ABSTRACT
This chapter explains the formal analysis of systemic risk to highlight some lessons and challenges facing the new Board and regional policy-makers in the areas of crisis warning and prevention. The debate on systemic risk measurement and management is not an arcane exercise in finance and must be taken seriously by the region. The outcomes will likely influence the shape of the international financial architecture and materially affect financial integration, development and economic growth. Asia's stake in international regulatory cooperation has increased substantially with the financial crisis, and regional policy-makers will need to play a major role in helping define new international standards for macro-prudential regulation. The Geneva Report makes clear that the main cause of systemic financial collapse is endogenous risk caused by key micro-economic externalities fuelling self-amplifying spirals. Despite the advances made in recent years, public-sector stress-testing models remain in their infancy.
