The introduction of a common global language for financial counterparties and products could ultimately lower barriers to market entry and make some bank functions surplus to requirements, a senior Bank of England policy maker says.
Speaking in New York, Andy Haldane, executive director of financial stability at the Bank of England, says industry initiatives to develop a common code for identifying financial counterparties and products will bring big improvements in risk management standards at firms, but may also erode the value of banks as middle-men in many common financial transactions.
The introduction of Legal Entity Identifiers aligned with a similar set of codes to describe financial products has the potential to create a new financial syntax, or "HTML for finance", says Haldane. Although some way off, the adoption of a common language could deliver huge improvements in system resilience and productivity, in much the same way as similar standards have boosted productivity in retail supply chains and on the World Wide Web.
Haldane cites four key benefits that are likely emerge.
First, there could be improvements in risk management in firms. He points to the fragmentation of data infrastructure that has exposed systems to human error and complicated the process of risk aggregation, highlighted in particular around the failure of Lehman Brothers. He says: "Missing inventories and mistaken counterparties could be all but eliminated if financial firms' information systems spoke in a common tongue."
Systemic risks could also be measured and monitored with more accuracy. As Haldane observes: "Complete counterparty data, collected according to common standards, would enable a much more accurate calibration of the financial interconnectivity of key financial nodes."
Third, mapping of the financial network could be comprehensively improved, both in terms of granularity but also timeliness. Just like meteorologists, he suggests, regulators could use a resulting risk map to issue warnings or stress-test the impact of extreme financial events.
Finally, he says a common financial language could help lower barriers to market entry in banking and "…might even begin to erode the too-big-to-fail problem through market forces." He describes how some musicians have successfully by‑passed record labels by selling their works directly to the public via the internet. Haldane suggests innovations in commercial peer-to-peer lending, again using the web as a conduit, could make some bank functions surplus to requirements.
"The banking middle men may in time become the surplus links in the chain," he says. "An information web, linked by a common language, makes that disintermediated model of finance a more realistic possibility."
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