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Background Information

Contest Details

The MIT Center for Finance and Policy (CFP) and the Harvard Crowd Innovation Laboratory (CIL) are launching a contest to generate new proposals to specify sets of criteria that regulators should apply to designate a financial institution as systemically important. A prize pool of $10,000 will be distributed to the winners who propose the most well-reasoned, comprehensive and implementable definitions. Everyone is eligible to participate. We particularly welcome submissions from financial economists, regulators, and practitioners, as well as from experts in systemic risk assessment from other fields.

The financial crisis of 2008 has brought vastly increased attention to risk spillovers in the financial sector. 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.

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. Financial entities whose failure or disruption could severely impact the financial system and broader economy are typically considered candidates for SIFI designation. Large banks, insurance companies, exchanges, clearing houses, finance companies and investment funds have all been identified as potentially or actually systemically important. Large government-controlled financial institutions–such as Fannie Mae and Freddie Mac, development banks, and sovereign wealth funds–are likely candidates as well, and criteria need to be developed for which ones should be classified as SIFIs.

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.

Please see Background Information for further information on SIFIs.

How to Participate

The submission deadline has passed. Winners will be notified in March, 2016. Winning proposals will be published on the CFP website.

The submitted proposal should aim to address the following questions and any others deemed appropriate by the respondent:

What are the basic principles and general framework that should be used for judging the systemic importance of an institution?
What are the key similarities and differences between that framework and current approaches used to define SIFIs?
How would such a framework be operationalized? This response should introduce specific criteria for SIFI designation, and ideally a methodology for how to empirically operationalize the criteria and identify SIFIs in practice. A successful entry will take into account the fact that different methodologies will need to be developed for different types of financial institutions. Examples of those differences should be explained.
Would the approach draw distinctions between firms of national versus global systemic importance?
Would the approach provide the flexibility to reverse a SIFI designation if a firm’s systemic risk is reduced, for instance by changes to its business model?
In general terms, what impact would such an approach to SIFI designation have on the number of firms so designated?

Prizes

Grand prizes of $5,000 and $2,500 for 1st and 2nd place proposals
Regular prizes of $500 to the top five ideas that have not received the grand prizes
In addition to cash prizes, winning proposals will have the opportunity for further development and testing in collaboration with the CFP (eventually brought to real data) and the results may contribute to the public debate on financial regulation worldwide.

This contest was made possible through a generous gift from CFP Advisory Board Member Robert C. Pozen.