BoE’s Haldane on complexity and the need for data

30 Mar 2015

In his speech, on microscopes and telescopes, the Bank of England’s chief economist, Andrew Haldane, talked extensively about the need for data so financial regulators could both monitor risk in the global financial system and take action to prevent this risk triggering a financial crisis. The Transparency Label Initiative™ is critical to making the data he would like to see available.

Monitoring risk in a system of systems requires data on each of the sub-systems, often at a high level of granularity. Often in response to crisis, efforts have been made over time to improve data on economic and financial systems…. In response to the latest crisis, renewed efforts have been made to fill data gaps and to improve the degree of disclosure by banks of their balance sheet positions…

Regulatory efforts to improve the degree of disclosure by banks of their balance sheet positions to whom? Regulators for monitoring the system or investors so they can limit their exposure to each bank based on the risk of the bank?

To date, as shown by the Office of Financial Research, the focus has been on improving the degree of disclosure to regulators only.

Yet there remain significant data constraints on our ability to map the macro-financial system of systems in the detail necessary to capture accurately interactions within and across sub-systems. Even among the world’s largest banks, data on their bilateral exposures to one another remains partial and patchy, especially for off balance sheet positions and securities holdings. That means large parts of the core of the international banking map remain, essentially, uncharted territory.

One of the benefits of the Transparency Label Initiative™ is it ends the problem of partial and patchy data on bank exposures. To qualify for a label, a bank will have to disclose its current exposures, particularly in the areas of derivatives and securities holdings.

These data gaps are even more acute when moving beyond the banking system. Large parts of the non-bank sector remain in the shadows from a data perspective….

Another benefit of the Initiative is it is not limited to banks, but also applies to the non-bank sector. As a result, this sector will emerge from its data perspective shadow.