A plan for better banking

As much of the developed world continues to dig out from the impact of the 2008 financial crisis, a team of researchers at Harvard and in London has created a model of bank failure aimed at helping economies avoid crashes. Their work highlights a fundamental dilemma for regulators: Improving the safety of individual banks may make the financial system as a whole more dangerous. Developed by Nicholas Beale, chairman of Sciteb, a consulting firm based in London, and David Rand and Martin Nowak, researchers at Harvard’s Program for Evolutionary Dynamics, the model considers risks to financial systems rather than those faced only by individual banks. The team’s paper, Individual Versus Systemic Risk and the Regulator’s Dilemma, appears online in the Proceedings of the National Academy of Science Early Edition. “We used a simple model to illustrate an idea that, on reflection, people understand instinctively,” says Rand. “When many banks do the same...

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