FERMiers Required: Viewing Virtual Environments of Banking and Finance as Watersheds

Abstract

"This paper conceptualizes financial markets as virtual environments which should be subject to stewardship requirements found in natural environments. As in natural environments, irresponsible self-governance and lax or off-target regulation result in environmental damage and social loss through externalities. The vehicle of watershed governance is proposed as the best-fitting analogy to financial markets governance for seven reasons: 1, scaling the watershed analogy from small to very large fits well with financial markets [community to global]; 2, watersheds and financial markets each consist of a variety of users who 3, tap hydrologic [capital] resources for many different uses; 4, financial markets, like watersheds, are made up of different types of goods, and so 5, better-managed large watersheds are governed through polycentric institutions with a range of public-private governance arrangements; 6, governmental, private sector and mixed agents seek to support and manage [sustainable] exploitation in each; and 7, comparisons of causes and results of environmental degradation between watersheds and financial markets are robust. The paper integrates literature from watershed governance and environmental management with banking and ERM [environmentally responsible management] to lay foundations of this watershed analogy, develop it, then sketch governance principles. Upstream-downstream interlinkage, soil maintenance and degradation, and cross-border riparian negotiations are used to illustrate challenging financial market governance issues. Effectively managing various types of goods and the property rights issues defining those goods types is discussed."