What Is a Systemically Important Financial Institution?

The so-called "systemically important financial institution" refers to a financial institution with a large business scale and a high degree of business complexity. Once a risk event occurs, it will bring a shock to the regional or global financial system. According to the agreement passed at the G20 Cannes Summit, these systemically important financial institutions will be required to add additional capital, and the Financial Stability Board will review and update the list in November each year.

Systemically important financial institutions

Right!

The so-called "systemically important financial institution" refers to the large scale of the business and the high degree of complexity of the business.

At present, scholars have focused more on the analysis of microeconomic aspects and reached consensus.
The first is to increase the range of instruments for investors and issuers to hedge, speculate and arbitrage in the market; the second is to reduce transaction costs and increase the liquidity of financial assets; the third is to reduce information asymmetry and agency costs. However, in the discussion of the macro effects of financial innovation, there are major differences. For example, Peter Tufanoc et al. (1995) demonstrated the improvement of financial innovation on the economic and social welfare in combination with cases. Too optimistic; Chen Ziji (2000) discussed and analyzed theoretically the issue of financial innovation promoting financial deepening, changes in the currency supply and demand mechanism in financial innovation activities, and the stability of financial innovation and the financial system. "It not only promotes financial development, but also brings difficulties to the formulation of monetary policy, and also increases the potential crisis of the financial system.
I. SIFIs financial product innovation and the stability of the financial system 1. Pricing of financial product innovation tools The emergence of financial product innovations may lead to the emergence of financial institution crises and thus increase the risk of the entire financial system, but this mainly depends on financial innovation Whether the various inherent risks are reasonably priced, that is, whether engaging in new financial business can generate sufficient profits to make up for risks from the market, credit and other aspects. Because of the increasing number of factors affecting financial markets, pricing financial innovation instruments is much more difficult than traditional financial instruments. After the emergence of innovative tools, if market competition is fierce and financial institutions will reduce pricing, this pricing may be lower than the price after a reasonable consideration of risk costs. Many western economists believe that with the maturity of the market for innovative tools and the risks of innovative tools truly representing themselves, the pricing of tools will tend to be reasonable. But in the process of transition from unreasonable to reasonable, many financial institutions may have suffered huge losses, and thus caused the instability of the financial system and the financial crisis.
2. Risk accumulation and contagion effects of financial product innovation Due to the risk accumulation and contagion effects of financial product innovation and the strong correlation between systemically important financial institutions and other financial institutions, financial product innovation of systemically important financial institutions reduces the stability of the financial system. Sex. The accumulation of risks and contagious effects of financial product innovation are mainly determined by the characteristics of financial product innovation tools and changes in transaction methods brought about by financial product innovation. Firstly, the leverage of financial product innovation tools small and large may bring high income to traders, and may also cause huge losses. Second, financial product innovation tools are virtual. The market consequence is that the scale of the financial product innovation market greatly exceeds the size of the original market, resulting in the separation of the virtual market from the physical market. In addition, the changes in transaction methods brought about by financial product innovation will also expose financial institutions to some operational risks. Finally, there is increased risk from speculation. Contemporary financial product innovation has created a large number of advanced methods for speculative activities. The use of these speculative methods has exacerbated the accumulation and transmission of financial risks. In addition, because financial product innovation has created a much more complex debt and debt chain between financial institutions on the one hand, it has directly strengthened the close links between financial institutions, financial markets, and financial institutions and financial markets. Indirectly, it has promoted the trend of financial internationalization mainly represented by the internationalization of financial services, the internationalization of financial markets, and the internationalization of capital flows. In addition, the public's psychological expectation of credit for other financial institutions caused by information asymmetry in the OTC market This will make it easier for local financial risks to be transformed into global financial risks, thereby weakening the ability of the financial system to resist local risks, and reducing the stability of the entire financial system. This is the contagious effect of financial product innovation.
Systematic importance of SIFIs financial product innovation and development of high-end industries Financial product innovation of financial institutions will promote the development of high-end industries.
For example, the development of high-tech industries and modern service industries.
Due to the characteristics of the development process of high-tech industries, traditional financial investment and bank credit and other financial support methods are difficult to meet their development needs. The widespread use of financial product innovation tools with the characteristics of small and big has enabled venture capitalists to invest with smaller venture capital, which has stimulated venture capitalists investment desires and promoted the further development of high-tech venture capital investments. In addition, the role of financial product innovation in high-tech venture capital investment is also reflected in: enabling venture entrepreneurs to obtain new sources of external funding that were not previously available; providing venture capitalists with cheap investment resources; and enabling venture capitalists to have liquidity Financing is smoother; venture entrepreneurs can better bear the risk of investment or financing decisions; it provides conditions for stable production costs for venture entrepreneurs; companies can participate in financial markets and avoid risks in the price of factors of production; Operation can provide risk companies with more accurate and predictable price information, which is conducive to enterprise production decisions, sales decisions, and other aspects of corporate management; the emergence of financial derivative markets makes price information more sensitive and facilitates the efficient use of resources Configuration.
The innovation of financial products by systemically important financial institutions will accelerate the development of modern service industries. Modern service industry, financial insurance, legal consultation, film culture industry, etc. Accelerating the development of high-end service industries will help better address the deteriorating employment environment in colleges and universities. Develop emerging high-end service industries, expand the industry areas of modern service industries,
It is very important to absorb these high-quality jobless groups, improve the environment for the use of social resources, maximize the intellectual advantage of our huge educational resources, and promote the development of the tertiary industry.
3. Systematic importance of SIFIs financial product innovation and economic development The financial product innovation of financial institutions drives economic development. Taking IS-LM
A model to analyze the impact of financial innovation on macroeconomics.
For example, the establishment of futures and options markets will help mitigate price fluctuations and reduce risks, and promote corporate investment (see the figure above). The increase in corporate investment will shift the IS curve to the right, from IS to IS`, which will lead to an increase in the equilibrium interest rate and an increase in equilibrium output. The interest rate increases from i0 to i`, and the output increases from y0 to Y`; At the same time, the substitutability of various financial assets will increase, resulting in currency demand being more sensitive to changes in bond yields,
The LM curve tends to be flat and LM`-like. Obviously, these will lead to an increase in output and a decrease in interest rates. At the new equilibrium point E``, the output is y``, and the interest rate is i``. Although the effect of monetary policy has weakened due to the increase in the elasticity of the interest rate of money demand, the effect of fiscal policy will increase. Financial innovation has changed the way investors react to changes in interest rates. Regardless of the channel used, rising interest rates will lead to a decline in real investment. But there are no financial innovations. As a result, differentiated financial innovations have increased the channels for investors to obtain funds, and increased the availability of funds for investors. Therefore, also in the case of rising interest rates, due to the impact of financial innovation, actual investment may not have fallen so much. Therefore, the sensitivity of actual investment to interest rates weakens with the development of financial innovation. It can be seen that financial innovation is strongly related to economic growth, and the abundance of financial innovation should make economic operations more efficient.
Financial innovation promotes economic growth by broadening financial functions, facilitating social investment and financing, and acting on economic growth through innovation in financial markets, financial institutions, financial services, financial instruments, and financial systems. Without financial innovation, the internal dynamics of its economy cannot be mobilized. Rational and moderate financial product innovation can dynamically adjust the structure of financial products and optimize the structure of the financial system, thereby optimizing the industrial structure and promoting economic growth. However, irrational excessive financial product innovation will cause the internal structural imbalance of the financial system and affect the real economy, eventually triggering an economic crisis. China's micro-financial innovation main body lacks innovation motivation, weak basic conditions, financial innovation is regional, and lags behind economic development. These have limited the ability of China's financial innovation to promote economic growth. Therefore, on the one hand, the market needs more financial product innovation to expand the variety of financial services and reduce the congestion of certain products or transactions; on the other hand, it is necessary to regulate and monitor the market participation behavior of financial institutions.