Spreadsheets and the Financial Collapse

TL;DR

This paper examines the critical role and risks of spreadsheets in financial systems, highlighting their contribution to financial crises and offering recommendations to mitigate associated dangers.

Contribution

It extends previous work by analyzing the impact of spreadsheets on financial stability and proposing regulatory measures to reduce overdependence on unreliable spreadsheet use.

Findings

Spreadsheets are highly central and critical in financial markets.

There is a suggested link between spreadsheet reliance and financial crises.

Regulatory recommendations can help mitigate spreadsheet-related risks.

Abstract

We briefly review the well-known risks, weaknesses and limitations of spreadsheets and then introduce some more. We review and slightly extend our previous work on the importance and criticality of spreadsheets in the City of London, introducing the notions of ubiquity, centrality, legality and contagion. We identify the sector of the financial market that we believed in 2005 to be highly dependant on the use of spreadsheets and relate this to its recent catastrophic financial performance. We outline the role of spreadsheets in the collapse of the Jamaican banking system in the late 1990's and then review the UK financial regulator's knowledge of the risks of spreadsheets in the contemporary financial system. We summarise the available evidence and suggest that there is a link between the use of spreadsheets and the recent collapse of the global financial system. We provide governments and regulating authorities with some simple recommendations to reduce the risks of continued overdependence on unreliable spreadsheets. We conclude with three fundamental lessons from a century of human error research.