In Cod We Trust

5 May 2009

The Bank of England is, it seems, hoping to learn something from the animal kingdom and other non-financial structures about how better to run the financial sector.

Gillian Tett, in the FT this weekend, reports that Mervyn King and his colleagues have been brainstorming with Lord Robert May, eminent zoologist and former head of the Royal Society, about whether the actions of the financial services industry can be predicted or controlled in the light of what we know about animal behaviour or environmental systems.

A paper co-authored by Lord May last year suggested that risk management in the financial sector is analogous to fisheries management. This latter has tended to focus on management of single species (for the financial sector, read individual banks, say), but the current trend is to regard such analysis as incomplete, and that "the wider ecosystem and environmental context (by analogy, the full banking and market system) are required for informed decision-making".
If this sounds fishy to you, it's worth looking at related findings in a paper just published by the Bank's Executive Director of Financial Stability, Andrew Haldane. This notes that, "however sensible structuring of credit may have seemed for individual firms, it is difficult to conceive of a network which could have been less structurally robust. Darwinian evolution is currently in the process of naturally deselecting CDOs. But there is a strong public policy case for the authorities intervening more aggressively when next financial innovation spawns species with undesirable physiological features."

Another striking analogy with the natural world is used in an Ftfm article this week, to demonstrate that "what may be good from an individual investor's point of view is not necessarily in the interests of the investment community as a whole".

What next in the apparently ever more closely linked worlds of finance and nature? Hedgehog fund managers? Primate equity?

Maybe we should just be grateful for a bull market…