Today the MIT CFP announced the winners of its first crowd-sourced contest, “What is a Systemically Important Financial Institution?” A collaboration between the MIT Center for Finance and Policy and the Harvard Crowd Innovation Laboratory, the contest was launched to generate new proposals to specify sets of criteria that regulators should apply to designate a financial institution as systemically important.
Sanjiv Das (Santa Clara University) received the first place prize. Second place was awarded to Barbara Novick (BlackRock). Honorable mentions included Volker Brühl (Goethe University); Agostino Capponi(Columbia University) and W. Allen Cheng (Columbia University); Kathleen Hanley (Lehigh University), Mark Kritzman (Windham Capital) and David Turkington; and Alex Pollock and Thomas Stanton. A prize pool of $10,000 was split between the winners.
The winning entries addressed these challenges in a variety of ways (click here for a more detailed synopsis). Those included several technical proposals for new risk assessment schemes. Others were qualitative, suggesting putting more weight on leverage and function and less on asset size; designating large government-run financial institutions that play a central role in the financial system such as the Federal Reserve Banks, Fannie Mae and Freddie Mac; and refining the process to put more weight on cost benefit analysis and looking for alternatives that would achieve the same benefits. “It was exciting to see the breadth of the entries received and the potential of crowd-sourcing to help tackle challenges in financial policy-making,” said Sloan Professor and CFP Director Deborah Lucas.
The financial crisis of 2008 brought vastly increased attention by regulators to risk spillovers in the financial sector that could cause systemic problems. As part of addressing systemic risk, financial regulators have been tasked with identifying Systemically Important Financial Institutions (SIFIs). Institutions designated as SIFIs are subject to additional oversight and regulation.
The contest was aimed at addressing the many challenges surrounding SIFI designation. There is not yet a globally agreed-upon definition of a SIFI, although regulators have proposed and are applying a variety of criteria to designate some institutions as systemically risky. The lack of a comprehensive, conceptually coherent, and globally accepted set of criteria for quantifying the systemic importance of individual institutions and for designating SIFIs raises difficulties for financial institutions and regulators alike. The designation comes with significant regulatory costs and administrative burdens for affected institutions. Those costs must be weighed against the potential benefits of increased financial stability. A more transparent designation process that avoids a one-size-fits-all approach would improve fairness and efficacy and make it easier for firms to take preemptive actions to reduce their contributions to systemic risk and thus avoid SIFI designation.
The contest was judged by professors Paul Glasserman (Columbia), Karim Lakhani (Harvard), Andrew Lo (MIT), and Deborah Lucas (MIT). The prizes were made possible by a generous gift from Robert Pozen (MIT).