Bank of England's executive director for financial stability told the Securities Industry and Financial Market Association in New York that there is often no common way of calculating risks and liabilities
The world's banks should develop a common language, like the barcodes used in international trade, so that financial risks can be mapped and understood, Andy Haldane, of the Bank of England's Financial Stability Committee, argued in a speech on Wednesday.Haldane, who is the Bank's executive director for financial stability, and widely regarded as one of its brightest brains, told the Securities Industry and Financial Market Association in New York that there is often no common way of calculating risks and liabilities, even within banks.
"Most financial firms have competing in-house languages, with information systems siloed by business line. Across firms, it is even less likely that information systems have a common mother tongue," he said.
"Today, the number of global financial languages very likely exceeds the number of global spoken languages."
Without a common language, Haldane said, trying to map the complex networks between different financial firms and their clients and customers is a "high-dimension puzzle", which hampered the clean-up after the collapse of Lehman Brothers.
"Many banks lacked adequate information on the risk of their counterparties, much less their counterparties' counterparties. The whole credit chain was immersed in fog. These information failures contributed importantly to failures in, and seizures of, many of the world's core financial markets, including the interbank money and securitisation markets."
Haldane cited two examples to demonstrate how a common language can spur technological improvement — the development of barcodes to transmit information through global supply chains; and the invention of the world wide web.
Scannable bar codes, developed in the US and first used in 1974, when Clyde Dawson bought a packet of chewing gum at a supermarket Ohio, now track 40m products, recording over 1500 attributes such as their width, depth and height.
"Because the language of individual countries was no longer an obstacle to trade, these standards helped to expand existing, and to create new, global supply links," Haldane said.
He argued that finance "lags by a generation" the developments in other areas. With a common language, he says the industry could manage risks better, both within and between firms; lower barriers to the entry of new companies; and allow regulators - and anyone else - to map the risks across the world financial system.
A shared financial language could also allow new business models to develop, cutting out the giants of finance, Haldane argues: peer-to-peer lending through online sites could start to replace old-fashioned banking, for example.
"With open access to borrower information, held centrally and virtually, there is no reason why end-savers and end-investors cannot connect directly. The banking middle men may in time become the surplus links in the chain."
Haldane said some of the steps taken by cross-border regulators in the aftermath of the financial crisis - including the idea of badging each financial institution with a code called a "Legal Entity Identifier", could be the first steps towards an internet-style revolution for finance