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As authorities move toward new regulations for international banking, scientists question whether they will address the most important causes of instability.
Deliberations over new regulations for international banking are now in the final stages. In September of last year, the Basel Committee on Banking Supervision proposed new rules that would raise capital requirements on individual banks and also set limits to their overall level of borrowing or leverage. These so-called “Basel III” rules aim to make banks more resilient and to prevent a repeat of the financial crisis.
All of which is good as far as it goes, say experts in the stability of networks, although they doubt it will really touch on the deeper roots of major banking failures.
“The proposed rules don’t focus on the networks of interconnection and interdependence between the banks,” says economist Mauro Gallegati of the Polytechnic University of Marche, a participant in a new European research project, FOC, coordinated by Guido Caldarelli from CNR, Italy, which aims to build a deeper science of the stability and resilience of complex financial networks (www.focproject.net), in part by using advanced ideas from physics and applied mathematics.
As he points out, problems initiated by the sub-prime mortgage industry only triggered a full blown financial crisis because of dense linkages between financial institutions made trouble in one part of the network spread quickly elsewhere. Hence, it’s not just individual banks that need to be made resilient, but the complex international network of banks and other institutions.
“What they propose goes in the right direction,” adds Gallegati, “but it really falls short of addressing the most serious part of the problem. You have to monitor the whole network.”
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