The European Commission is investing in a research project to develop new systemic risk indicators for “early warning systems” that could alert governments and bankers to impending financial crises in the earliest stages and take early action to stop them from spreading. Researchers from universities in Italy, Spain, Switzerland and the UK, experts at Yahoo! and the European Central Bank will investigate how financial institutions are exposed to systemic risk as a result of complex, highly inter-connected digital information and transaction systems.

Project Aim

The aim of the "Forecasting Financial Crises" project is to improve policy makers' understanding of how banking systems, stock markets and the flow of credit are mutually interconnected. The conceptual and software instruments developed during the research could help develop early-warning systems that would permit actions to be taken if needed to stabilise financial markets. The research will focus not only on financial transaction data, but also on internet search data such as the frequency of certain key words related to finance in search engines. The aim is to develop new risk indicators that could be used by policy bodies like the European Central Bank, the European Systemic Risk Board, or the Basel Committee on Banking Supervision to help to prevent future financial crises.

The approach is based on new multi-disciplinary research, linking results from complex systems science and the physics of stability and resilience to modern approaches in economics. The resulting ICT-based tools would complement the far-reaching measures taken in Europe in response to the recent financial crisis to step up regulation of financial institutions and to increase monitoring and supervision of markets.

Background

Research work started in September 2010 and will end in 2013 with a total cost of €2.48 million. The Commission is contributing €1.8 million under the ICT research budget of the R&D Seventh Framework Programme 2007-2013. The project is part of the Commission's initiative to boost high-risk ICT research in future and emerging information technologies (FET Open), an objective of the Digital Agenda for Europe adopted by the Commission in May 2010 following the Europe 2020 strategy for smart, sustainable and inclusive growth.

FET-Open is continuously open for conceptually new, high-potential research proposals with a long-term vision. It funds research to react quickly to newly emerging challenges in ICT research that would be outside the priorities of other funding schemes.

Consortium

The "Forecasting Financial Crises" project features the following European institutions:

• Institute of Complex Systems of the Italian National Research Council. (Italy)
• University of Oxford (UK).
• Swiss Federal Institute of Technology Zurich. (Switzerland)
• Fundació Barcelona Media of University Pompeu-Fabra (Spain).
• City University London (UK).
• Polytechnic University of the Marches (Italy).
• Yahoo! Research.