Haldane Says Common Finance Language Would Lower Stability Risks

Bank of England official Andrew Haldane said a common language for financial information would help firms better assess the risks they face and improve financial stability.

The lack of global standard practices for capturing data prevents financial institutions from producing timely and accurate assessments of their risk management, Haldane said in a speech in New York today. For instance, Lehman Brothers Holdings Inc. mistakenly excluded a $6 billion real-estate exposure in reports to its board months before its collapse.

“Missing inventories and mistaken counterparties could be all but eliminated if financial firms’ information systems spoke in a common tongue,” said Haldane, executive director for financial stability at the U.K. central bank. “Real-time, consolidated data capture is still a distant aspiration. As long as that is the case, real-time consolidated risk management remains a pipe dream.”

The financial industry is a “laggard” in developing common standards when compared with the global supply chain’s use of product barcodes and the World Wide Web’s use of HTML language, he said. The Financial Stability Board is overseeing efforts to improve data collection, and the use of Legal Entity Identifiers and Product Identifiers will help progress toward “a consistent global method for financial product identification.”

“The financial crisis exposed myriad weaknesses in those risk management practices, especially among the larger and more complex financial firms,” Haldane said, citing “defective” governance of risk. “But underlying these high-level problems was a set of lower-level deficiencies in data and risk capture. IT infrastructure was often ill-suited to capturing these risks.”

‘Risk Countours’

Haldane, who wrote the paper with two bank colleagues, Robleh Ali and Paul Nahai-Williamson, said there is “no reason why, with the right data infrastructure captured in an common language, technology could not be used to map and simulate the risk contours of the global financial system.”

A world with such standards in place will help officials address the risks posed by financial firms that are “too big to fail.” It would also help bolster the safety of central clearing houses, which regulators are relying upon to promote transparency and stability in securities trading.

“If clearing houses are not themselves to become a new manifestation of the too-big-to-fail problem, clearing house risk management will need to be transformed,” he said. “Common standards for data, LEIs and PIs,” will help them, for instance, use real-time data on risk exposure to set margin requirements.

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