All posts by Stefano Battiston

2013.10.30 – Report of Working Group Session on Financial Systems

Report on Working Group Session on Financial Systems

– Beijing 2013.10.30 –

This is a tentative report, edited by Stefano Battiston and Guido Caldarelli based on the discussion of the working group. Feedbacks and suggestions are welcome.

Participants to the WG: Franziska Schuetze, Jakob Grazzini, Antoine Mandel, Elke Henning, Stefano Battiston, Guido Caldarelli.

Suggested Dates for third GSS conference: October-November, after ECCS (22-26 September 2014).

Note: it is possible to organize a satellite of ECCS about GSS. A submission for a satellite proposal should be addressed to the scientific committee of the conference.

 

In general, policy makers and regulators are particularly interested in the systemic implications of new practices and instruments in the financial system and many are interested in getting insights from interdisciplinary approaches like the ones offered by the GSS community. In this perspective, in the last 3 years, some of the people of the GSS community have established successful collaborations with researchers and representatives of policy making institutions such as Central Banks of Italy, Germany, England and other EU countries, as well as the European Central Bank and the Directorate General MARKETS of the EU Commission. These collaborations will be further developed in the following years and represent a tangible deliverable of the  the GSS spirit.

 

Topics, emerged in the discussion, which according to the group should be covered in sessions of the next GSS conference. Those are

1 Financial networks and financial innovations and resilience.

Market players are connected in financial networks via balance sheet interlocks and as well as exposures to common assets and common source of funding. In this systems the propagation of financial distress is still not fully understood especially in the presence of complex financial instruments and procyclical effects.

2. Linkages among climate change, sustainability and finance.

Climate change and questions on sustainability are strongly linked to finance. Climate change leads to the creation of financial instruments (e.g. climate derivatives) that can be used to the purpose of climate change adaptation (e.g. insurance instruments) but may could have undesired effects in terms of climate change mitigation. It is also clear that climate change mitigation needs appropriate financial instruments in order to make possible investments in appropriate technologies. In this respect, it is important to distinguish between short-term and long-term instruments and actors operating at these levels.

3. Linkage between finance and real economy. A lot of attention have been devoted to the impact of financial crises to the real economy. However, more attention could be devoted to a related but different issue, namely the one of shaping a socially useful financial system. The notion of socially useful is deliberately subjective and may need inputs from outside the economic discipline including ethics (e.g. the notion of fairness).

4. Actors, interests and values in the financial system.

In relation to the previous topic, it could be argued there has been a shift from a situation in which assets are central to the market (and actor do not play a role) to the one in which actors (e.g. financial institutions) are central to the market. Similarly, scientific investigation should focus more attention on the role of actors and the effect of their economic interests. This can be done both in a modeling perspective. However, there are also promising empirical analyses that are possible only thanks to emerging ICT. This can be tackled in two innovative ways. The first is to carry out a data stream from existing repositories that adopt the Semantic Web standards. The second way is to enable the interested public to contribute data themselves. For instance, a journalist may be aware of certain linkages between two organizations. She can add this information into a dedicated data infrastructure (under some obvious constraints, such as that the source of the information is indicated and the user is authenticated). Both the user contribution approach and the semantic web approach will provide, in our project, examples of crowd-sourcing and distributed complex-problem solving applied to a global societal issue.

Note. There is here an interesting connection to the Working Group on Inequality.  Much of the emerging inequality in today’s economy is driven by the financial sector and it has been emphasized the potential instability generated by inequality. There is a potential role of active participation of citizens in mitigating of inequality via activities such as crowd-funding. Crowd-funding is conceptually similar to crowd-sourcing and also relies to ICT.

5. Reforming the international financial system. 

The concept of an international commodity reserve currency has been recently revived by the governorate of the Central Bank of China. A related debate concerns the evolution towards a multipolar international currency system (e.g. dollar, euro and renmenbi). The implications of these reforms deserve a lot of attention and members of GSS have already actively worked on these topics. Another related issue is the fact that financial institutions act globally across borders and are connected in a global nexus of economic interests while a global regulatory body with strong enforcing power does not exist.

Report from Working Group on Global Financial Systems

GSS Preparatory Meeting on October 29 2013 – Report on Working Group Session on Financial Systems

Suggested Dates for third GSS conference: October-November.

Topics touched upon in the discussion that the group thought should be covered in the next conference:
- financial networks, resilience against shocks, contagion etc. in the presence of complex instruments such as derivatives, collateralization, etc.
- climate-finance
- climate change impact on macro
- linkage finance – real economy and
- societal role / social function of financial system
- shaping a socially useful financial system
- finance is about assets and actors do not matter. this community is moving towards a view in which actors are central and not the assets. influence of actors.
- crowdsourcing
- actors, interests, values, stakeholders
- banks: how are they taking care of risk in the years to come?  linkage to integrative risk management working group.
- short-term versus long term. E.g. Pension funds: do the instruments they use really serve the social purpose
- international financial system political economy side

The above topics can be grouped in the following 5 areas that the group suggests as topics for the Sessions in the next conference.
1 financial networks and financial innovations and resilience
2. linkage climate change, sustainability – finance,  climate change impact on macro
3. linkage finance – real economy – shaping a socially useful financial system
4. actors, interests and values in the financial system
5. reforming the international financial system: political economy

The Doomsday Machine

I am attaching a document

Self_Organized_DoomsdayMachine

describing the idea I presented on Tuesday about the role of the financial system in decoupling saving from real economy.

Here is the slide

SchemeFSGlobal

It is a short paper I wrote together with Paolo Tasca who at the time was doing his PhD with me.  We did not further develop the concept but I think it’s very relevant to GSS, because if we do not understand how this decoupling can be mitigated, it will be very difficult to address global issues effectively.

I think there are some objections to the approach used in the paper around the issue of internalizing externalities and I would be happy to hear them.