Transparency, Risk Management and International Financial Fragility

Mario Draghi, Francesco Giavazzi, Robert C. Merton

NBER Working Paper No. 9806
Issued in June 2003
NBER Program(s):International Finance and Macroeconomics

Discussions of financial risk often fail to distinguish between risks that are consciously borne and those that are not. To understand the breeding conditions for financial crises the prime focus of concern should not be simply on large risk-taking per se, but on the unintended, or unanticipated accumulation of large risks by individuals, institutions or governments, often through the lack of knowledge or understanding of the risks by stakeholders and overseers of those entities. This paper analyses specific situations in which significant unanticipated and unintended financial risks are accumulated. It focuses, in particular, on the implicit guarantees that governments extend to banks and other financial institutions, which may result in the accumulation, often unconscious from the viewpoint of the government, of unanticipated risks in the balance sheet of the public sector. The paper also discusses how risk exposures can be measured, hedged and transferred through the use of derivatives, swap contracts, and other contractual agreements with specific reference to emerging markets.

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Document Object Identifier (DOI): 10.3386/w9806

Published: Draghi, Mario, Francesco Giavazzi, and Robert C. Merton. Transparency, risk management and international financial fragility Geneva Reports on the World Economy, vol. 4. Geneva: International Center for Monetary and Banking Studies and London: Centre for Economic Policy Research, 2004.

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