Banking: Could ecological thinking have prevented the crisis?

20th April 2011

It may sound leftfield but increasingly people in the central banking mainstream are discussing how a lack of diversity made the crisis a lot worse.

Elliott notes that two years ago the Bank of England executive director of Financial Stability Andrew Haldane produced a report that suggested regulators needed  to draw parallels with work of scientists on epidemics, fish conservation and rainforest destruction.

Now Elliott notes that in the March edition of Central Banking, the journal for central bankers, the editor, Claire Jones has interviewed scientist Robert May on how the stability and complexity in ecosystems supports the case for deep structural reform of finance.

Elliott gives this ‘précis' of the argument. "In the decade or more leading up to the crisis, the financial sector became bigger, more complex and more homogeneous. Mutual institutions became banks, commercial banks dabbled in investment banking, and investment banks set up in-house hedge funds. What had been a diverse financial ecosystem became a monoculture."

At the time, in his report, Haldane wrote: "The financial system became, like plants, animals and oceans before it, less disease-resistant. When environmental factors changed for the worse, the homogeneity of the financial ecosystem increased materially its probability of collapse."

Elliott feels that all this has a bearing on the Vickers' interim report which most would argue does very little to ensure the diversity among financial companies.

For those that feel this is all blue sky, Haldane can of course talk pure ‘financial' too. For those who want an argument about how banks can really be made safer with contingent convertible capital or CoCos, here is FT Alphaville.

But whether it's CoCos or coconuts, those worried about a lack of radical thinking over bank regulation can at least see they are not alone and some of those who agree are moving in very influential circles. 

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