Scientists and economists are working together to improve the financial sector The credit crunch highlighted the need to change the workings of the financial sector, so economists are turning to science, infectious disease and ecosystems to find the best ways to reform the financial world.
Could an understanding of ecology have helped prevent the credit crunch?
It sounds unlikely, but a group of scientists working with the Bank of England believe banking has lessons to learn from biological science.
"One of the things that's come out of the crisis is that people now have the courage to think out of the box," says Gillian Tett of the Financial Times.
"There's a lot the financial world can learn by looking at other disciplines."
Banking has a long history of borrowing ideas from science - astronomer Edmund Halley was constructing mortality tables for the life assurance industry back in the 17th Century.
But the real wave of scientific input came in the 1970s and 1980s, when computing power began to revolutionise finance.
"You had the technological revolution and at the same time you had growing complexity of finance, and growing demand from investors for an ability to navigate this complex world," says Gillian Tett.
A market opened up for talented, numerate graduates to create new, ever more sophisticated products for banks, as the financial sector grew and grew.
But the financial sector with its globalisation and vast array of products, services and capabilities, became too tangled and when the crash came, it threatened to bring down whole economies.
"This was not something that our conventional models could make sense of," says Andrew Haldane, executive director of financial stability at the Bank of England.
"Activity in every country around the world fell off a cliff," he says.
But there was one group of people who could make sense of it.
Enter the biologists.
Comparisons of biological systems, with their complicated webs of interactions between all the different species, are being drawn with the interactions between different banks and financial institutions.
"We need to think about the system as a system, rather than looking at this atom by atom, or node by node," says Andrew Haldane, admitting that pre-crisis, this had not been done.
Andrew Haldane Bank of England“For the equivalent of the promiscuous, we have these big banks globally who have interconnections with all the other banks in the system”
Scientists and the Bank of England have begun to explore possible insights from the life sciences.
"We didn't differentiate between the big and the small, we didn't really think hard about the joins between them," he says.
Until now, system-wide data collection in banking has been virtually non-existent. Regulators are hoping they can gather information to allow them to map the financial web, and spot fluctuations that could lead to an institution collapsing.
The banking-as-biological system approach can also help explain why the financial world became so vulnerable.
Paradoxically, as banks grew bigger and more complex, the financial system as a whole ended up being more homogenous.
"It's rational for an individual bank to have sought to diversify its balance sheet," says Haldane.
By taking on different functions, a bank spreads its risk - it is not putting all its eggs in one particular financial basket.
But all the big banks were doing the same thing.
"The quest for diversification by individual banks, led to the system as whole rather lacking in diversity," Haldane says.
And lesson one from looking at a biological population - a lack of diversity equals a lack of robustness.
Another approach is to look at the spread of disease through a population by drawing on the parallels between big banks, and the epidemiological concept of a "superspreader" - an individual who, through their contact with others, is responsible for the spread of an infection.
Big banks can be looked on as the equivalent of the natural world's "superspreaders" Like the spread of an infectious or sexually transmitted disease, the crisis that struck the biggest banks had a knock-on effect to the other institutions connected to them
"For the equivalent of the promiscuous, we have these big banks globally who have interconnections with all the other banks in the system," says Andrew Haldane.
"What you need for those types of entity is a greater amount of protection upfront," he says.
In banking terms, that protection requires that the interactions between institutions are kept from becoming so convoluted that everything goes wrong when there is trouble.
You want to be able to isolate the bits that are going wrong.
In terms of diversity, diversity - or lack of it, with all the big banks trying to do a bit of everything - that's where all the talk of breaking up the banks comes from, with people calling for a separation of retail and investment functions.
So, to protect the banking system, you want to make sure that the interactions between institutions don't get so convoluted that everything goes when there is trouble. You want to be able to isolate the bits that are going wrong. And then, with reference to the earlier point about diversity - or lack of it, with all the big banks trying to do a bit of everything - that's where all the talk of breaking up the banks comes from, with people calling for a separation of retail and investment functions.
"This has been a learning experience for all of us," says Haldane.
"Things have happened that people thought couldn't happen, and the quest has been to make sense of them.
"It's been tremendous that others have come along and said look, you might be startled by this, but these sorts of things have been happening in our discipline for a hundred years, here's a way of making sense of it".
Scientists of the Subprime can be heard on BBC Radio 4, on Thursday 17th February at 9pm, or catch-up afterwards on BBC iPlayer - iPlayer Radio Home.
This article is from the BBC News website. � British Broadcasting Corporation, The BBC is not responsible for the content of external internet sites.
Source: http://www.bbc.co.uk/go/rss/int/news/-/news/business-12479998
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