by Gwynn Guilford
Mark Buchanan thinks Google's PageRank algorithm could help prevent financial crises. PageRank "works on the notion that Web pages effectively vote for other pages by linking to them" and the most important pages "should be those drawing links from many other pages, especially from other really important ones." How this relates to the financial industry:
The systemic risk that turned the U.S. subprime-lending crisis into a global disaster is circular, too. We can’t identify it simply by looking for the banks with the most assets or the biggest portfolios of risky loans. What matters is how many links a bank has to other institutions, how strong those links are and how risky those other banks are, not least because they too have links to other risky banks.
Apparently, European physicists and scientists have actually modeled something similar called DebtRank. Buchanan flags some surprising revelations:
At the peak of the financial crisis, in November 2008, for example, DebtRank scores for the largest 20 or so banks show that simple bank size isn’t as important as we have come to think. Institutions such as Barclays Plc, Bank of America Corp., JPMorgan Chase & Co. and Royal Bank of Scotland Group Plc presented more systemic risk than did Citigroup Inc. or Deutsche Bank AG, despite being significantly smaller in total assets. Wells Fargo & Co. stands out even more: It presented as much systemic risk as Citigroup, despite having only a quarter of the assets.
This lines up with the argument that it's interconnectedness – and not "bigness" – that creates the "too ___ to fail" problem. However, did Wells Fargo really present as much systemic risk as Citigroup? Maybe it did, but the fact of its retail focus – it didn't have an investment bank arm until it bought Wachovia in December 2008 – might suggest a distortion in the metrics (a quick look at the report shows that the period analyzed was March 2008-2010, but Wachovia is still a separate DebtRank node).
The Dish 