Disintermediating the banks: How LEIs and PIs could create a common financial language, transform risk management and break down barriers to market entry

Legal Entity Identifiers, Product Identifiers and a consistent global method for financial product identification

Andrew Haldane of the Bank of England yesterday presented a paper in which he describes a suggested system of tagging financial instruments with electronic identifiers known as Legal Entity Identifiers (or LEI) and Product Identifiers (or PI):

“Though these acronyms are new, the principles underpinning them are not. LEIs are effectively the nouns of a new financial vocabulary, naming the counterparties to each financial transaction. Meanwhile, PIs are the adjectives of this new vocabulary, describing the elements of each financial transaction. Together, LEI-nouns and PI-adjectives are key building blocks of a new common financial language.”

The features of any financial instrument could be reduced to manageable and available data

Mr Haldane continued:

“As yet, we are some distance from having a consistent global method for financial product identification. The prize beyond that, a big one, would be to integrate LEIs and PIs using a commonly-agreed global syntax – an HTML for finance. This would allow us to move from words to sentences. It would provide an agreed linguistic base for a common financial language. Provided this language is flexible enough, like…HTML, it ought to be capable of describing any instrument whatever their underlying complexity. So if a common language for finance were to arise with these features, what benefits might be expected?”

Those benefits would include improving risk management in firms and across firms, mapping the network of international finance and lowering barriers to entry.

Banks become “surplus links in the chain”

That last point is particularly interesting, with Mr Haldane suggesting that the construction of this common financial language – in which all information about an instrument is known and available – would lead to the disintermediation of the established banks:

“With open access to borrower information, held centrally and virtually, there is no reason why end-savers and end-investors cannot connect directly. The banking middle men may in time become the surplus links in the chain. Where music and publishing have led, finance could follow. An information web, linked by a common language, makes that disintermediated model of finance a more realistic possibility.”

See also: What is shadow banking? The Chairman of the FSA on the risks that “shadow banking” poses to financial stability

UPDATE 21 March 2012: The arguments in Mr Haldane’s paper are examined in this blog post from FT Alphaville.

UPDATE 8 June 2012: A Global Legal Entity Identifier for Financial Markets – Financial Stability Board

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