institutions would also have been better prepared for sovereign crises. the point is that such robust targets are independent of risk assessment errors and provide additional buffers to absorb risks stemming from the “ known unknowns ” and “ unknown unknowns ”. another example of how complexity reduction can help prevent crisis is standardisation of financial products. in the past, otc contracts were created with unknown and very hard - tohandle, non - normal probability distributions of random variables – which means creating “ known unknowns ” via terms of contracts with potentially destabilising effects on the financial system. 3. second and third sybilline book : communicating risk analysis the second message we might have found in the sibylline books is this : “ be aware that risk analysis has to be carefully communicated. sometimes policy backups are necessary. ” the example of stress testing immediately leads us to the third message of sibylline books. in a setting in which financial analysis is communicated to the public it is important to find the balance between making realistic assumptions about scenarios and avoiding devastating self - fulfilling prophecies of the markets. moreover, if stress tests detect capital needs private and public recapitalisation has to be announced and implemented, thereby preventing market uncertainty. in a systemic crisis recapitalisation has to be a part of a comprehensive package including public aid for banks. this aid helps to restore confidence in the wholesale markets, to overcome funding problems and ultimately to mitigate excessive deleveraging pressure. 4. fourth and fifth sybilline book : building up institutions and credibility the fourth message contained in the sibylline books could be : “ systemic risk analysis needs an appropriate institutional set - up ”. as in ancient rome, where the sibylline books were treasured by the priests of the temple of jupiter, modern - day risk analysis needs an institutional framework. the eu has solved this problem by delegating systemic risk analysis to the esrb which can issue official warnings and recommendations. other eu bodies and the national authorities are responsible for implementing policy measures. central banks have an important role to play here given their analysis competence and expertise. but monetary policy instruments are not in the first instance financial stability policy instruments. bis central bankers ’ speeches therefore, the institutional set up is not simply a matter of organisation but essentially a matter of credibility of the institutions involved. so the fifth sibylline message might be this : “ the risk analysis credibility of the various bodies needs to be built up

andreas dombret : systemic risk analysis and crisis prevention speech by dr andreas dombret, member of the executive board of the deutsche bundesbank, at the high - level eurosystem seminar with central banks and monetary agencies of the gulf cooperation council, abu dhabi, 19 january 2012. * 1. * * systemic risk analysis and the sybilline books dear colleagues, referring to the sovereign debt crisis in europe the minister of finance of poland, jacek rostowski, mentioned that the negotiations remind him of the story of the purchase of the sibylline books in ancient rome. those books contained prophecies which were not an exact forecast of future events but had to be understood as an aid to finding measures to prevent and manage a devastating disaster. the last king of ancient rome, the legendary tarquinius superbus, was eager to acquire those nine sibylline books. but the price that sibyl, the prophetess, demanded struck him as too high, and the king declined to buy them. either offended or shrewd, sibyl burned three of the nine books and offered him the remaining six books for the same price as before. but tarquinius again turned down the offer. so the prophetess burned three more books, again offering the remaining three books for the original price. this time, tarquinius accepted the terms, and the books found their way into the temple of jupiter. the books got lost in more recent times. but the questions remain : what advice did the books would have had for modern policymakers? what kind of systemic analysis is presented there? 2. first sybilline book : reducing complexity modern systemic risk analysis consists of many tools. central banks, supervisory authorities as well as national and international bodies of macroprudential supervision such as the european systemic risk board ( esrb ) and the financial supervision board ( fsb ) apply these tools. such tools start with the collection and description of a wide set of indicators, most of them giving concurrent signals with regard to financial stability. in a further step it is tried to extract those indicators with predictive power, which is rather difficult, conceptually as well as statistically. other tools are designed to condense the information into risk dashboards, colour coded systems or web diagrams to present an overview of the highly complex picture. more sophisticated methods include stress tests to study the effects of different scenarios and specified econometric models capturing potentially destabilising feedback loops