LONDON -- The financial system could be made more stable if regulators were able to harness scientific advances in mapping complex networks, Bank of England policy maker Andrew Haldane said Tuesday.
Writing in New Scientist magazine, Haldane said the financial system is a complex and adaptive network similar to an ecosystem, yet regulators have spent too much effort focusing on the behavior of individual firms and not on the system as a whole.
"The mistake came in thinking the behavior of the system was just an aggregated version of the behavior of the individual. Almost by definition, complex systems do not behave like this," Haldane said.
Haldane, the BOE's executive director for financial stability, said regulators realized their error during the financial crisis that culminated in the collapse of investment bank Lehman Brothers and the subsequent global recession.
"Systemic risk has entered their lexicon, and to understand that risk, they readily acknowledge the need to join the dots across the network."
But he added regulators currently lack sufficient data and the right economic models necessary to "turn this good intent into action."
Haldane said economists and regulators may be able to adapt techniques used in weather forecasting, managing utility grids and studying the brain to improve their understanding of the financial system. Creating maps of the system could help regulators avoid future crashes, he said.
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Writing in New Scientist magazine, Haldane said the financial system is a complex and adaptive network similar to an ecosystem, yet regulators have spent too much effort focusing on the behavior of individual firms and not on the system as a whole.
"The mistake came in thinking the behavior of the system was just an aggregated version of the behavior of the individual. Almost by definition, complex systems do not behave like this," Haldane said.
Haldane, the BOE's executive director for financial stability, said regulators realized their error during the financial crisis that culminated in the collapse of investment bank Lehman Brothers and the subsequent global recession.
"Systemic risk has entered their lexicon, and to understand that risk, they readily acknowledge the need to join the dots across the network."
But he added regulators currently lack sufficient data and the right economic models necessary to "turn this good intent into action."
Haldane said economists and regulators may be able to adapt techniques used in weather forecasting, managing utility grids and studying the brain to improve their understanding of the financial system. Creating maps of the system could help regulators avoid future crashes, he said.
nasdaq.com
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