May 21, 2010

Richmond Fed's Annual Report Features Essay on Systemic Risk

Richmond, Va.

The Federal Reserve Bank of Richmond today released its 2009 Annual Report, which features the essay, "Systemic Risk and the Pursuit of Efficiency."

Author Kartik Athreya, a senior economist at the Richmond Fed, considers what economists mean when they use the term "systemic risk" — a term that has been employed widely but not always consistently. In his essay, Athreya identifies systemic risk with "linkages between market participants that lead to outcomes that can be unambiguously improved after a shock." But should policymakers, in fact, take actions that would improve such outcomes? Not necessarily. Athreya points out that that a policy intervention may appear useful when undertaken during a crisis ("ex post") but could well be detrimental when evaluated before the fact ("ex ante"), because of the way it affects the incentives of financial market participants. Ultimately, Athreya argues, policymakers should strongly consider pursuing ex-ante rather than ex-post efficiency. Such a policy rule may be difficult to commit to, but could help to restore market discipline and prevent future shocks to the financial sector.

The Richmond Fed's Annual Report also includes reports on the region's economy and the Bank's operational and financial activities. And it takes a special look at the Bank's involvement in communities throughout the Fifth District of the Federal Reserve System.

The Annual Report is available on the Bank's website, or by contacting the Bank's Research Publications group at 800-322-0565.

As part of our nation’s central bank, the Richmond Fed is one of 12 regional Reserve Banks working together with the Board of Governors to support a healthy economy and deliver on our mission to foster economic stability and strength. We connect with community and business leaders across the Fifth Federal Reserve District — including the Carolinas, District of Columbia, Maryland, Virginia, and most of West Virginia — to monitor economic conditions, address issues facing our communities, and share this information with monetary and financial policymakers. We also work with banks to ensure they are operating safely and soundly, supply financial institutions with currency that’s fit for distribution, and provide a safe and efficient way to transfer funds through our nation’s payments system.

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