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Ecosystems and Financial Regulation

Dominique Dron, 18 October 2015

[English] [français]

This note offers theoretical insight into and practical suggestions for a new approach to financial regulation, based not on abstract theorizing but on lessons drawn from natural ecosystems. Ecosystems, like financial, information, and energy systems, are all complex. The way that all these systems function can be at least partially modeled through mathematics; therefore principles of resilience identified by observing ecosystems can be legitimately assumed to remain valid in other domains.

Recent research shows that the longevity and self-regulating capacity of ecosystems rest on four principles of resilience: the existence of feedbacks, which keep the system within physically sustainable limits; a plasticity of relationships and flows due to appropriate degrees of connectivity, yet without generalized substitutability; a significant diversity of actor types; and looped material and energy cycles, allowing to preserve vital stocks.

In the current dominant financial system, these sources of resilience are either missing or highly inadequate. Consequently, the way it functions is far from the balance between resilience and effectiveness achieved in ecosystems; in fact, the current system is spontaneously evolving in the opposite direction. As a solution, this note suggests regulations that are analogous to ecosystem’s principles of resilience: control of excess quantities and volatility, rationalization of substitutability, increased actor and criteria diversity, and reconnecting with other systems.

The goal is not to apply to the financial system an ecosystemic model, which would be no more than an analogy, and a reductive one at that, but, on the contrary, to identify more objectively the structural characteristics of financial systems by shedding light on how other complex systems operate, free of classical economics’ theoretical assumptions.

The author graduated from Ecole Normale Supérieure and Mines-Paristech and works at the
French Ministry of Economy. The opinions expressed in this note are the author’s own. This note
draws on and completes a presentation made at the Banque de France/ACPR seminar on 2015
January 26.

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