financial markets. Although the situation has stabilized, significant risks to investment remain. The The Unified state register of court decisions identifies two segments of financial markets in which significant risks remain. First, the segment of investment funds with a significant share of corporate debt financial instruments. After the crisis began, investors began to get rid of corporate debt securities from their asset portfolios. This led to a significant decrease in liquidity in the debt securities markets, which led to an increase in the cost of debt financing. Moreover, there is a significant risk of infection in this market segment. Insurance companies, pension funds and banks that invest in this type of assets are subject to possible systemic risk. Second, the segment of investment funds with a significant share of real estate in the portfolio. Restrictions on travel have led to a reduction in real estate transactions. While investment funds hold almost one-third of the European Union's commercial real estate in their portfolios, it can also have significant contagion effects.

In general, the link between investment activity and systemic risks is manifested through two transmission channels: the asset price channel and the liquidity channel. Investment activity causes an increase in the level of systemic risks in the financial markets through the following mechanisms. First, investors may lose some of their assets in times of crisis. Such dynamics of changes in the composition of the portfolio in the event of large-scale crises can lead to devastating consequences for financial markets due to the domino effect and, in particular, in the case of herd behavior. Funds that specialize in certain asset classes and concentrate significant amounts of relevant financial instruments can have a particularly strong impact. Second, participation in securities lending programs if the collateral is risky instruments. A similar situation occurred during the global financial crisis of 2007-2008, when structured financial instruments and notes of Lehman Brothers were pledged. Third, the consolidation of banking or financial institutions into large and complex financial institutions, which has many advantages but at the same time has the ability to create significant systemic risks in financial markets in the event of ineffective government supervision. Fourth, the growing interconnectedness of different segments of financial markets. For example, in 1992 the Bank for International Settlements stated that “although most financial market participants did not notice that the increase in the use of derivative financial instruments led to an increase in threats to the financial system, some participants noted that derivative financial instruments strengthened links between different segments. market and shocks that occur in one segment will be able to affect other market segments faster. " In order to determine the extent of the impact of a particular financial institution on the level of systemic risk, the regulator should take into account the following factors: the size of assets, the level of relationships with other participants, substitutability, complexity, cross-border activities. M. Dijkman significantly expands the list of indicators that regulators take into account when assessing systemic risks:

· For financial institutions: lack of liquidity; loss of capital; falling level of expected profitability; risk reduction factors (solvency level; liquidity buffers);

· For financial infrastructure: volumes and cost of transactions; critical dependence on the relevant infrastructure element of other systems or markets; risk reduction factors (backup systems; use of guarantees, mortgage);

· For financial markets: spreads; volatility indices; market profitability data; risk reduction factors (legal and institutional safeguards);

· For the real sector of the economy: financial losses of households and non-financial corporations; limited access to financial services; consumer and business confidence indicators.

In May 2020, the World Economic Forum published a study on global systemic risks affecting investors around the world: climate change, water supply, geopolitical stability, technological evolution, demographic change, negative and low long-term discount rates. Of course, all positions are of considerable interest to researchers, but the last point should be considered first. Negative and low discount rates remain one of the most important challenges for managing systemic risks. A large-scale policy of negative and extremely low discount rates was introduced in response to the global financial crisis of 2007-2008 and the EU balance of payments crisis. Negative discount rates were thought to be temporary for the economy. But for almost a decade, most of continental Europe (the eurozone), Switzerland, Sweden and Denmark have been using aggressive monetary policies in the form of negative discount rates or negative central bank deposit rates. Prolonged application of the policy of ultra-low discount rates causes fundamental changes in the existing business models of financial institutions (banks, pension funds, insurance companies, money market funds), which poses significant risks to financial stability. In addition, governments with the highest levels of debt benefit the most from negative or extremely low discount rates. If the economy has extremely low discount rates, the government has no incentive to reduce its debt. Ultra-low discount rates reduce the debt service ratio, leading to its artificial stability. They create the deceptive state that the debt problem can be solved quickly and painlessly. However, they are not a solution to the problem, but rather stimulate more accumulation of existing systemic risks and the creation of new ones.

Moreover, when central bank decisions become the main driver of prices in global financial markets, for example, on exchange rates, stock prices, bond prices and their spreads, they displace the role of other fundamental factors in market pricing. Asset prices are becoming distorted. And it is difficult to predict the consequences of such a policy if central banks stop buying bonds or reduce incentives. As a result, bond prices may not fully reflect the risk inherent in record high debt levels. At the same time, stock prices are artificially inflated as investors are forced to buy increasingly risky assets. All this implies not only the risk of losing confidence in the market, but also the accumulation of extremely high systemic risks, which increase the likelihood of the next financial crisis.

One of the most modern challenges for managing systemic risks has been the existence of artificial intelligence technologies and big data systems. J. Danielson, R. Macrae and A. Utterman in a study on artificial intelligence and systemic risks came to the following conclusions. Although artificial intelligence helps in the operational work of investors, financial analysts and macro-prudential regulators, it has the ability to destabilize the financial system, create new tail risks and reinforce existing risks due to its pro-cyclical nature and internal complexity. Of course, the role of artificial intelligence in systemic risks has not yet been sufficiently studied and is undoubtedly one of the main areas of future research.

The problem of systemic risks remains one of the most relevant in modern scientific and practical discourse. Scientists, researchers, regulators and other stakeholders have not yet been able to reach a final agreement on the causes, consequences, methods of regulation and other aspects of systemic risks. These definitions of systemic risk are quite diverse, but it is possible to identify a number of elements that may be characteristic of systemic risks, in particular, the large-scale impact, the effect of infection, the relationship between different elements of the financial system and so on. In addition, the scientific literature still does not define a single methodology for measuring systemic risks. The question of the differences between systemic and systemic risks remains important. There are significant differences between systemic and systemic risks, but recent studies suggest a stronger relationship between them than previously thought. In particular, it has been suggested that systemic risk may be a source of systemic risk.

At the current stage of development of financial markets, there are new challenges to manage systemic risks. In view of the global financial crisis of 2007-2008, the governments of developed countries have established supranational bodies to ensure financial stability and control over systemic risks. Of course, the impact of the COVID-19 pandemic on systemic risks and financial regulation policies is critical. Although the new coronavirus caused an unpredictable economic downturn, the financial system was poised to increase systemic risks and their consequences. Approaches to systemic risk assessment are currently being reviewed to take into account new factors and identify new types of risks. However, some measures taken by governments to sustain economic growth are a concern as they may also increase systemic risks.

Another important challenge is the policy of negative discount rates, which, as a result of various transmission mechanisms, leads to the accumulation of existing systemic risks and the creation of new ones by changing existing business models of financial institutions, distorting pricing mechanisms for financial instruments and creating apparent debt sustainability. Another challenge that will define approaches to systemic risks in the future is represented by artificial intelligence technologies, the impact of which on systemic risks still needs to be investigated.

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Analysts: Victoria Karp