March 20, 2009

What we need is a digital Bretton Woods

Posted in Your Ideas ·

It seems to me that the main culprit of the credit crunch—of which we all know there are many—is the credit rating agencies. Triple A ratings given to products related to sub-prime mortgages in the states made their local problem a global problem. Why is it that only a handful of rating agencies get to dictate the probability of default? Surely in the digital age we can come up with a better system.

As we all know, the Internet has dramatically changed the way we listen to music, read the daily news, communicate etc. One emerging trend amongst Internet savvy companies— is a notable example—is to pose technical questions on the Internet and invite to public to suggest/develop solutions with the best winning a prize. This new way of working is known as crowdsourcing, and has been embraced by the citizens of the Internet.

Is it possible to use Internet to measure risk? All major banks provide an Internet banking service so that customers can transfer money, pay bills etc. But what if they where forced to go a step further and provide access to their balance sheet in real time? Think of it as an RSS feed that provides information on the vital statistics of the bank. This information could then be analysed by everyone, be they a technically savvy small investor or a not-for-profit research unit based in a university, the possibilities are endless. Anyone with a laptop, Internet connection and the necessary software could act as big brother to the banks, with the prize being that everyone can judge for themselves the risk profile of a bank; thereby crowdsourcing risk measurement and making the rating agencies redundant.

The Internet technologies required to build such a system already exist. Although, the financial regulation system does not. What we need is a digital Bretton Woods that will force banks to provide the information necessary so that crowdsourcing of risk measurement can happen. Moreover, for us in Ireland, the honesty that such a system can provide would promote better management of our banks and give international investors greater confidence in our country. Any future system for commercial and financial relations among the world\’s countries that does not utilise the power of computers and the Internet will not solve our problems for long, and we will face similar problems in 10 years time. We need to utilise the best technologies available to us now, so that we can avoid a similar crisis in our lifetime.

An interesting article on the ideas outlined above: