Systemic Risk in Banking : Systemic risk is the possibility that an event at the company level could trigger severe instability or collapse an entire industry or economy.

1. Too Big to Fail
Systemic Risk in Banking
BIPIN BANERJEE

2. What Is Too Big to Fail?
 Too big to fail is a phrase used to describe a financial
institution that is so entwined in the global economy that
its failure would be catastrophic.
 The government will often intervene to bail out the business
or even an entire sector such as Wall Street banks or U.S.
carmakers to prevent economic disaster.
 Big doesn't refer to the size of the company, but rather it's
involvement across multiple economies.
 One example of such intervention was the Emergency
Economic Stabilization Act of 2008, which included the
$700 billion Troubled Asset Relief Program (TARP).
 Synonym: Systemically Important Financial Institutions
[SIFI]
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3. What is Systemic Risk?
 Systemic risk is the possibility that an event at the company
level could trigger severe instability or collapse an entire
industry or economy.
 It can also be small, specific problems, such as security flaws
for bank account, or website user information. Bigger, wider-
reaching issues include a broad economic crisis sparked by a
collapse in the financial system.
 Systemic risk is the risk that an event at the company or
industry level could trigger a huge collapse, like the 2008
financial crisis.
 Companies considered to be a systemic risk are called “Too
big to fail.“
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4. Moral Hazard
 A moral hazard exists when a person or entity engages in risk-taking
behaviour based on a set of expected outcomes where another person or
entity bears the costs in the event of an unfavourable outcome.
 Example 1: Before the financial crisis, financial institutions' expected that
regulating authorities would not allow them to fail due to the systemic risk
that could spread to the rest of the economy. There was the expectation
that if negative factors led to a crisis, the financial institution would receive
special protection or support from the government. Otherwise known as
moral hazard.
 Example 2 : Lenders made risky lending decisions under the assumption
they would not be holding the debt through its entire maturity. Banks were
offloading a bad loan, bundled with good loans, in a secondary market
through collateralized loans, thus passing on the risk of default to the
buyer.
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5. Identifying SIFI
 CONTAGION: A contagion is the spread of an economic crisis from
one market or region to another. What one institution does,
because of it’s trading relationships, it’s relationships in the
industry- Will that failure of one industry have an impact on the
other institutions in the industry?
 CORRELATION: Correlation means the degree to which two banks
move in relation to each other. Do these banks function in the same
way? Do they take the same kinds of risks as other banks do? If
one goes down, do they all go down?
 CONCENTRATION: In the industry is there one player that is
massive, that is larger than all of the other ones like AIG, the
insurance giant which is much larger than its peers.
 CONTEXT: What happens if these institutions function normally in
an normal operative environment, But if the economy goes bad,
they may all go down with it?
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6. Real Examples of SIFI
 Banks that the U.S. Federal Reserve has said
could threaten the stability of the U.S.
financial system include the following:
1. Bank of America Corporation
2. The Bank of New York Mellon Corporation
3. Barclays PLC
4. Citigroup Inc.
5. Credit Suisse Group AG
6. Deutsche Bank AG
7. The Goldman Sachs Group, Inc.
8. JP Morgan Chase & Co.
9. Morgan Stanley
10. State Street Corporation
11. UBS AG
12. Wells Fargo & Company
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 Examples of global systemically important financial
institutions include:
1. Mizuho, Japan
2. Bank of China, China
3. BNP Paribas, France
4. Deutsche Bank, Germany
5. Credit Suisse, Switzerland

7. 07
TARP
Troubled
Assets
Relief
Program
 The Troubled Asset Relief Program (TARP) was an initiative created and run by the U.S.
Treasury to stabilize the country’s financial system, restore economic growth, and
mitigate foreclosures in the wake of the 2008 financial crisis. TARP sought to achieve
these targets by purchasing troubled companies’ assets and stock.
 Program of Bail-out and capital
infusion into U.S Banks &
Companies to save the economy
from Global Financial Crisis.

8. 08
Bail Out of few
“Too Big to fail”
Financial
Institutions
in 2008 Crisis
Freddie Mac
Fannie Mae
MORTGAGE
LENDERS
Wells Fargo
Chase
INVESTMENT
BANKS
American
International Group
INSURANCE
COMPANIES

9. "If they're too big to fail, they're too big.”
-ALAN GREENSPAN
All truths are easy to understand,
once they are discovered;
the point is to discover them.
Truth is,
-GALILEO GALILEI