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Project in the Spotlight

Created: 23 Aug 2013

Jeffrey SheenAn important project being undertaken within the Centre for Financial Risk was profiled at a recent symposium on systemic risk which will ultimately offer valuable insight for policy makers and market participants to manage and hedge against risks, based on real-time information.

Hosted by the Centre for International Finance and Regulation (CIFR), the research being undertaken by Centre for Financial Risk co-directors Professor Jeffrey Sheen and Professor Stefan Trueck, with Dr Ben Wang and Dr Chi Truong, was presented at the symposium on 8 August.

Their project, Early-Warning Systems and Managing Systemic Risk using Real-Time Financial and Business Conditions Indicators, is a key research project at the Centre for Financial Risk.

The presentation outlined the research to date, which involves estimating real-time business and financial indicators, then conducting systemic risk analysis before considering the implications. It aims to eventually contribute to enhanced understanding of financial stability in Australia and the region.

The project, which is based on forward-looking indicators for business conditions, financial and systemic risks, will provide an efficient low cost summary of information, in real-time, contributing economic benefits to policy-makers and market participants who manage and hedge against risk.

So far it has involved the estimation of unobservable domestic and external indexes for Australia that summarise large amounts of information, decomposing the contributions of the set of observable variables, and constructing responses to both unobservable and observable variables to shocks. The analysis focused on the 2008 financial crises and its aftermath, and considered – but was not limited to - a range of economic indicators, including a measure of business confidence, the terms of trade, total hours worked and treasury bond spreads.

Key results from this phase showed business confidence played a vital role in the index reflecting domestic business conditions, while the terms of trade were crucial to the external conditions index. Three important linkage channels from the external index to the internal index were also recognised.

Data collection and management is now proceeding to work towards the aim of developing a systemic index with early-warning features that can be used for macro-prudential policy. This will look closely at expected default frequencies across many countries, resulting in an inference of the probability of a systemic event in Australia, even though there have been few defaults in this country.

Professor Jeffrey Sheen

"What we expect to find actually is that Australia's financial institution are contributing very little risk. They're actually very well managed, well regulated and supervised. We're not expecting policy makers to have to change very much of what they do, in fact we're going to validate the effectiveness of what they have done." 

View highlights from the Centre for International Finance and Regulation (CIFR) Symposium

The inaugural symposium was held on 8 August 2013, where finance sector leaders gathered to discuss the progress of six CIFR-funded research projects focused on systemic risk. The first of a series, the symposium was designed to give researchers the opportunity to discuss their projects with an audience of academic peers, finance industry executives and financial sector regulators.

The event received strong support with more than 100 people participating, providing a powerful demonstration of CIFR's increasingly important position in financial markets, policy formulation and research.

Guests were welcomed by Kylie Hargreaves, Acting Deputy Director General, NSW Trade & Investment. CIFR Chairman. Peter Mason, CIFR Chairman, then introduced the symposium by reinforcing the importance of the CIFR projects being undertaken. This was followed by CIFR CEO David Gallagher foreshadowing CIFR's new approach to commissioning research projects.

Six researchers then presented preliminary findings and key issues from their research projects: Professor Mardi Dungey, University of Tasmania; Associate Professor Harald Scheule, UTS; Dr Scott Donald, UNSW; Professor Jeffrey Sheen, Macquarie University; Dr Ying Xu, ANU, Professor Fariborz Moshirian, UNSW.

The projects were reviewed by an eminent panel of senior regulatory and industry representatives including Dr John Laker, Chairman, Australian Prudential Regulation Authority, Dr Malcolm Edey, Assistant Governor,(Financial System), Reserve Bank of Australia, Dr Andries Terblanché, Senior Partner, KPMG Australia and Mr Ian Paterson, Partner, King & Wood Mallesons.

Peter Mason, CIFR Chairman

"This is what CIFR is all about. Translating the research which is being undertaken by a wide range of people into practical impact for the stakeholders to get a feel for what the direction is of the research and the quality is. I must stay it's been a huge success, you can tell that by the engagement in the room."

John Laker, APRA Chairman

 "The six projects covered different dimensions, two looked at the assessment of risk and how you might try to identify risk early, two looked how the financial system was interconnected with the real economy and two looked at transmission mechanisms in the region. Together they have covered a wide field. The take away for APRA is the important questions of the interconnectedness of the financial systems and the links between the financial system failure and the real economy."