happened in 2007/8 – they often hoard money rather than lending it
out. The rumour and speculation that circulates from one trader to
another may therefore bring down firms that would otherwise have
survived the crisis.
During 2011, Arinaminpathy and Robert May worked with Sujit
Kapadia at the Bank of England to investigate not only direct
transmission through bad loans or shared investments, but also the
indirect effect of fear and panic. They found that if bankers started
hoarding money when they lost confidence in the system, it could
exacerbate a crisis: banks that would otherwise have had enough
capital to ride it out would instead fail. The damage was much worse
when a large bank was involved because they tended to be in the
middle of the financial network.[93] This suggested that rather than
simply looking at the size of banks, regulators should consider who is
at the heart of the system. It isn’t just about banks being ‘too big to
fail’; it is more about them being ‘too central to fail’.
These kinds of insights from epidemic theory are now being put
into practice, something Haldane described as a ‘philosophical shift’
in how we think about financial contagion. One major change has
been to get banks to hold more capital if they are important to the
network, reducing their susceptibility to infection. Then there is the
issue of the network links that transmitted the infection in the first
place. Could regulators target these too? ‘The hardest part of this
was when you went to questions of “Should we act to alter the very
structure of the web”?’ Haldane said. ‘That’s when people started to
kick up more of a fuss because it was a more intrusive intervention in
their business model.’
In 2011, a commission chaired by John Vickers recommended that
larger British banks put a ‘ring-fence’ around their riskier trading
activities.[94] This would help prevent the fallout from bad
investments spreading to the retail parts of banks, which deal with
high-street services like our savings accounts. ‘The ring-fence would
help insulate UK retail banking from external shocks,’ the commission
suggested. ‘A channel of financial system interconnectedness – and
hence of contagion – would be made safer.’ The UK government
eventually put the recommendation into practice, forcing banks to