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The Atlanta Fed's 2013 Financial Markets Conference explored four critical topics: risk measurement; the influence of political systems on financial stability; rules versus discretion in financial regulation; and the resolution of systemically important financial institutions, or SIFIs.

The 18th annual conference is the Atlanta Fed's signature annual research and policy event and is presented by the Center for Financial Innovation and Stability (CenFIS).

Terrain of risk management
Several presentations, papers, and the conference's opening keynote speech by Fed Chairman Ben Bernanke addressed risk measurement. Bernanke discussed how supervisory stress tests conducted since the financial crisis have helped strengthen large U.S. banks. Atlanta Fed economist Kris Gerardi presented a paper examining the failure of stress tests by the Office of Federal Housing Enterprise Oversight to capture the true risks posed by Fannie Mae and Freddie Mac, the government-sponsored enterprises (GSEs) that securitize mortgages. The two GSEs became so troubled that they were taken over by the federal government during the financial crisis. Other discussions examined the question of why risk management is so difficult, as posed in the paper presented by David Rowe of David M. Rowe Risk Advisory. Til Schuermann of the consulting firm Oliver Wyman gave several answers, including that we don't observe enough bad events to allow us accurately to estimate the losses from such events.

A panel chaired by Ron Feldman of the Minneapolis Fed discussed resolving troubled large financial firms. Arthur Murton of the Federal Deposit Insurance Corporation (FDIC) discussed the agency's SIFI resolution strategy, which focuses on using creditors to recapitalize the parent holding company while solvent subsidiaries continue to operate. Kenneth E. Scott and other panelists talked about the merits of using the bankruptcy code rather than the FDIC to resolve SIFIs. Eugene Ludwig, CEO of the Promontory Financial Group, noted that in following requirements to prepare a plan for their own resolution, big financial firms can offer valuable insight to senior management and boards about the structure and operations of their complex organizations.

Of politics, cages, and obedience school
Conference participants also pondered financial stability and politics. In a paper, Columbia University's Charles Calomiris and Stanford University's Stephen Haber argued that the structure and stability of the banking system are products of bargains rooted in "the logic of politics and not the logic of efficiency." Thus, the stability of a financial system, these authors conclude, is determined mainly by negotiations between politicians and bankers, with little input from those outside the political process.

One conference session examined the rules versus discretion in regulation debate. The chair of the session, economist Willem Buiter of Citigroup, argued that neither inflexible rules nor discretion in the form of rampant opportunism is optimal. Andrew Haldane of the Bank of England focused on one type of regulation, the Basel Capital Accords. Those rules have grown increasingly complex but are still not leveling the playing field for market participants, Haldane argued. This session theme was touched upon during a dinner keynote by Stanford University's John Taylor, who questioned the merits of discretionary countercyclical capital regulation.

See the related links to access papers, presentations, videos, and more information about the conference.