How to cope with a financial system that looks like it's about to collapse every time bad news turns up? This is an issue that is causing a few headaches amongst the regulators. Here's some musings from Chris Skinner over a paper from the Financial Stability gurus at the Bank of England:
Third, the paper argues for policies that create much greater transparency in the system.This means that the committees worldwide will begin “collecting systematically much greater amounts of data on evolving financial network structure, potentially in close to real time. For example, the introduction of the Office of Financial Research (OFR) under the Dodd-Frank Act will nudge the United States in this direction.
“This data revolution potentially brings at least two benefits.
“First, it ought to provide the authorities with data to calibrate and parameterise the sort of network framework developed here. An empirical mapping of the true network structure should allow for better identification of potential financial tipping points and cliff edges across the financial system. It could thus provide a sounder, quantitative basis for judging remedial policy actions to avoid these cliff edges.
“Second, more publicly available data on network structures may affect the behaviour of financial institutions in the network. Armed with greater information on counterparty risk, banks may feel less need to hoard liquidity following a disturbance.”
Yup. Real time data collection will be there in the foundation of future finance.
But have a care: you can't use the systems you have now. That's because if you layer regulation over policy over predictions over datamining over banking over securitization over transaction systems … all layered over clunky old 14th century double entry … the whole system will come crashing down like the WTC when someone flies a big can of gas into it.
The reason? Double entry is a fine tool at the intra-corporate level. Indeed, it was material in the rise of the modern corporation form, in the fine tradition of the Italian city states, longitudinal contractual obligations and open employment. But, double entry isn't designed to cope with the transactional load of of inter-company globalised finance. Once we go outside the corporation, the inverted pyramid gets too big, too heavy, and the forces crush down on the apex.
It can't do it. Triple entry can. That's because it is cryptographically solid, so it can survive the rigours of those concentrated forces at the inverted apex. That doesn't solve the nightmare scenarios like securitization spaghetti loans, but it does mean that when they ultimately unravel and collapse, we can track and allocate them.
Message to the regulators: if you want your pyramid to last, start with triple entry.
PS: did the paper really say "More taxes and levies on banks to ensure that the system can survive future shocks;" … seriously? Do people really believe that Tobin tax nonsense?
Posted by iang at August 7, 2011 07:46 AM | TrackBack