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Systemic risk level


Disastrous Floods as Indicators of Systemic Risk Neglect (Part #6)


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With respect to the financial crisis, one blogger fruitfully draws attention (Why fixing what failed before always led to the next, 27 January 2011) to an article introducing the notion of "systemic risk" by Andrew G. Haldane and Robert M. May (Systemic risk in banking ecosystems, Nature, 469, pp. 351-355). Those authors argue:

In the run-up to the recent financial crisis, an increasingly elaborate set of financial instruments emerged, intended to optimize returns to individual institutions with seemingly minimal risk. Essentially no attention was given to their possible effects on the stability of the system as a whole. Drawing analogies with the dynamics of ecological food webs and with networks within which infectious diseases spread, we explore the interplay between complexity and stability in deliberately simplified models of financial networks. We suggest some policy lessons that can be drawn from such models, with the explicit aim of minimizing systemic risk.

The article was accompanied by a forum response on Financial systems: ecology and economics and an editorial response (Natural Wealth: ecological models can be used to guide economic policy -- but should they?, Nature, 469, 266, 19 January 2011). [It is ironically appropriate that such insights into global systemic risks should only be fully accessible to those who subscribe to Nature.]

With respect to aspirations to "normality" in unpredictably dynamic systems, it is appropriate to ask at what risk level do people, communities, businesses, infrastructure facilities, and countries believe themselves to be operating. For some, risk levels have already been irrecoverably exceeded (James Lovelock, The Vanishing Face of Gaia: a final warning: Enjoy It While You Can, 2009). Governments readily ignore warnings on which the insurance industry focuses most assiduously, if only "in the small print". In the case of the Queensland floods, the government has cordially invited the insurance industry -- in a spirit of solidarity with the people so disastrously affected -- to set aside considerations of risk which would otherwise allow them to avoid making compensation. The escape clauses would naturally relating to Acts of God (if not Gaia). Arguably governments also avoid taking account of information relevant to their normal operations when it only appears "in the small print".

Australia is a country much exposed to forest fires, understood as natural to forest ecosystems. For that reason, it is common to see roadside panels indicating the risk of fire on any particular day, according to weather conditions. Indicator posts may also be positioned on roads crossing rivers showing the levels to which waters may rise during the wet season. However they do not indicate the risk of water rising to any given level.

Australian road signs

Fire Danger Rating

Flood warning

In that spirit it may be asked to what extent citizens and institutions are appropriately and explicitly informed (other than implicitly through their insurance premiums) regarding the risk of the following in particular areas:

  • fire
  • theft
  • flood
  • hurricane
  • violence / muggings
  • industrial accident (Bhopal, Chernobyl, French)
  • volcano
  • earthquake
  • landslide / avalanche / rock falls
  • nuclear explosion
  • wildlife hazards
  • health hazards
    • radio frequency
    • unhealthy foodstuffs
    • genetically modified foods
  • lightning strike
  • asterioid strike

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