Global Finance System Industry Analysis

A wakeup call to rethink and renegotiate roles 

in the global finance system

The finance crisis offers a unique opportunity to create a global finance system for the 21st century that vastly enhances stability, wealth, social well-being, and environmental sustainability. Current responses to the global financial crisis will not produce this type of system. The processes only engage traditional insiders and their institutions - those that presided over the development of the crisis. There is a vacuum of vision about how to create a process that will produce the scale of change needed. Without vision, leadership, and the right processes, we will squander the opportunity. And we will condemn ourselves to repetition of the crisis.

A year-long consultation with four dozen professionals engaged in different aspects of finance from different sectors around the world concludes that we now need a global process that will be:

Foundational:

Change must be driven by addressing profound questions about the purpose of the financial system and the principles that direct its actions.

Comprehensive:

Change must encompass the connections between accounting systems, currencies, regulatory systems, economic structures, and all parts of the financial system.

Inclusive:

The process must include other groups including responsible investors, multi-stakeholder groups working on finance issues, asset owners, labor, NGOs, and critical academics.

Systemic:

The change must connect financial stability to the real economy, social equity, and environmental sustainability.

Value network modeling of global finance

The study of the Global Finance system identified key organizations and stakeholder groups. However, the concept of the "global finance public policy system" is still quite vague, even after those groups are identified. In order to make it all more concrete and accessible, this initiative used three visual analytic mapping approaches. These help to understand the organizations, their respective roles, and their relationships. They are generally associated with the broad approach called "social network analysis."

Web Issue Crawler: The Internet is structured around sites that have unique URL addresses. Most websites have (hyper)links to other sites that you click on to take you to other sites or pages. These are inserted because they have more detailed information with regards to a topic (including, of course, ads), because the host wants to connect people to allies or colleagues, or because they may be foes on an issue. The connections between unique URLs provide the basis for mapping relationships by doing a web crawl in an issue arena. Based upon an initial set of URLs known to be in an arena (the "seed" URLs), a software program can draw the relationships between organizations' web links, to give a diagram of the virtual network of the organization.

Example: Global Finance Public Policy Organizations (GFPPOs)

The web crawl map for the Global Finance Public Policy Organizations (GFPPOs) is seeded with URLs of what we have identified as the critical and influential actors in the global finance public policy arena. The resulting map (Diagram 1) is corroborating evidence that, on the basis of measuring co-links, the influential organizations (by proxy of their websites) are central. Colored red in this diagram, these site nodes are well connected, centrally located, and large in size.

In addition to their presence in the map, the relative location of the nodes is also telling. The web crawl shows the bis.org node (Bank for International Settlements) to be in the center of the map. Their central location and size of the node is an indicator that BIS has many in-links from a wide range of other websites.

Diagram 1: Web crawl map showing influential organizations as red dots.

See larger (pdf).

Organizational (Participant-Based) Value Network Analysis: Like the web issue crawler, this approach describes relationships between organizations. However, it also describes what is being exchanged - what the relationship is producing. Moreover, it can be applied to intra-organizational analysis to understand relationships and activities of particular organizations in more depth.

Role-Based Value Network Analysis: This methodology provides visual representation of an issue system like global finance in terms of roles and exchanges between roles. It is particularly useful for thinking of a system comprised of networks rather than organizations. This is very useful when you want to understand which roles are necessary for a healthy issue system, which roles need more attention, and ones that might be so well resourced that competition is creating problems. One organization usually plays more than one role, and a role-based analysis removes the confusion of overlapping and competing roles that two organizations may be playing. It also "depersonalizes" a system to help people move away from the blinders that organizational loyalties and opinions usually generate.

Example: Bank for International Settlements (BIS)

As indicated by the diagrams of Bank for International Settlements (BIS) (Diagram 2) and the Financial Stability Forum (FSF) (Diagram 3), these two organizations are each central to a network of other organizations. BIS, for its part, is the central secretariat for several committees, supervisory groups, and international associations. BIS in turn is funded by central banks. Policy decisions and advice emerge from the various committees and supervisory associations which are then incorporated by the central banks into their decision making.

Example: The Financial Stability Forum (FSF) 

FSF (since renamed FSB: The Financial Stability Forum), coordinated and funded out of the BIS, is tasked with providing recommendations on stabilizing the finance system to the BIS as well as other committees and associations coordinated by the BIS. The central banks, the European Central Bank, the World Bank, and the International Monetary Fund all receive the FSF reports and recommendations. The FSF, then, is a critical and central policy recommending body of experts that influences and in turn is influenced by central banks and other public policy organizations.

Roles in the Public Policy System

The final map (Diagram 4) is a map of the roles in the current global public policy system where the role of global policy (gp) developer is central. A detailed description is not proposed here. However, the earlier maps point out that this role is actually played by a confusing constellation of organizations with BIS in a dominant central one. The organizations and people in this gp developer role receive extensive inputs from central banks, researchers, experts, members, and stakeholders. The gp developer then delivers direction and funding, information, standards, advice, financial services, reports, etc., to many other roles in the system. 

Despite the confusing number of organizations and the scale of the gp developer task, the map shows that there are a modest number of critical roles in developing the gp for finance. These roles can be organized in a number of ways, and by distinguishing between them and their interdependence, new ways of organizing the gp system for finance can be proposed. As well, this map about the current system facilitates discussion about the strength and weakness of some roles - such as the stakeholder one (referring to the formal role of stakeholders for influencing gp development). As well, perhaps additional roles such as the one of rating agencies should be brought in more formally.

Conclusions

There really is a "global finance public policy system," but it is opaque and confusing. The system is characterized by division that hinders fairness, effectiveness, transparency, and accountability. One important division is between institutions that have a global mandate and those that are national (or for Europe to some extent regional). The former generate policy, and by-and-large it is the latter that (decide whether to) implement it. This inevitably increases the gap between theory and practice.

The lack of accountability is perhaps most evidenced by the very weak role of most stakeholders in the global financial system. The system is not simply one with a large group of close runner-ups in terms of voice in the system. There is essentially no role for consumers, NGOs, labor, responsible investors, asset owners, and critical academic voices.

Given the gap between today's finance system and principles of fairness, effectiveness, transparency and accountability, simple reform is insufficient. Reform is associated with changes that are defined by traditional power-brokers. More than the technical rules and regulations need changing: the very goals and principles that guide the finance system need defining.

Successful transformation processes are characterized by all stakeholders in a system coming together to reinvent the system by asking foundational questions about purpose, principles, and roles. Participants must all be ready to change their roles in response to definitions of purpose and principles.

The value of such a process is that a transformation process inevitably brings in new stakeholder voices and new perspectives. This environment of challenging views generates innovation, new ideas, and novel strategies. This suggests that stakeholders in the system should convene to (1) rethink a vision of the system - its purpose and principles - how things would be if it worked really well, (2) how their roles should shift to realize that vision based upon the understanding that everyone's activities will have to change, and (3) set up a process to implement the changes.

Note that the value network maps are focused primarily on tangible deliverables in this first phase of the initiative. The hope for the project is that participating organizations and institutions can be engaged in a multi-stakeholder dialogue to rethink the global policy system as a true value network.

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