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
The Journal of Risk Finance – Emerald Publishing
Published: Nov 8, 2011
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