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January 19, 2011 8:21 pm
A senior Bank of England official has for the first time made the cover of Nature, the leading research journal, with a paper that examines the lessons that financial regulators can learn from biology and other sciences.
Andrew Haldane, the bank’s financial stability director, wrote the paper with Lord Robert May, the Oxford university ecologist and former government chief scientist. Both are involved in financial ecology , a research field that has come to prominence since the banking crisis.
The authors draw two main lessons for banking policy – and the avoidance of another crisis – from studies of natural ecosystems and the spread of diseases.
First is the need to promote diversity across the financial system. Until 2008, big international banks all tended to diversify in the same way, which appeared to reduce risk for individual companies but increased systemic risk.
“Homogeneity bred fragility,” they write. “In rebuilding and maintaining the financial system, the systemic diversity objective should probably be given much greater prominence by the regulatory community.”
Their second conclusion is the financial system would be more resilient if it became more “modular”, so that the failure of one component did not threaten widespread collapse.
“By limiting the potential for cascades, modularity protects the systemic resilience of both natural and constructed networks,” say Mr Haldane and Lord May.
One insight from epidemiology is to focus preventive action on “super-spreaders” who, because of their infectiousness and/or behaviour, are most likely to transmit disease to many others. Banks that might be super-spreader institutions in a financial crisis should have “higher – potentially much higher – buffers of capital and liquid assets”.
The authors point out that “encouraging modularity and diversity in banking ecosystems” is one aim of the Independent Commission on Banking, which is due to report in September.
Nicholas Beale, a financial ecology researcher whose work is cited by Mr Haldane and Lord May, said: “This is a really important paper, which will help set the agenda for scientific work on banking ecosystems for some years. It also has significant messages for the financial community.”
Philip Campbell, the editor-in-chief of Nature, said: “We’re delighted to celebrate intellectual collaboration between economists and ecologists – and also to ensure that readers are aware of uncertainties and debates surrounding the outcomes.”
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