manuel sanchez : systemic risk – policy challenges remarks by mr manuel sanchez, deputy governor of the bank of mexico, at the mfi international harper lecture, milton friedman institute, mexico city, 11 may 2011. * * * it is a pleasure and an honor to participate in this panel of the mfi international harper lecture. for me, this conference is particularly relevant as the key note speaker is distinguished economist, lars peter hansen, my former professor, a member of my thesis committee and a good friend. as in the days when i took courses from lars at the university of chicago, today i have learned a lot from his interesting presentation on systemic risk. i would like to comment on some policy challenges related to systemic risk, hoping that they may complement lars ’ deep empirical insights on this issue. in my remarks, i will emphasize three points : first, that the available definitions of systemic risk are dependent on judgment in an environment of uncertainty ; second, that we need a deeper understanding of the causes of systemic risk, particularly regarding the distinction between root factors and symptoms ; and third, that policy measures should be clearly designed to mitigate the causes of systemic risk. i would like to mention that these comments are entirely my own and do not necessarily reflect those of the bank of mexico. the notion of systemic risk let me begin by recognizing that there is no widely accepted definition of systemic risk. however, any overview of research and policy reports in this area uncovers a frequently held notion of systemic risk as the possibility of a disruption affecting the normal functioning of the financial system. there are at least three noteworthy elements of this common concept. one is the reference to the financial system. this definition implies a potentially large scope, as the referred system can comprise all financial intermediaries, regulated and unregulated ; the markets of all financial assets ; the infrastructure that the financial system uses to perform its tasks, including payments and settlements ; and, the regulatory framework. the second element is the allusion to normal functioning. the activities of any well operating financial system are many, but they can be summarized as intermediating payments, converting savings into lending usually through maturity transformation, and managing risk. however, to my knowledge, there are no clear indicators of what normal functioning is meant to be, which makes this qualification subjective, as it calls for the judgment of the observer or the policy maker. for instance, do stock - market crashes or sudden and substantial currency depreciations constitute interruptions to normal functioning?

the renminbi destined to become a global or regional currency? ”, asian economic papers 16 : 1. see subramanian, a. and m. kessler ( 2013 ) : “ the renminbi bloc is here : asia down, rest of the world to go? ”, peterson institute for international economics working paper no. 12 - 19, august. dominant reference in other emerging market economies outside asia with strong trade ties with china. on the other hand, it is undeniable that the renminbi ’ s role as a major reserve currency at the global level is still relatively modest. this is clearly illustrated by the fact that china ’ s global economic significance, as measured for instance by its 18 and 11 percent shares in total ( ppp - adjusted ) output and merchandise trade, respectively, is still far from being matched by the renminbi ’ s 1 percent participation in global international reserves. to some extent, this may be explained by the significant network - increasing returns ( that is, the increased likelihood of a currency being used as either a means of payment, unit of account or store of value deriving from its use for such purposes by other parties ) backing the persistence of the us dollar as the main global currency and reserve asset. however, it must be kept in mind that given china ’ s trade and financial linkages worldwide, network effects could in fact rapidly move in favor of underpinning a much wider use of the renminbi globally. therefore, the main challenge the chinese authorities face in allowing the renminbi to achieve a more relevant global currency status, seems to be related to the implementation of additional efforts in a number of areas. in my view, action is particularly important in connection with the following : 1. the further liberalization of the capital account. i fully agree that the best approach here is one emphasizing gradualism and prudence, as a movement in this direction must be accompanied by reforms in a number of other, key areas, to avoid adverse implications for macroeconomic and financial stability. given china ’ s economic size, this is important not only from a national but from a worldwide perspective. my impression here is that the room of maneuver for the chinese authorities is not very wide. while a more ambitious pace for the internationalization of the renminbi requires a speedier and more comprehensive liberalization of the capital account, to be successful the latter in turn needs a stronger financial system, as well as further efforts to upgrade governance of the