Written on 29 Jun 2021.
It can be said that the past shapes the future and it goes without saying that money often plays an intrinsic role. When the Banque de France was founded in 1811, during Napoleonic times, it was not France’s first experience of a central banking system. More than 100 years prior to this, the precursor to the central bank (the Banque Générale, later known as the Bank Royale) was founded. However, when the Mississippi speculative bubble burst in 1719, France’s economy was brought to its knees making it turn its back on a central banking system for the 100 years which followed. Many argue that this financial collapse was one of the main factors which lead to France’s revolution in 1789 which shaped the France we know today. Speculative crashes during this period were not unique to France and since then there have been many. In the last 100 years alone, we have experienced 4 significant ones.
An important factor in history is identifying and learning from our downfalls so we do not repeat them. Warren Buffet puts it eloquently: “Only when the tide goes out do you discover who's been swimming naked.” In other words, be prepared and be prudent. By understanding our foibles carefully, we can improve, set up new systems, and regulations, to avoid future similar situations. It is no surprise therefore the Banque de France emphasizes the importance of research. Each year the Banque de France Award Foundation, awards research grants for monetary, financial and banking economics. It encourages independent research projects in its main areas of interest. This year EDHEC Business School was very proud to see one of their academic staff, Jérémy Leymarie (part of a team of 4 academics), awarded a research grant for research in systemic risk measures. Jérémy talked about his research, the grant award as well as his experience since arriving in EDHEC a year ago.
Yes, I’m originally from Corrèze but spent a good part of my life in Auvergne. I started my higher education in Clermont-Ferrand and went on to study in Orléans in France and the Netherlands. Of course, like most kids when entering higher education, I had no real aim to become an academic. Along the way, however, my passion for learning developed. I have been very much inspired by those teaching staff who have accompanied me in my academic path. They have given me a thirst for knowledge and made me want to push my academic capabilities. I guess you could describe me as a bit of a perfectionist, and I have always been very focused which has helped to get me to where I am now. I’ve always though been interested in Financial Markets, so it was the logical step when I decided to gain expertise in this area.
The call for proposal opened in October 2020. It is a very prestigious award as the competition is fierce. I think it is seen as one of the hardest selection processes on the French market today. The foundation awards typically 4 grants for a total amount of 120,000 euros and we were amongst the top 4 so we were delighted to receive a grant of 30,000 € for our research project.
Yes, it’s focus is on systemic-risk measures… To explain a little more clearly, systemic risk basically describes an event that can spark a major collapse in a specific industry or the broader economy. The recent COVID-19 pandemic crisis, has triggered extensive research on systemic risk. Just now, during these difficult times, the identification of financial institutions that contribute the most to the overall risk of the financial system (the so-called Systemically Important Financial Institutions abbreviated to SIFIs) is very pertinent. SIFIs pose a major threat to the system, so it is no surprise that regulators and policymakers from around the world have called for tighter supervision, extra capital requirements, and liquidity buffers for them. Those precautionary rules and regulation mechanisms are implemented through the use of systemic-risk measures; thus identifying the vulnerabilities of the financial system. In layman’s terms, they are methods used to assess and identify “the weakest links in the chain.’ They are indicators that quantify the contribution of given financial institutions to the total risk on the financial markets.
Systemic risk measures are based on publicly available market data - such as stocks, asset returns, option prices, or CDS spreads and allow us to put the risk contribution for each financial institution into a single figure thus helping us to identify the financial institutions or insurance companies* (SIFIs) whose failure might trigger a crisis across the whole financial system.
Every year, risk models* are used by academics and central bankers to identify those SIFIs which could potentially trigger a financial crisis. In practice, there is a wide range of risk models which are used to calculate this however, today there is no real consensus as to which models are most suited for modeling systemic risk. Our aim is, is to help regulators and risk managers compare the systemic-risk models that are generally used to forecast the systemic risk of financial institutions performance.
Yes, I am working together with three colleagues: Olivier Scaillet (University Geneva and Swiss Finance Institute), Sylvain Benoit (University Paris Dauphine) and Ophélie Couperier (ENSAE Crest). We have all known each other for quite some time; I worked with Olivier as a junior on a previous Banque de France project (“backtesting systemic risk measures”). We all knew we had the right synergy to work together well. I basically had the idea and bounced it off Olivier, Sylvain, and Ophélie who were enthusiastic too and it all went from there. Olivier was really the person who validated it as he has huge experience in this field, so at this point, I took it to the Banque de France. It’s great because we form a very strong team complementing each other with a good balance of expertise in the field and a sound base of technological knowledge.
Well, of course, firstly EDHEC is a highly renowned, prestigious business school which is extremely international and known for its world-class team of academics, so being part of that is clearly an honour… It wasn’t just that however. During my series of interviews at EDHEC, I was made to feel comfortable because there was a real human element throughout the selection process. This drew me even more.
It’s been fantastic. Right from the beginning I had a good feeling, I had my first interviews with Professor Christophe Croux and he was extremely encouraging and welcoming which put me at ease and he has continued to be a great support. He has made sure that settling in has been as easy as possible despite these difficult times. It’s certainly been an odd year but it’s been good. I am though looking forward to having a proper coffee with my colleagues this next academic year! That will be great
Well, it is a two-year process. In 2022, we will present our progress in front of a panel at the Banque de France. This will be followed in 2023 by a full presentation representing our final work and findings. Throughout this period, we will keep the foundation informed of any publications or conferences done in the context of this project.
* A financial model is the summary of a company's performance, based on certain variables, that helps the business forecast future financial performance.