The Feasibility of Systemic Risk Measurement

A testimony by Andrew Lo for the U.S. House of Representatives Financial Services Committee for its hearing on systemic risk regulation, held October 29, 2009. It proposes two major measures that could alleviate the next big financial crisis.

First, new legislation that provides more transparency on a confidential basis to regulators on financial institutions activities. This would allow measuring systemic risk using a variety of methods such as developing “network maps”.

Second, establishing a Capital Markets Safety Board (CMSB) devoted to measuring, tracking, and investigating systemic risk events. The board would manage the related data and analyse every financial wreckage in a similar manner as National Transportation Safety Board (NTSB) examines e.g. ariplane crashes.