A Sustainable Financial System

Research focus

Our research focuses on routes towards a sustainable financial system. We aim at sustainability in three dimensions:

1. In the economic dimension, the financial system should be resilient both towards exogenous shocks and endogenous variability.
2. In the social dimension, it should contribute to social stability.
3. In the ecological dimension, it should finance the large-scale investments needed for the sustainability transition.

The financial system has two main objectives

1. Safeguarding the savings of world citizens, in particular their pension savings.
2. Financing investments in the real economy.

The financial system is facing some tough challenges

• In the past decades, the financial system has progressively decoupled from the real economy and become self-referential. The following figure contrasts world trade and daily cross-border payments from 1980 to 2010:

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• Financial institutions have become too-big-to-fail and too-connected-to-fail.
• The financial system has become fragile and faces the risk of break-down.
• A break-down of the financial system would endanger the savings of world citizens and the operation of the real economy with the risk of serious repercussions to the stability of societies.
• Societies face the challenge to finance the large-scale investments needed for accomplishing a sustainability transition, in particular concerning their infrastructure.
• For triggering the financial streams needed for financing a sustainability transition, societies need to define appropriate business cases.
• The architecture of the financial system allowed – or even encouraged – the build up of destabilizing macroeconomic imbalances rather than keeping them in check. The following figure shows average absolute current account imbalances as percentage of GDP:

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• A multipolar world with several national reserve currencies may show chaotic dynamics analogous to the 3-body-problem of celestial mechanics.

Two proposals from China

In 2009, Zhou Xiaochiang, the governor of the Chinese central bank, made two remarkable suggestions:

1. In the long run (we guess his time horizon is about 2050), he advocated the creation of an international reserve currency.
2. In the short run, he suggested to build upon the International Monetary Fund (IMF) and its Special Drawing Rights (SDRs) and gradually develop the SDRs towards an international reserve currency.

A possible first step

As a possible first step, the European Investment Bank (EIB) could emitt project bonds defined in the currency unit Special Drawing Rights (SDR or, technically speaking, XDR).

Project activities

• December 2012: IASS Workshop Towards a Sustainable Global Financial System.
• June 2013: IASS Working paper Sustainability, Finance, and a Proposal from China, 1^st print.
• June 2013: Prof. Klaus Töpfer presented key results of our working paper at the 2^nd Global Systems Science Conference, Brussels. Audience mainly academia, EU commission, central banks, NGOs.
• September 2013: Armin Haas gave invited talk Sustainability, Finance, and a Proposal from China at the conference Towards a Sustainable Financial System, Stockholm. Audience mainly academia, Swedish central bank, civil society.
• December 2013: IASS Workshop Governance for Sustainability: How to Transform the Bretton Woods Institutions?
• April 2014: EU Horizon 2020 proposal Distributed Global Financial Systems for Society (Dolfins) submitted. Consortial lead: Stefano Battiston, Professor of Banking, University of Zurich.
• April 2014: EU Horizon 2020 proposal Green Growth and Win-win Strategies for Sustainable Climate Action (Green-Win) submitted. Consortial lead: Jochen Hinkel, Research Line Leader Adaptation and Social Learning, Global Climate Forum.
• April 2014: Paper Currencies, Commodities and Keynes submitted to the scientific journal History of Political Economy.
• Currently: Paper Keynes, Zhou, and the Bancor in preparation. Target journal: Cambridge Journal of Economics.