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Re-shaping the Global Financial Architecture: Dual SIFIs' Role

for suitable measurement methods of total system-wide risk. 2. The adherers to the second stream lay stress on procedures for attributing total system-wide risk to individual institutions.

Both streams present a theoretical analysis of some of the elements of systemie risk, analyze empirical facts to be able to verify, whether the findings could be used for big financial companies risk management and/or for macro-economic regulation.

Most recent analyses were concentrated on such elements of systemie risk as the “interconnectedness”; other authors analyse “vulnerability” of financial institutions to be able to predict futurę losses stemming from systemie risk¹.

2. Systemie significance and Systemically Important Financial Institutions

If systemie risk is dangerous, it is necessary to manage it. The bigger the company, the higher is potential systemie risk for national economy. The role of supervisory authorities is to minimize this risk as much as possible.

To be able to manage systemie risks arising from the existence of economi-cally significant financial companies, the financial regulatory/supervisory authorities had-firstly, to identify the significance of big financial companies, secondly, to classify these companies from the point of views of potential losses caused by their activities, event. potential failure, and thirdly, to reduce the number of potentially ‘"dangerous” companies for national economy, i.e. primarily for its financial stability.

In 2009, a policy discussion paper was published by Federal Reserve Bank of Cleveland. This study discussed one of the most important issues (that time) of the regulatory reform problems. The paper proposed a framework of identify-ing and supervising the systematically important institutions. These institutions were thought to derive considerable advantages from their size, for example “to be too big to fail '. TBTF theory supposes that big size companies, in case of a failure, should be saved by State subsidies etc. to prevent further bigger losses caused by their big size. The so called “four Cs”, i.e. contagion, concen-tration, correlation and conditions were proposed as important criteria for SIFIs' identification; several categories of SIFIs were defined. This paper, however,

1

M. Drehman. N. Tarashev: Measuring the Systemie Importance of Interconnected Banks. BIS Working Papers. No. 342. March2011.