10th August 2012
In order to solve these problems most people agree that what is needed is greater transparency. How to achieve this, however, poses something of a logistical dilemma.
This, according to Buchanan, is where Google can help:
"The systemic risk that turned the U.S. subprime-lending crisis into a global disaster is circular, too. We can't identify it simply by looking for the banks with the most assets or the biggest portfolios of risky loans. What matters is how many links a bank has to other institutions, how strong those links are and how risky those other banks are, not least because they too have links to other risky banks. Something like [Google] PageRank might be just the right thing to cut through it."
Given the negative headlines surrounding algorithmic models following the Knight Capital debacle it may be something of a surprise to see one being championed as a solution to the crisis of confidence in the banking system. Yet Buchanan's insight has a number of points to commend it.
Taking the power back
One of the major points of concern surrounding banks has been how to shift from the self-regulating model that collapsed so spectacularly to something that allows for greater oversight without becoming obstructive. This is a difficult balancing act and one beset with potential pitfalls that both the businesses and the regulators could easily fall into.
An algorithmic model that could map the web of connections between financial institutions without having to interfere with their operations would surely be beneficial. Through it investors could see which banks were most vulnerable in the case of a firm getting into financial difficulty and plan their investments accordingly.
As well as providing timely warnings of systemic risks, additional transparency could also be used as an advertisement for the robustness of particular firms and increase their appeal. Indeed this way investors would have known before the crisis struck that "Barclays Plc, Bank of America Corp., JPMorgan Chase & Co. and Royal Bank of Scotland Group Plc presented more systemic risk than did Citigroup Inc. or Deutsche Bank AG, despite being significantly smaller in total assets".
Flagging confidence combined with depressed share prices may yet force open the doors and let more light into these businesses. However, we must remember that the semblance of transparency does not always equate to the real thing.
Lies, damned lies and statistics
Mark Twain's immortal words sum up one of the central problems of the theory – faith in data. Much like the Libor scandal, that shocked investors into looking at the process rather than the figures in interbank lending markets, users of DebtRank will need to have confidence in the reliability of the data and the way it is collated.
Here the example of Google can be educational. The company, which holds "don't be evil" as its unofficial corporate motto, has built a reputation on openness and trust. A large part of this has been based on its focus on data sharing though analytical tools like PageRank.
Mindful Money's psychologist blogger Ken Eisold says:
"I think the most important factor is that people believe the data is not being manipulated – as it turned out the Libor rate was. Perhaps you could say, though, that the Google brand inspires trust because it is felt to be impartial, objective, dependent on algorithms and not human judgment. I suspect the faith [in data] has to do in part with the mystery of how they mine the internet as if Google is omniscient."
The problem with articles of faith is that they are seldom challenged, and those who dare to do so are quickly labelled heretics. But with transparency must come accountability otherwise it is simply a public relations exercise.
If DebtRank were to be effective the raw data itself must be open to scrutiny. Financial firms may balk at taking this step for fear of revealing too much of their business models to competitors but it would be the only way to ensure that communities using the service could hold it to account.
Furthermore, proactively moving the discussion about the structure of the banking system into the public sphere offers banks an opportunity to engage with a debate that has become hostile to the institutional filter put on communications.
In his book Information Politics on the Web, Richard Rogers argues that the web is "one of the few places where one may stage the encounter between issue (network) politics and informational politics". Perhaps DebtRank offers a chance for financial firms to demonstrate a cultural shift to a sceptical public – and who knows, transparency might even provide the catalyst for a share price recovery.
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