4  See, for example, de Bandt and Hartmann (1998), “What is systemic risk today?”, in Risk Measurement and Systemic Risk, Proceedings of the Second Joint Central Bank Research Conference, hosted by the Bank of Japan, Tokyo, 1997. 5  In this regard some of the ECB outputs (partly in collaboration with academics and researchers from other central banks and international organisations) include: Fell and Schinasi, (2005), “Assessing Financial Stability: Exploring the Boundaries of Analysis”, National Institute Economic Review, Vol. 192, No. 1; de Bandt and Hartmann (2000), “Systemic risk: A survey”, ECB Working Paper, No 35, November; Hartmann, Straetmans and de Vries (2004), “Asset market linkages in crisis periods”, Review of Economics and Statistics, 86(1); Hartmann, Straetmans and de Vries (2005), “Banking system risk: A cross-Atlantic perspective”, NBER Working Paper, No. 11698, October; Cappiello, Engle and Sheppard (2006), “Asymmetric dynamics in the correlation of global equity and bond returns”, Journal of Financial Econometrics, 4(4); Gropp, Lo Duca and Vesala (2009), “Cross-border bank contagion in Europe”, in Shin and Gropp (eds. ), Banking Integration, Bank Stability, and Regulation, special issue of the International Journal Central Banking, 5(1); Iyer and Peydró-Alcalde (forthcoming), “Interbank contagion at work: Evidence from a natural experiment”, Review of Financial Studies. 6  Group of Ten, (2001), “Report on Consolidation in the Financial Sector”, Basel. BIS Review 115/2009  3  Following de Bandt, Hartmann and Peydró-Alcalde (forthcoming), we can distinguish three broad and interrelated ways in which systemic risk can materialise.

Information on non-banking institutions, potentially of systemic importance, such as hedge funds, was scattered, not quality-checked and typically provided on a voluntary basis. A tendency to create a bias towards the best performers was the result. Even for the banking sector, for which data is abundant – and, what’s more, there is substantial expertise in conducting risk assessments – the information available to bodies entrusted with financial stability functions but without a supervisory mandate is far from satisfactory. The information on the degree of interconnectedness that I previously mentioned is critical, even if only to identify the key nodes of the financial system network which would need to be closely monitored. So far, for the case of the ECB, systemic risk analysis is conducted solely on the basis of publicly available information, mostly gathered from individual financial reporting. The failure of Lehman Brothers just over a year ago illustrates well the relevance of such inter-linkages between financial institutions. They may matter more than the size of their balance sheets. And if those linkages are impaired, they can affect the functioning of the entire financial system. In fact, before the crisis an increasing amount of overall risk in the economy was perceived to exist, but there was little certainty as to where the risks lay. Few  BIS Review 115/2009  7  suspected that the vast majority of them would be held directly or indirectly at key nodes of the financial system network.