More widespread implementation of central counterparties and intra-system netting arrangements are needed to ensure that the financial network is structured so as to reduce the chances of future systemic collapse, Bank of England Executive Director for financial stability, Andrew Haldane said Tuesday.
Addressing the Financial Student Association in Amsterdam, Haldane said counterparties and intra-system netting arrangements reduce the financial network's dimensionality and complexity.
A high-dimension web is instantly compressed to a sequence of bilateral relationships with the central counterparty. The lengthy network chain is condensed to a single link. Provided that link is secure - the hub's resilience is beyond question - counterparty uncertainty is effectively eliminated, he said.
There have been various initiatives over the recent past to introduce central counterparties for the clearing of certain financial instruments, including CDS products over the past 18 months. This is welcome.
But the debate needs not to end there. A much broad range of over-the-counter financial instruments, both cash and derivatives, could potentially benefit from the introduction of a central counterparty, he said.
Haldane said, In many important respects, the current financial crisis is cut from familiar cloth. Its genesis was the over-extension of credit, over-inflation of asset prices and over-exuberance of participants.
Further, the central banker noted that during the outbreak of the severe acute respiratory syndrome, or SARS, in 2003, human flight was prohibited and contagion contained. In the present financial crisis the flight is of capital, not humans, he said.
He said this financial epidemic may endure in the memories long after SARS has been forgotten. But in halting the spread of future financial epidemics, it is important that the lessons from SARS and from other non-financial networks are not forgotten.
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