A review of global banking regulation under an assumption of complexity

Abstract

The global banking system can be shown to be a Complex Adaptive System that exhibits phase transitions from time to time. These phase transitions can result in significant financial losses to the community that we estimate to be much more significant than losses occurring during business as usual periods. In this paper, we argue that the significant losses arising from phase transitions in the banking system requires a very different approach to regulation than the current Basel regime, and that there is a need to transition the Basel regime from a Federation of Systems to a System of Systems. We demonstrate that the World Health Organisation's recent management system for pandemics is ideally suited for management of the global banking system and would have greater potential to control the phase transition losses than the current Basel system.