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Small enough to fail a systems approach to financial systems reform

Small enough to fail a systems approach to financial systems reform The current issue and full text archive of this journal is available at www.emeraldinsight.com/1526-5943.htm Commentary COMMENTARY Small enough to fail: a systems approach to financial systems reform Michael Mainelli Z/Yen Group Limited, London, UK, and Bernard Manson London, UK Introduction The “Credit Scrunch” of 2007 was a systemic failure. Interactions between elements of the system (banks, rating agencies, regulators, governments, financial instruments, etc.) mattered more than the specific behaviour of a particular actor. If you believe the crisis was an apocalypse or foreshadows an apocalypse, then you should be considering fundamental reform. You want to redesign, and design principles would be handy. What might they be? Systems theory, touching on if not encompassing chaos theory and complexity theory, gives us a rich background to some simple design parameters, namely input process output, governance, monitoring, feed back and feed forward. Systems theory goes some way to explaining why financial systems, due to their large amount of feed forward (positive feed back), tend to exhibit “fat tail” outcome distributions and more instability than physical systems. Bob Giffords, the technology analyst, groups together feed back, monitoring, feed forward and governance components as “feed through”, highlighting the effect of people’s perceptions on the http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Risk Finance Emerald Publishing

Small enough to fail a systems approach to financial systems reform

Mainelli, Michael; Manson, Bernard
The Journal of Risk Finance , Volume 12 (5): 10 – Nov 8, 2011
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Publisher
Emerald Publishing
Copyright
Copyright © Emerald Group Publishing Limited
ISSN
1526-5943
DOI
10.1108/15265941111176163
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Abstract

The current issue and full text archive of this journal is available at www.emeraldinsight.com/1526-5943.htm Commentary COMMENTARY Small enough to fail: a systems approach to financial systems reform Michael Mainelli Z/Yen Group Limited, London, UK, and Bernard Manson London, UK Introduction The “Credit Scrunch” of 2007 was a systemic failure. Interactions between elements of the system (banks, rating agencies, regulators, governments, financial instruments, etc.) mattered more than the specific behaviour of a particular actor. If you believe the crisis was an apocalypse or foreshadows an apocalypse, then you should be considering fundamental reform. You want to redesign, and design principles would be handy. What might they be? Systems theory, touching on if not encompassing chaos theory and complexity theory, gives us a rich background to some simple design parameters, namely input process output, governance, monitoring, feed back and feed forward. Systems theory goes some way to explaining why financial systems, due to their large amount of feed forward (positive feed back), tend to exhibit “fat tail” outcome distributions and more instability than physical systems. Bob Giffords, the technology analyst, groups together feed back, monitoring, feed forward and governance components as “feed through”, highlighting the effect of people’s perceptions on the

Journal

The Journal of Risk Finance – Emerald Publishing

Published: Nov 8, 2011

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