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[description] => Read CP25/14 (PDF)
We want to develop a safe, competitive and sustainable cryptoasset sector – one that enables innovation and is underpinned by market integrity and consumer protection.
Qualifying stablecoins are cryptoassets that aim to maintain a stable value by referencing 1 or more fiat currencies. Stablecoins have the potential to drive efficiency in payments and settlement using blockchain technology, with particular benefits for cross-border transactions.
Our proposed rules aim to ensure regulated stablecoins maintain their value. They also mean that customers should be provided with clear information on how the backing assets are being managed.
This is the latest milestone in our roadmap for crypto regulation. The proposals are the result of extensive engagement through roundtables and feedback on previous discussion papers.
This CP is published alongside CP25/15, setting out our proposed prudential requirements for qualifying stablecoin issuers and cryptoasset custodians.
We will work closely with the Bank of England on the upcoming regime to ensure a clear pathway in regulation for stablecoins.
Our proposals will affect consumers and firms who use, or interact with:
Who needs to read this document:
It may also interest:
In support of the opportunities stablecoins present to financial services and the broader economy, the FCA will add a specific focus on stablecoins to our innovation services in the coming months.
We will also consult on proposed cross-cutting conduct and firm standards requirements, as set out in our crypto roadmap, which will be relevant for stablecoin issuers and cryptoasset custodians.
Send us your comments by 31 July 2025 using the online form. We will consider this feedback before we publish our final rules.
Complete the online form
If you cannot use the form, email us at cp25-14@fca.org.uk.
Under the government’s plans, our regulatory remit for cryptoassets will expand from the current Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs) and financial promotions regime to a more comprehensive crypto regime.
On 29 April 2025, the Treasury published a draft of forthcoming statutory provisions
Link is external
to create new regulated activities for cryptoassets, and a policy note detailing the intended policy outcomes of these provisions.
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[description] => Address by Mr Yandraduth Googoolye, First Deputy Governor of the Bank of Mauritius, at the IMF's Africa Training Institute, Ebene, 17 November 2017.The views expressed in this speech are those of the speaker and not the view of the BIS.Central bank speech | 21 November 2017by Yandraduth GoogoolyePDF version (36kb) | 4 pagesCourse on Core Elements of Banking SupervisionI wish to begin by thanking the ATI for organising this very informative course on the "Core Elements of Banking Supervision". This course is a must for any aspiring bank supervisor. However, allow me to humbly state that this course is but a stepping stone towards understanding banking regulation and supervision. To become an astute supervisor, one needs to effectively marry theoretical underpinnings with practical insights. In this respect, I will encourage you to constantly monitor even the minute anecdotal information that you come across during your day at work. And I am able to share these tips because I started my career at the Bank of Mauritius over three decades ago as a bank supervisor. And during my career, I have overseen not only the transformation of the banking sector in Mauritius and abroad, but also, the revolution behind banking supervision and regulation.Finance and banking are necessary for growth and development. Besides contributing adequately to the economy's gross domestic product, the financial services sector intermediates between savers and borrowers, efficiently allocates financial resources, improves economic development, and creates employment opportunities. Thus, the promotion of a sound financial services sector is central to safeguard the economy's resilience. Trust and stability are other key elements that add towards the well-functioning of the financial system. In the absence of these elements, the economy's ability to mobilize savings for economic use would be jeopardised. Stability is key because it gives the assurance for participants to trade in financial markets and use the services of financial institutions.Financial market infrastructure refers to the platforms that provide the services and facilities to support activities, such as exchanges, clearing houses, and payment and settlement systems. These platforms are crucial in the financial system as they are the nodes to mitigate systemic risks. The safe operation of these various platforms, even under extreme adverse conditions, is a prerequisite to ensure financial system stability. An efficiently working financial infrastructure would typically ease friction, diminish transaction costs, and take full advantage of financial intermediation.The need for regulation and supervision of the financial system arises because financial intermediaries and markets are subject to asymmetric information. Thus, the major aim for financial regulation and supervision is to foster the effective functioning of the financial system in order to enhance the ability to absorb shocks and maintain financial stability. Financial instability arises as a result of shocks hitting the financial system, which impede with the payment system and, ultimately, affect the smooth running of business and trade. Regulators and supervisors across the globe are charged with managing the health of banks and other financial institutions and preserving the stability of the financial system for two basic reasons: consumer protection and maintain financial stability.Accordingly, the ultimate objective of any regulator is to ensure that the banking sector attends to its traditional role of a shock absorber to the financial system. The banking sector has to work towards mitigating any risk between the financial sector and the real economy. Let me remind you that banks are also the channels through which the central bank transmits monetary policy to the economy. On this count, the central bank is definitely concerned with bank soundness for the effective transmission of monetary policy. In addition, thanks to its role as lender of last resort, the central bank is also compelled to have complete information on the financial soundness of any bank that might call for emergency liquidity assistance.The route towards a framework for bank supervision and regulation can be traced back towards the end of 19741, when the then Committee of Banking Regulations and Supervisory Practices was established by the central bank Governors of the Group of Ten countries in the aftermath of serious disturbances in international currency and banking markets (notably the failure of Bankhaus Herstatt in West Germany). The Committee, headquartered at the Bank for International Settlements in Basel, was established to improve the quality of banking supervision worldwide, and to serve as a forum for regular cooperation between its member countries on banking supervisory matters. Starting with the Basel Concordat, first issued in 1975 and revised several times since, the Committee has established a series of international standards for bank regulation, most notably its landmark publications of the accords on capital adequacy which are commonly known as Basel I, Basel II and, most recently, Basel III. . It is surely not my intention to walk you through these various developments.In 1997, the Basel Committee issued the Basel Core Principles for Effective Banking Supervision, which have since been revised from time to time. These BCPs are the very gospel of effective banking supervision as they provide the lifelines for a sound banking sector. Bank supervisors naturally have to engage not only in off-site analysis of banks' performance but also in extensive on-site inspections to assess the soundness of banksNow, allow me to share a few notes on the developments of supervision and regulation in Mauritius. This year marks the 50th anniversary of the Bank of Mauritius. The enactment of the Banking Act 1971 together with attributes in the Bank of Mauritius Act 1966 laid down the basic legal framework governing the operations of banks in the domestic financial system. The subsequent promulgation of the Banking Act 1988 set the basis for the development of a reputable offshore banking sector in Mauritius. In this context, emphasis was laid on the supervisory responsibilities vested upon the Bank, providing for mandatory trilateral meetings to be held with banks and their external auditors. After a few sporadic changes over the years, these two Acts were completely overhauled and replaced with two pieces of legislations in November 2004, namely the Bank of Mauritius Act 2004 and the Banking Act 2004. The independence of the Bank of Mauritius was reinforced, together with an added responsibility of ensuring the stability and soundness of the financial system of Mauritius. The Banking Act 2004 eliminated the separation between domestic and offshore banking activities and provided for a single banking licence to cover both activities. In 2016, the functions of the Bank were broadened with the added responsibility of regulating and supervising the locally incorporated, ultimate and immediate financial holding companies of banks and non-bank deposit taking institutions licensed by the Bank.Alive to the fact that the Bank of Mauritius Act and the Banking Act still fall short of meeting the international standards for bank resolution and crisis management, the Bank sought assistance from the International Monetary Fund to strengthen the legal frameworks in these areas. In the same vein, the Bank opted for a review the Bank of Mauritius Act 2004 and the Banking Act 2004 in line with international best practices imposed not only by the Basel Committee of Banking Supervision (BCBS) but also the Financial Stability Board (FSB), the International Association of Deposit Insurers (IADI), the Organisation for Economic Co-operation and Development (OECD) and the Financial Action Task Force (FATF). Here, allow me to extend our deepest thanks to Mr Ravi Mohan, who was instrumental in this endeavour and supported us throughout. We also have a couple of bills in the pipeline, notably, the Deposit Insurance Scheme Bill and the National Payment Systems Bill, both of which aim at strengthening the stability and soundness of the financial sector.The Bank of Mauritius has already adopted the macro-prudential perspective in financial regulation to curb excessive risk on certain sectors. Guidelines have been issued for the implementation of macro-prudential policy measures such as caps on loan to value ratio, debt-to-income ratio, higher provisioning and capital requirements for certain sectors. The macro-prudential rules have been reviewed from time to time in the light of variations in the vulnerabilities of the system. One among the essential aspects of supervision that are crucial for macro-level monitoring is the efficient exchange of information between supervisors, both at home and abroad. Such an exchange provides an essential supervisory tool to support the supervision of banking groups. In this respect, the Bank has signed Memoranda of Understanding (MoUs) with several domestic and foreign regulatory authorities. The Banking Act 2004 allows the Bank to share information with any other central bank, under conditions of confidentiality. We are mindful, at the Bank, that exchange of information is crucial with regulators of countries where our banking groups hold a regional presence. The Bank has, in this context, held three Supervisory Colleges since 2013 with its host regulators. In Mauritius, a Memorandum of Understanding (MoU) was drawn since December 2002 between the two supervisory authorities, namely the Bank of Mauritius and the Financial Services Commission, on information sharing. Over the years, the cooperation and coordination of these two institutions have been enhanced through the setup of a Joint Coordination Committee (JCC) and several working groups to coordinate supervisory work on common supervisory areas. The JCC typically meets every two months and reviews areas of interest. In addition, as the First Deputy Governor of the Bank, I have been appointed Vice-Chairman of the FSC since June 2017. This appointment makes the cooperation between the two institutions more efficient and focused.As part of its reform strategy to reinforce the domestic banking sector, the Bank also initiated changes to the corporate structure adopted by the two largest banking groups in Mauritius. The separation of banking activities from non-banking activities limits the risk of contagion from non-banking business to the bank, and allows management to focus on their core business of banking. In line with Basel III requirements, these banks are made to hold higher capital requirements. Five domestic banks have been identified as being domestic systemically important banks, and since 1 January 2016, these banks have been required to hold, in a phased manner over a four-year period, an additional capital requirement ranging from 1 to 2.5 per cent of their risk weighted assets depending on their systemic importance.An area, where we, at the Bank, are very mindful is the improvement in AML/CFT processes. We have a zero tolerance approach for breach of AML /CFT rules and offending institutions are subject to fines. We have also instructed our banks to put in place a fully automated system for the detection of suspicious transactions and monitoring of the level of activity in customers' accounts.The legal and regulatory landscape will, undoubtedly, undergo further changes driven primarily by innovative companies and applications - such as fintech companies and start-ups, distributed ledgers, blockchain and other crypto-currencies, which are transforming the financial services and banking sector landscape. The recently issued Basel Committee on Banking Supervision consultation document on the implications of fintech for the financial sector assesses how technology-driven innovation in financial services, or "fintech", may affect the banking industry and the activities of supervisors in the near to medium term and advocates 10 key recommendations for banks and bank supervisors to address the challenges of fintech. I will urge you to go through these documents and to keep abreast of such developments as they will be of key importance in the near future.Ladies and gentlemen, regulation and supervision should not be limited to only banks and/or financial institutions. We often make this mistake of holding a narrow view on this subject matter. We have to see the bigger picture, instead. There is the need to focus on financial stability, which is encompassing and also address the regulation and supervision of financial market infrastructure. Going forward, the domain of bank supervision and regulation will keep its dynamism and a potential issue is the challenges for regulators which new technology is bringing to the banking industry. The emphasis on financial technology would entail identifying where risks lie. Putting forward a pro-active framework for regulation and supervision is high on the agenda. And this requires the collaboration and cooperation of stakeholders. We must not forget that gains achieved over years of development can be wiped out through lax financial regulatory standards.Thank you.1 Source: History of the Basel Committee, Bank for International SettlementsAbout the authorYandraduth GoogoolyeMore from this authorRelated informationMore speeches from "Bank of Mauritius"Country page: Mauritius
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[description] => Remarks by Mr Ravi Menon, Managing Director of the Monetary Authority of Singapore and Chairman of the APAC Network Advisory Board, at the GFANZ APAC Summit opening, Tokyo, 5 June 2023. The views expressed in this speech are those of the speaker and not the view of the BIS.Central bank speech | 06 June 2023by Ravi MenonPDF full text (8kb) | 3 pagesMary Schapiro and colleagues from GFANZ Global, GFANZ APAC Advisory Board Members, ladies and gentlemen, thank you for coming for the inaugural GFANZ APAC Summit.We launched the GFANZ Asia Pacific Network a year ago, in recognition of the critical importance of this region to the global fight against climate change.Ms Yuki Yasui, Managing Director of the GFANZ APAC Network, will speak on the achievements of the Network shortly.Let me just say, on behalf of the Advisory Board, how proud we are of the outcomes that Yuki and her team have achieved in such a short span of time.Mary has given us a very comprehensive overview of all the work that needs to be done and what GFANZ is doing on all those fronts. Transition is the centre piece of all that work and she has touched on it extensively. I want to touch on the mother of all transitions, and I think it is also the single most important step we can take to reach net-zero by 2050 – and that is to accelerate the retirement of coal fired power plants.Coal power generation is the largest source of carbon emissions globally.The International Energy Agency has called for a 55% reduction in coal-related emissions by 2030 and a full phaseout of unabated coal in power generation by 2040.Early phaseout of coal is especially critical in the Asia Pacific.The region's coal plants account for about a third of APAC's total GHG emissions.More ominously, if they continue to operate as planned, they will exhaust two-thirds of the carbon budget that we have remaining to keep the rise in global temperatures from increasing to within 1.5 degrees Celsius.The challenge of phasing out coal is also most acute in the Asia Pacific.Coal accounts for nearly 60% of power generation in the region.Asia's energy demand is projected to increase by two-and-a-half times by 2050, on the back of economic development, population growth, and urbanisation.The Asian Development Bank estimates that around 150 million people in APAC still do not have access to electricity. So this is a huge problem. Asia stands to suffer the most in terms of hundreds of millions of lives due to climate change, and yet the transition is going to affect them the most as well.Added to the challenge, Asia's coal plants are young, less than 15 years old on average. This makes the economics of phasing out coal more challenging, especially as new coal plants continue to be built to keep pace with energy demand.We need a holistic approach for Asia's energy transition that meets three objectives:reduce emissions significantly;meet growing energy demands; andlimit any adverse impact on jobs and communities.Neither the continued burning of coal nor the immediate cessation of coal plants meets all three objectives.What we need is a coherent strategy for the managed phaseout of coal that achieves environmental sustainability, energy security, and a just transition for communities whose livelihoods depend on coal.Finance alone is not enough but it can play a critical role in getting us from coal to clean. A combination of public and private capital, coupled with appropriate policy reforms, can provide the right economic model to encourage owners to voluntarily wind down their coal fired power plants ahead of their technical end of life. We will also need innovative financing structures to blend public and private capital.But there are significant challenges to financing the early retirement of coal.Financial institutions will need to justify how such financing is consistent with their net-zero commitments, especially when their financed emissions rise over the short term.They will need to address potential greenwashing concerns that new coal capacity is being created to replace the coal plants being phased out early.There is a lack of scalable risk sharing mechanisms to support coal plant owners in their transition to cleaner energy.This is why the GFANZ APAC Network is launching today for public consultation a report providing detailed guidance on financing the managed phaseout of coal fired power plants in the region.The guidance aims to ensure that managed phaseout transactions are climate credible, economically viable, and socially inclusive. It proposes a three-step process.First, ensuring that there are credible plans for coal phaseout at the government, company, and project level. This is critical to address two key risks in managed phaseout projects:one, 'emissions leakage' where the closure of a coal fired power plant is offset by increased operation of other coal plants or new coal plants built.second risk, moral hazard, where a phaseout transaction perversely encourages more coal power generation in order to later benefit from a potential coal phaseout plan.Second, optimising meaningful outcomes across climate impact, financial viability and socio-economic considerations. There are several measures financial institutions can take to achieve this.one, prioritise projects that align with a science-based pathway that is consistent with timelines set by internationally recognised bodies;two, ensure measures are in place to support access to secure, reliable, and affordable clean energy;three, assess the programmes that are in place to mitigate adverse socio-economic impacts, such as social cost assessments, stakeholder engagement, land repurposing plans, and worker and community transition plans; andfour, conduct a holistic financial viability assessment of the project including the cost of socio-economic support measures.The third and final step in the GFANZ framework – provide transparency and accountability for coal phaseout plans in line with the GFANZ Net Zero Transition Plan framework. This entails ensuring:an implementation strategy that is in line with net-zero objectives;an engagement strategy that reaches relevant stakeholders;metrics and targets that support disclosure and monitoring of progress; anda governance structure to oversee and support the implementation of the plan.We hope that the GFANZ guidance will serve as an important, ambitious and practical tool to help catalyse coal phaseout transactions in the coming years. We hope it will be useful for other regional initiatives to encourage coal phaseout, such as the Asian Development Bank's Energy Transition Mechanism and country-led platforms such as the Just Energy Transition Partnerships, or JETPs, in Indonesia and Vietnam.The managed phaseout of coal cannot be achieved solely by the financial sector or through innovative financing structures. Technology will play an important role. So will supportive government and regulatory policies, such as removing fossil fuel subsidies, implementing carbon pricing, setting emissions standards, extending social safety nets and worker re-training programmes.The managed phaseout of coal is not easy to do. It is a system-wide challenge that requires a system-wide approach – an approach that involves the public, private, and people sectors. But to achieve a just transition to net-zero, it is critical that we do this, and do this well and do this right.Thank you very much, I wish you all the best for the Summit ahead.About the authorRavi MenonMore from this authorRelated informationMore speeches from "Monetary Authority of Singapore"Country page: Singapore
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[description] => Outcomes-focused impact measurement and management (IMM) is critical to enhance the practical benefits and positive outcomes enabled by financial inclusion investing. To explore how the industry can move forward, join CGAP, IFC, Global Partnerships, and Tyme for a discussion on what’s missing and what’s next for outcomes-focused IMM in financial inclusion investing. This webinar explored: Key gaps holding back progress on outcomes-focused IMM, key enablers needed to advance outcomes-focused IMM practices, concrete actions and commitments required to move the industry forward, and a future vision for success in outcomes-focused IMM.
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[channel] => Newsletter Issue 32
[name] => Towards 'Right-Fit' IMM for Financial Inclusion Investing: What's Missing and What's Next?
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[description] => Press release | 20 October 2011The Basel Committee on Banking Supervision today published answers to a second set of Basel III frequently asked questions. To promote consistent global implementation of Basel III, the Committee will continue to review frequently asked questions and publish answers along with any technical elaboration of the rules text and interpretative guidance that may be necessary.The Basel Committee has received a number of interpretation questions related to the December 2010 publication of the Basel III regulatory frameworks for capital and liquidity and the 13 January 2011 press release on the loss absorbency of capital at the point of non-viability. Today's publication updates the first set of FAQs that relate to the definition of capital, which was published in July 2011.Related informationFull publication: Progress report on Basel III implementation
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[url] => https://www.brookings.edu/articles/3-technical-choke-points-that-could-sink-the-common-core-tests/
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[description] => One month ago, the Partnership for Assessment of Readiness for College and Careers and Smarter Balanced Assessment Consortium, the two organizations charged with designing and administering the Common Core assessments started field-testing. Approximately 4 million students from around the country will take the nearly finished exams. The purpose of the trials is to test the tests. Education leaders want to assess the quality of the test items to discover which ones are too easy and too difficult. These field tests will also focus on discovering and fixing technical glitches. Both Common Core assessments are taken on a computer rather than the traditional paper and pencil. The field tests are essential to making sure testing goes smoothly next year when the test results will count towards compliance with accountability policies like teacher evaluations.
Technical difficulties represent a major threat to the long term success of the Common Core. If the Common Core tests suffered a failed launch then it would present a potent moment for its political enemies to try and stop the implementation of the standards. Online testing in Indiana, Kentucky, Minnesota, and Oklahoma from several test providers have encountered severe technical glitches in the past. Students experienced slow loading times, the unexpected closing of test applications, and some were not even able to log into the exam. Bugs like these have the potential to invalidate hundreds of thousands of test scores. There is scant evidence on the status of the current Common Core field tests. According to one report the Smarter Balance technical assistance hotline was averaging 637 calls a day while the PARCC helpline was averaging 1,100. However, most of these issues were easily resolved.
There are three main technical hurdles the Common Core tests will need to overcome for a successful launch:
One- Computer Availability
Ideally every student will take these next generation assessments on a computer. Computer based tests are far preferable to paper based tests. They are less expensive to administer, easier to grade, and more accurate. Many schools have computer labs or other facilities suited to test students. These schools can rotate students through the lab to take exams. Some schools will have to bus students to libraries or universities to administer the tests. Computers with viruses, antiquated hardware, or unpatched operating systems may run slow to a point that it interferes with the student taking the test. Computer availability is a largely solvable problem for most communities. However, administrators must have plans in place ahead of time to avoid costly delays.
Two- Access to Online Test Applications
The Common Core tests require Internet access. In 2005 about 94 percent of schools were connected to the Internet and 97 percent of those used broadband services. Since 2005, that percentage of schools with Internet access has likely approached but not reached 100 percent. Internet service providers may throttle access, which could slow the tests and result in the loss of the answers to test items. Schools without hi-speed access may not be able to administer the test at all. This is especially problematic for rural areas that lack access to broadband Internet. Students in these areas will either have to take a paper test or travel to a location with Internet access.
Three- Unexpected Glitches after Peak Usage
The area of greatest concern is glitches that the current field tests would miss. Many of the problems with Healthcare.gov were not know until hundreds of thousands of people attempted to use the website at the same time. It’s often difficult to anticipate these problems without rigorous testing. The best data on the field tests came from the PARCC Live Field Test Updates.
These daily press releases provided a useful but incomplete data on the number of field tests, which were administered and completed. The largest number of tests started on a given day was 55,000. Students took tests over multiple days so the peak number of test takers was likely closer to around 80,000. However, once the tests go live many hundreds of thousands will take the tests each day. For example California has over 6,000,000 K-12 students. On a test day the number of users could easily exceed 500,000. The prospect of unknown glitches should worry test designers and the testing consortia.
None of these problems should catch education leaders off guard. Common Core cheer leaders and opponents would likely agree that implementation is the key to successful standards based reform. A failure to address these technical issues would represent a serious blow to the Common Core because it would speak directly to the quality of the implementation effort. If the Common Core is to stand a chance of improving the quality of the nation’s education system school leaders must plan to address these issues today to prevent a disastrous launch.
The Brookings Institution is committed to quality, independence, and impact.
We are supported by a diverse array of funders. In line with our values and policies, each Brookings publication represents the sole views of its author(s).
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[description] => Speech by Mr Rajeshwar Rao, Deputy Governor of the Reserve Bank of India, at the "National E-Summit on Non-Banking Finance Companies", organized by the Associated Chambers of Commerce and Industry of India (ASSOCHAM), Mumbai, 6 November 2020.The views expressed in this speech are those of the speaker and not the view of the BIS.Central bank speech | 06 November 2020by Rajeshwar RaoPDF full text (180kb) | 10 pagesDr. Charan Singh, Shri Deepak Sood, Shri Ramesh Iyer, Shri Vineet Agarwal, Shri S. Ramann, Shri Sunil Kanoria, Shri Raman Agarwal, Ladies and Gentlemen,I thank the Associated Chambers of Commerce and Industry of India for this very kind invitation to address the 'National E-Summit on Non-Banking Finance Companies'- with the theme "Stability and sustainability of Financial Sector".2. At this juncture, NBFC sector is passing through a critical phase. Recent failures of certain large Non-Banking Financial Companies (NBFCs), severe liquidity strain confronting the sector and the consequent financial stability concerns have brought NBFC regulations back into focus. I thought that the time is opportune to talk a little bit on the innovative transformations taking place in the NBFC sector and the regulatory response from the Reserve Bank. It would be contextual to take stock of the direction in which regulatory focus has moved and what could be the future shape of NBFC regulations. This is intended as an analysis to evoke discussion and debate on the subject.Growth of NBFC sector and the need for prudence3. NBFCs have come a long way in terms of their scale and diversity of operations.About the authorRajeshwar RaoMore from this authorRelated informationMore speeches from "Reserve Bank of India"Country page: India
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[url] => https://www.brookings.edu/articles/productivity-measurement-in-an-age-of-multinational-companies-and-new-technologies/
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[description] => Technology seems to be advancing everywhere one looks – in cars, in medicine, in voice recognition, in smartphones, in artificial intelligence. Yet official statistics show that productivity growth (goods and services produced for each hour of work and one gauge of technological progress) has slowed over the past decade. This inconsistency has led some to question whether official measures of Gross Domestic Product (the value of all the goods and services produced in the economy) and productivity are adequately capturing the benefits of innovations.
Karen Dynan of Harvard University and Louise Sheiner of the Brookings Institution discuss these issues, among others, in their paper “GDP as a Measure of Well-being,” published as part of the Hutchins Center on Fiscal and Monetary Policy’s Productivity Measurement Initiative.
To get an idea of how the benefits of technology may be missed in official measures, consider the iPhone, a device which has become indispensable to many of its 90 million U.S. users. Does GDP capture all of the benefits of the iPhone? Should it?
According to Dynan and Sheiner, the benefits of the iPhone should be in GDP—in the sense that properly measured GDP would account for the benefits that consumers derive from their iPhones. In practice, however, these benefits are likely underestimated in official statistics because of the difficulties in measurement. Of course, GDP does take some account of the iPhone: iPhone purchases are counted as consumption, and the wages of the workers in Cupertino and at all the Apple stores across the U.S. are counted as part of income. But two very different sources of mismeasurement suggest that both income and consumption arising from the iPhone are understated. First, the U.S. tax system may provide an incentive for Apple to understate how much of the value of the iPhone stems from work done in the U.S., meaning that domestic profits, and nominal GDP, are understated. Second, comparisons of GDP or productivity from one period to another, require determining how much of an increase in spending is simply price inflation (more money for same thing) and how much is buying more of something, or buying something better. When people spend money on new technologies, the price deflator used to convert that spending into real consumption may not fully reflect the value that consumers get from their purchase, meaning that inflation is overstated. Both of these sources of mismeasurement lead productivity — real GDP per worker — to be understated.
The challenges discussed in this blog are not unique to the iPhone, nor are they new. They reflect the difficulty of accurately measuring GDP in a modern economy, with a large number of multinational companies capable of profit shifting, rapidly changing products, and the frequent entry of new products with no direct comparisons.
Does U.S. GDP appropriately capture Apple’s profits from the iPhone?
Apple is a multinational enterprise with a complex global supply chain, meaning that producers in many different countries contribute to its production. Most of the value of the iPhone derives from its intangible characteristics, like its design and the technological capabilities of its operating system, rather than from its underlying parts — the glass, the computer chip used to run it, etc. This makes it hard for government agencies that put together the GDP statistics to know how much of the value of the iPhone comes from work done in the United States — which is all that counts for the U.S. GDP — and how much is produced abroad. And because the United States taxes domestic profits more heavily than foreign profits, Apple has a big incentive to understate its domestic production. (The recent corporate tax reform changed these incentives somewhat, although it is not clear how much.)
Here’s one method Apple could use to minimize the share of revenue that is taxed in the United States: Apple U.S. contracts with an affiliate in a low-tax country, say Ireland, and leases the rights to its software, blueprints, and branding at a price that is much less than its market value. In other words, Apple Ireland pays Apple U.S. a fee that is less than what Apple would charge if the transaction were arms-length. Apple U.S. is happy to do this because it owns Apple Ireland. Apple Ireland then contracts with manufacturers in other countries, like Foxconn in China, to do the assembly. iPhones are then exported from Ireland to the United States and from Ireland to the rest of the world.
The key here is that the lower the price Apple U.S. charges Apple Ireland, the lower Apple U.S.’s stated profits, the lower the value of the U.S. exports, and the lower measured the U.S. GDP. If the transfer price is artificially low, then so is measured GDP.
Are the benefits that consumers get from the iPhone properly accounted for in GDP?
Even though GDP is often described as a measure of production, Dynan and Sheiner show that it is also, conceptually, a pretty good measure of the benefits that consumers get from the economy. So the benefits from the iPhone — the value that consumers get from it — do belong in GDP. Unfortunately, measuring the value of the benefits from truly novel products is very difficult, perhaps impossible, with current measurement approaches.
When people were first offered the opportunity to buy the iPhone — say, for $500 — their $500 could buy them something that was better than what they could have bought the previous year, before the iPhone had been introduced to the market. The real purchasing power of their money had increased.
Because the value of that $500 had increased, properly measured prices must have declined. What is the source of that price decline? It is the price decline in the iPhone itself. Imagine that consumer demand is such that a small number of people are willing to pay $699 for an iPhone, but no one is willing to pay $700 (what economists call the “reservation price”). When the iPhone is not available for sale, it is as if the iPhone is available, but priced at $700. When the iPhone is introduced at $500, it is as if its price has declined from $700 to $500. If this price decline were in the official price measurements, real GDP would capture the benefits of the iPhone.
But because the $700 is not observed—there is no market for iPhones when no iPhones are sold — official price statistics can’t include it in their official inflation measures. Instead, inflation measures are based only on changes in the prices of actually marketed products. For example, the Bureau of Labor Statistics (BLS) might have used the price changes on older non-smart phones as a proxy for inflation for the whole category of phones, including smart phones. Using this method, the BLS would have missed the price decline coming from the iPhone’s introduction, and inflation would be overstated. Including the implicit price decline would require a very different methodology for truly novel goods, one that uses other kinds of information to figure out consumers’ reservation price.
What about when new iPhone models are introduced? How are those benefits captured?
New iPhone models with more features but higher prices get introduced regularly. Are the benefits of the new models captured? Perhaps.
Up until recently, the method used by the BLS to measure price changes for smartphones was to examine the prices of existing models. So, if the price of the iPhone 6 fell when the iPhone 7 was introduced, then the benefits of that price decline would be captured. But if most people switch to the iPhone 7 even given the decline in the price of the iPhone 6, then that method probably understates the amount of consumer benefit.
Very recently, the BLS has started to explicitly quality-adjust smartphone prices when possible — that is, if the BLS estimated that consumers valued the new iPhone 7 features at $150, they would measure inflation by comparing last year’s iPhone 6 price to this year’s iPhone 7 price less $150. This method can be used when the new features are not that different from existing ones, so that it is possible to estimate their value to consumers. This method doesn’t work so well when new features are truly novel. For instance, if the iPhone 7 is roughly the same phone as the iPhone 6, but with a larger, better screen, and a faster processor, then the BLS can estimate the value of these improvements to consumers. However, if the iPhone 7 has novel features, like the ability to recognize basic human speech or 3D touch, or if the iPhone 7 supports new apps that increase the phones’ functionality, then the contribution of these improvements to consumer welfare is likely missing from GDP.
Properly accounting for the benefits of new technologies would boost the level of GDP, but wouldn’t necessarily eliminate the slowdown in measured growth in output and productivity. That’s because official statistics have always underestimated the benefits of new goods and new technologies. Of course, if productivity growth is increasingly taking the form of new goods and services, rather than lower prices on existing goods and services, the challenges confronting the statistical agencies will only mount over time. To address this, the Hutchins Center at Brookings has embarked on an initiative to improve productivity measurement that is engaging the scholars, government’s statistical agencies, policymakers, and the business community.
The Brookings Institution is committed to quality, independence, and impact.
We are supported by a diverse array of funders. In line with our values and policies, each Brookings publication represents the sole views of its author(s).
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[description] => U.S. Sen. Richard Lugar, chairman of the Senate Foreign Relations Committee, launched the Brookings Institution’s 90th Anniversary Leadership Forum today with a major address on energy security.
Founded in 1916, Brookings is a private nonprofit organization devoted to independent research and innovative policy solutions.
“Our mission has always been to bring rigorous thinking to bear on the big issues facing our country and the world,” said Brookings president Strobe Talbott, who introduced Sen. Lugar (R-IN). “Our challenge as we enter our tenth decade is to make sure we’re asking the right questions and looking for answers in an atmosphere that encourages a diversity of views and fosters civility of discourse. In his 30 years in the Senate, Senator Lugar has epitomized those values.”
Throughout 2006, Brookings will host a number of discussions, dialogues and forums aimed at analyzing current and emerging policy issues. Senator Lugar’s address focused on one such challenge: energy security.
“Geology and politics have created petro-superpowers that nearly monopolize the world’s oil supply,” Lugar said, noting that foreign governments control up to 77 percent of the world’s oil reserves through their national oil companies. Over time, he predicted, “oil will become an even stronger magnet for conflict and threats of military action than it already is.”
To deal with the new geopolitics of energy security, he called for expanded international coordination on energy issues; formal U.S. coordination with China and India as they develop strategic petroleum reserves; and regional partnerships in the Western Hemisphere.
Throughout its history, Brookings has offered a platform to world leaders, including Nelson Mandela; Kofi Annan; Presidents Lyndon Johnson, Gerald Ford, and Bill Clinton; Associate Justice Stephen G. Breyer and Chief Justice William Rehnquist. Recent speakers have included Sen. Chuck Hagel, Sen. Barack Obama, Sen. Hillary Clinton, Secretary of State Condoleeza Rice, and Iraq’s first president, Jalal Talabani.
Brookings is widely praised for its intellectual rigor and pragmatic approach to a wide range of issues. Ninety years ago, the institution’s founder, philanthropist Robert Somers Brookings, began to finance the formation of three organizations that were later merged as the Brookings Institution. His original focus was bringing the U.S. government’s administrative functions into line with modern business methods.
Over time the organization has grown to include economic policy, foreign policy and metropolitan policy as well as governance studies. In the 1930s and 1940s, Brookings scholars critiqued many aspects of the New Deal, worked on elements of the Marshall Plan, and helped design the structure of the United Nations. In the 1970s, Brookings scholars laid the economic groundwork for deregulation and pushed for the creation of the Congressional Budget Office. Brookings also provided CBO with its first director, Alice Rivlin, who remains a senior fellow at Brookings today.
Brookings continues to provide the highest quality research, policy recommendations, and analysis on the full range of public policy issues. More than 100 current scholars have served in academia and in every presidential administration since Truman—and hold diverse points of view. Visiting scholars have come to Brookings from across the globe, including China, India, Japan, Russia, Korea, and Australia.
In recent years, Brookings has formed partnerships with other think tanks, such as joint programs for the study of federal regulation and for the study of election reform with the American Enterprise Institute for Public Policy Research; a retirement security project with Georgetown University; a tax policy center with the Urban Institute; and an economic modeling project with the Observer Research Foundation of India.
Brookings is financed by an endowment and through the support of philanthropic foundations, corporations, and private individuals. A Board of Trustees is responsible for the general supervision of Brookings, approval of its areas of investigation, and for safeguarding the independence of its work. The Institution’s president is responsible for formulating and setting policies, recommending projects, approving publications, and selecting staff.
The Brookings Institution is a private nonprofit organization devoted to independent research and innovative policy solutions. Celebrating its 90th anniversary in 2006, Brookings analyzes current and emerging issues and produces new ideas that matter—for the nation and the world.
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[updated_at] => 2025-12-02T22:47:29.000Z
[description] => Speech by Mr Benjamin E Diokno, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), to the Economic Journalists' Association of the Philippines, Manila, 27 August 2019.The views expressed in this speech are those of the speaker and not the view of the BIS.Central bank speech | 12 September 2019by Benjamin E DioknoPDF full text (34kb) | 4 pagesGood morning, ladies and gentlemen. First, let me thank the Economic Journalists' Association of the Philippines for inviting me to share the Bangko Sentral ng Pilipinas' view on the current and future state of the Philippine economy.As we are all aware, the specter of slowing global economic growth looms larger than ever on the horizon as protectionist policies and geopolitical tensions continue to dominate the global growth narrative.Greater global economic uncertainty may lead to higher risk aversion as international investors turn to safe-haven assets, resulting in volatility in our domestic financial markets. When this happens, this could have adverse consequences on our price and financial stability objectives, and ultimately on the country's growth momentum.Nevertheless, in this presentation, I will show you how the BSP, with our purposeful and meaningful structural reforms, can help support against the impact of these external risk factors.Risk factors identified last year, such as the escalating trade tensions between major economies and geopolitical factors, have either intensified or materialized this year and contributes to weaker global economic prospects.Acknowledging the impact of these on world trade and investment, the IMF have several times downgraded its 2019 and 2020 global growth projections this year. Moreover, the IMF continues to view the balance of risks to the global outlook as being on the downside, with further escalation of trade tensions.In response, central banks around the world, including the Philippines, have responded by easing their respective policy rates to stimulate their domestic economies.In fact, some central banks have surprised the markets by reducing their rates by more than what was expected. This indicates that the global monetary policy easing cycle could gather momentum and last longer and deeper than previously anticipated.Despite all this, we remain optimistic about the prospects of the Philippine economy. As I emphasized earlier, we are well-positioned to deal with these challenges.We now have an encouraging mix of a manageable inflation environment alongside steady economic growth, which affords policymakers sufficient space to respond appropriately to evolving domestic and global conditions.Overall liquidity and credit conditions remain supportive of the country's growth requirements. We likewise continue to have a fiscal target that both delivers effective government spending while remaining prudent in meeting debt obligations.Our sound and stable banking system is aided by strong prudential regulation and supervision. Finally, our robust external payments position, underpinned by comfortable FX reserves and prudent external debt management, acts as additional cushion against external vulnerabilities.In terms of the current state of the Philippine economy, the current manageable inflation environment bodes well for sustaining economic growth. Headline inflation slowed down further to 2.4 percent in July, the lowest inflation reading since January 2017. Thus, the year-to-date average inflation rate of 3.3 percent is now well within the Government's inflation target of 2 to 4 percent.Price pressures eased anew in July 2019, as food inflation slowed down following the summer harvest season and amid liberalized rice importation.Meanwhile, it is not surprising that we had a lower-than-expected GDP growth in the first two quarters of the year. To a large extent, the delay in the passage of the 2019 budget and the election ban significantly weakened government spending and public construction.Nevertheless, we expect catch-up fiscal spending by the Government to buoy the growth momentum in the second half of 2019.We likewise take comfort in the fact that credit and liquidity dynamics in the country remain supportive of growth.The latest reading of credit growth is 10.5 percent as of end-June 2019 while domestic liquidity expanded by 6.4 percent during the same period.Notwithstanding the slower growth in loans for production activities, we continue to see sustained business demand on account of favorable macroeconomic conditions in the country, particularly with the easing of inflation in 2019.Meanwhile, the continued lending activities of Philippine banks indicate their effectiveness in facilitating a smooth flow of funds in the economy, boosting economic growth.Banks remain sufficiently capitalized, while their past due ratios have consistently declined over the years. This enhances their capacity to manage risks and at the same time increase profitability.We expect these improvements to continue given the positive outlook on the macroeconomy.In addition, we continue to have sizeable international reserves to help insulate our domestic economy against external shocks. This is built from sustained remittances, robust receipts from business process outsourcing and tourism, and steady foreign investment inflows.As of end-July 2019, gross international reserves stood at 85.2 billion dollars, equivalent to 7.4 months' worth of imports of goods and payments of services and primary income.Meanwhile, overseas Filipinos' remittances remained robust in the first half of the year, increasing by 3.2 percent, which is equivalent to US$14.6 billion.Taking all these into account, the Monetary Board in its most recent meeting on 8 August 2019, deemed it necessary to reduce the BSP's key policy rate by another 25 basis points to 4.25 percent. This brings the year-to-date monetary policy adjustment to 50 basis points.In doing this, the BSP noted that price pressures have continued to dissipate, while prospects for global economic activity are likely to remain weak amid sustained trade tensions among major economies.Domestically, the outlook for growth continues to be firm on the back of a projected recovery in household spending and the accelerated implementation of the government's infrastructure spending program.Looking ahead, we expect inflation to remain on a target-consistent path for 2019 and 2020. The latest baseline forecasts indicate that inflation is projected to average 2.6 percent for 2019 and 2.9 percent for both 2020 and 2021.Inflation expectations have also moderated further to levels consistent with the target based on the BSP's survey of private sector economists.We assess the balance of risks to the inflation outlook to remain broadly balanced for 2019 and 2020, before tilting to the downside for 2021. Weaker global economic prospects continue to temper the inflation outlook.Going forward, the BSP will continue to monitor price and output conditions to ensure that monetary policy remains appropriately supportive of sustained non-inflationary economic growth over the medium term.In terms of financial stability safeguards, we now have a deeper policy toolkit to deal with external and domestic shocks to the system. These tools will allow the BSP to respond to the formation of imbalances and address the build-up of system risk.First, we continue to implement a flexible exchange rate regime as our first line of defense against external shocks. Such a framework allows the BSP to intervene only if volatility in the foreign exchange market is perceived to adversely affect the inflation outlook.Our policy toolkit now encompasses macroprudential regulations that can be targeted against specific sources of risks, contingency measures such as liquidity-enhancing facilities, and regional firewalls that boost the flexibility and effectiveness of our actions.Aside from this, amendments to the BSP Charter allows the BSP to issue its own securities.The BSP has also expanded its crises surveillance and monitoring toolkit. To name a few, we have the Bank Distress Index, which is used to identify potential banking crisis episodes in the country; the Philippine Composite Index of Financial Stress, which is used to measure the degree of financial stress across markets; and the Early Warning System on currency crisis and on debt sustainability.Likewise, in terms of supervision, we continue to review and align our financial regulations and policies with international standards to enhance risk management and ensure the competitiveness of our banks in view of the ASEAN integration. We intend to further develop our macro-financial surveillance capability by improving coordination and cooperation with other government agencies and regulators.With the rapidly evolving technology and payments landscape, our policy stance in supporting responsible fintech innovation remains anchored on three core principles:1) Regulations must be risk-based, proportionate and fair.2) There should be an active multi-stakeholder collaboration.3) Regulations must ensure consumer protection.Accordingly, please allow me to mention some key policy initiatives that we have implemented:We updated the BSP's regulatory framework on the operation of money service business to enhance the customer due diligence expectations and re-balance the objectives of financial integrity and financial inclusion.We also established a framework for regulating virtual currency exchanges which subject them to registration, minimum capital requirements, internal controls, and regulatory reporting, among others.At the same time, we recognize that digital finance delivered through mobile technology alone cannot reach everyone. This is why we have also issued regulations that enable cash agents to provide improved "last mile" delivery of financial services to the unbanked and under-banked among our countrymen.Needless to say that the BSP is committed to the effective discharge of its mandates and policy thrusts-foremost of which is maintaining price stability-to contribute to the country's favorable growth narrative. Maintaining price and financial stability, as well as an effective and transparent payments systems, will help foster an enabling macroeconomic environment that is conducive to a sustainable economic growth.On monetary policy, the BSP remains committed to a forward-looking approach to pre-emptively address risks to price stability. In every policy decision that we will make, we will always be guided by the evolving conditions for inflation and outlook, while being mindful of developments in the world economy.On financial stability, the BSP will continue efforts to safeguard the domestic financial system and help manage risks attendant to financial market developments. The goal is to strengthen the regulatory regime to ensure responsible risk-taking by financial institutions.We are also stepping up advocacy efforts to promote financial learning and microfinance to more sectors and areas across the country.Finally, in the area of payments and settlements, we will remain proactive in ensuring the safety and timely completion of financial transactions by minimizing systemic risks and enhancing the integrity of financial processes through progressive policies on e-commerce and innovations.The growth narrative of the Philippine economy has gone a long way. The transformation that the domestic economy underwent before achieving its current state, has been arduous, and at times, painful, but nevertheless rooted on solid structural underpinnings and macroeconomic policy discipline.In closing, while the Philippine economy is not immune from risks in the global market, it is well insulated. In a global environment where risk sentiment is fragile and uncertainty is permanent, we are confident to say that the Philippines still provides a unique value proposition that is not fleeting, but anchored on a dynamic track record of changing for the better.At the same time, we need to ensure that this growth performance continues over the longer term so that the next generation of Filipinos will likewise enjoy years of economic prosperity. In this regard, a sustained commitment to pursue the Government's infrastructure and reform agenda will support high, inclusive, and sustainable growth.For its part, the BSP remains committed to the effective pursuit of its mandates for the country's continued, balanced, and sustainable growth which ultimately will improve the life of every Filipino people.Thank you and mabuhay!About the authorBenjamin E DioknoMore from this authorRelated informationMore speeches from "Central Bank of the Philippines (Bangko Sentral ng Pilipinas)"Country page: Philippines
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[description] => At the beginning of 2002, Enron was the seventh largest company in the United States, with operations extending worldwide.
Telecommunications giant Global Crossing operated in twenty-seven countries and two hundred cities on five continents. But both companies collapsed last year under the weight of financial problems created by the self-dealing of a few corporate insiders and masked by nontransparent accounting.
These and other similar corporate failures deprived millions of company employees and shareholders of their lifetime savings and retirement benefits. Stock prices of other U.S. companies also took a beating, partly in response to the revelation of these scandals, and foreign markets have suffered enormous losses.
The practice of opaque self-dealing by a few insiders—as evidenced by insider trading and a lack of transparency in corporate and government operation—has contributed to the meltdown of the financial markets around the world. A crucial, invigorated reform effort is under way worldwide to stem the problem, which, if left unchecked, could lead to global financial ruin.
POLICY BRIEF #118
Roller Coaster Rides
Since January 2002, all major U.S. stock indexes have plummeted. NASDAQ fell almost a third in 2002, and the Dow Jones industrial average and S&P 500 tumbled for the third consecutive year, the longest downturn since 1939-41. Overseas, Japan’s Nikkei 225 closed down 18.6 percent for the year; Britain’s FTSE 100 was down 24.5 percent. Of course, the burst of the dot-com bubble, the uncertainty about a war in the Middle East, and a possible rise in oil prices may have all contributed to the stock price decline. However, it is only natural to suspect that “Enronitis? “opaque self-dealing by a few insiders” has contributed to the financial meltdown.
Insider trading—the buying and selling of stock by people who possess nonpublic information relevant for its price—is one of the primary indicators of self-dealing among an elite few within a corporation. Recent work by Julan Du of the Chinese University and Shang-Jin Wei has shown that insider trading can affect stock price volatility—and even more important, economic performance—around the world.
Stock markets are volatile. That is not news. But volatility varies significantly from one country to the next. Measured by the standard deviation of the monthly returns of a major market index, stock market volatility is almost twice as high in Italy as it is in the United States. Markets in developing countries are typically even more volatile. The Chinese market, for example, is three and a half times more volatile than the U.S. market; the Russian market, six and a half times more volatile.
Excessive volatility matters because it affects people’s incentives to save and to invest. A certain degree of market volatility is unavoidable, even desirable. Ideally, changing stock prices signal changing values across economic activities and thereby improve the way resources are allocated. But volatility that is unrelated to market fundamentals results in confusing signals that hamper resource allocation. To the degree that insider trading affects the volatility of a country’s stock market, it could also affect that country’s economic performance.
Some think that because insider trading allows relevant information to be quickly reflected in the stock price, it should reduce market volatility and improve economic efficiency. However, this view fails to take into account the rational actions that a few insiders would take to maximize personal benefits. Access to inside information is most valuable when prices are either rising or falling dramatically, so people who are positioned to possess inside information love market volatility. They realize that the actual extent of volatility could be partly a consequence of their actions.
There are two channels through which insiders may generate increased volatility. First, they may choose riskier projects or riskier technology than they normally would. Second, insiders have an incentive to manipulate the timing and content of the information release in such a way as to increase the price volatility.
Laws and enforcement regarding insider trading differ widely around the world. The set of activities defined as illegal can vary, as can the diligence with which laws are enforced. In the United States, for example, insider trading is a criminal offense with penalties including jail terms. In Hong Kong, insider trading is considered a civil violation with a maximum penalty of a fine.
But Hong Kong compensates for that light penalty with tight antifraud regulation and rigorous and predictable law enforcement. Government regulators are well trained, professional, and relatively incorrupt. Corporate insiders in Hong Kong would think twice before releasing misleading information or committing financial fraud.
Because insider trading is an opaque practice, it is difficult to precisely measure and compare among countries. Consequently, few empirical studies have been done on the subject. But a recent survey conducted by Harvard University and the World Economic Forum for their annual Global Competitiveness Report (GCR) polled business executives in approximately 3000 firms in 53 countries and resulted in a new measure of the extent of insider trading. As mentioned, both the differences in the definition of insider trading along with the fact that it is illegal in many countries make it difficult to assess. However, business executives who are savvy about financial markets should have a sense of the extent of insider trading. Therefore, although the GCR insider trading index is derived from subjective responses, these responses should reflect the practices within firms as accurately as possible.
The executives were asked: “Do you agree that insider trading is not common in [your country’s] domestic stock market?” The measure was adjusted by Du and Wei so that on a scale from 1 to 7, a higher number corresponds to more insider trading. The average of the answers for a particular country is used as a measure of that country’s extent of insider trading. Using this formula empirically, insider trading is shown to correlate with higher market volatility (figure 1).
To illustrate this comparatively, we look at what would happen to the market volatility if the extent of insider trading rises from a relatively low level, such as the U.S. rating of 2.62, to that of China, with a relatively high rating of 4.62 (see table 1). The statistical analysis shows that this rise in insider trading would increase the volatility of stock returns by 2.5 percentage points (e.g., stock volatility will go up from 5 percent to 7.5 percent). This is a substantial increase, considering that the average volatility of the entire sample of 56 countries is 9.8 percent.
In contrast, using the difference in the volatility of GDP growth rate for the two countries yields an increase of only one percentage point. In other words, China’s higher stock market volatility is explained more by excessive insider trading than by the volatility of its economic fundamentals.
Correlation does not necessarily imply causality, but the research by Du and Wei employs a statistical approach designed to address the issue. Using these additional statistical methods, their findings show that the positive correlation between insider trading and market volatility likely implies a causal relationship where an increase in insider trading leads to a rise in stock market volatility. Furthermore, insider trading is associated with a higher market volatility even after one takes into account the impact from the volatility of the real output growth, volatility of macropolicies, and market liquidity and maturity on stock market volatility. To sum up, an economy where insider trading is rampant is likely to have a very volatile stock market, resulting in less savings and lower investment than otherwise.
Opacity
Another symptom of “Enronitis” is a lack of transparency in corporate and government operation. The recent wave of corporate scandals in the United States has thrown open some corporate curtains to reveal practices that were routine but secret until now. Other countries, however, have even more serious deficiencies in transparency that exist not only in the private sector but in the government as well. These practices have caused countries like China, Russia, and Venezuela to lag behind the rest of the world in the financial realm, as research by Gaston Gelos of the International Monetary Fund (IMF) and Shang-Jin Wei demonstrates (see “Additional Reading,” p. 5).
Policymakers often cite lack of transparency as one cause of the financial crises in emerging markets over the past decade. A recent IMF report, for example, noted that a “lack of transparency was a feature of the buildup to the Mexican crisis of 1994-95 and of the emerging market crises of 1997-98.”
The report concluded that “inadequate economic data, hidden weaknesses in financial systems, and a lack of clarity about government policies and policy formulation contributed to a loss of confidence that ultimately threatened to undermine global stability.”
The international financial institutions have actively promoted increased transparency among their member countries and are aiming for more transparency in their own operations. The emphasis on greater transparency presupposes that destabilizing behavior by individual investors can be avoided or attenuated by making better information available. For example, international investment funds may be more likely to engage in herding—that is, to make investment decisions only because other funds are making them—in less transparent countries. As a result, investors may rush in and out of those countries even in the absence of substantial news about fundamentals. Greater transparency could discourage such behavior.
The term transparency denotes both the availability and the quality of information measured at the country level. In government, transparency refers to the availability of macroeconomic data (both timeliness and frequency) as well as to the conduct of macroeconomic policies. Corporate transparency refers to the availability of financial and other business information about firms.
In principle, for investment across countries, just as for investment across corporations within a country, greater transparency levels the playing field for all investors and increases the confidence of the investors collectively, and as a result, can encourage investment. While this is intuitive, it has not been demonstrated rigorously.
Advances have been made by Gelos and Wei, whose research tests this theory empirically. Before it can be concluded that international mutual funds invest less in less transparent countries, there must be a benchmark on how much international funds would have invested in various countries if they had the same degree of transparency. A natural benchmark is the index produced by Morgan Stanley Capital International (MSCI), which essentially documents the weight of a country’s stock market assets in the global market. Finance theory predicts that the allocation of investment across different countries should be proportional to the importance of these countries in the world stock market.
It is common for asset managers to report their positions relative to this index and for investment banks to issue recommendations relative to it (e.g., “over-weight Singapore” means “advisable to invest more than Singapore’s weight in the MSCI Emerging Markets Free index”).
Looking at the difference between the actual share in the world market portfolio and the MSCI weight for opaque and transparent countries, we see that the more transparent countries actually attract a greater amount of foreign investment than predicted by MSCI, whereas the more opaque countries obtain less than predicted (see figure 2).
In this research by Gelos and Wei, transparency is measured for both government and corporate operations, independently and collectively. The variables used are referred to as opacity measures, as a higher rating is associated with a lack of transparency. The research examines two aspects of government transparency: the transparency and predictability of a government’s monetary and fiscal policies (Macro policy opacity) and the frequency and timeliness of the official release of the important macroeconomic data (Macro data opacity).
In addition, the lack of transparency at the corporate level is gauged from a survey of firms worldwide on executives’ own perception of the degree of mandatory disclosure requirement (corporate opacity).
The statistical analysis suggests that a lack of transparency on all levels is associated with a lower share of emerging market funds. For example, a country like Venezuela would quadruple its portfolio holdings if it increased its transparency to Singapore’s level (see opacity measures, table 2).
This increase in portfolio holdings should be an important incentive for countries to increase their transparency levels. In addition, greater transparency could moderate the herding tendency of outside investors, which might reduce the country’s vulnerability to financial contagion and crisis.
At least since the 1997-98 Asian financial crisis, herding behavior by international investors has been said to have contributed to the market volatility in the developing countries. Although in economic theory the relationship between transparency and herding is not clear, our research uncovers some evidence of a positive association between a country’s opacity and the tendency for international investors to herd when investing in its assets (see figure 3). Thus, if herding by international investors contributes to a higher volatility or more frequent financial crises in emerging markets, it is related to these countries’ transparency features.
Beyond herding, another important question is whether capital flight during a time of currency and financial crisis is related to a lack of transparency. Do differences in transparency, above and beyond macroeconomic indicators of a country’s economic health, explain why some countries suffer greater confidence loss than others during turbulent times? Our research suggests that more opaque countries do suffer larger outflows during crises. For example, during the Asian and Russian financial crises, we observed that capital exodus was greater in less transparent countries.
Wanted: Fair Play
It is not easy to restore confidence in financial markets where fraudulent and illegal practices within corporations have run rampant, and where government operation is not transparently accountable to its citizens. Greater transparency and investor confidence will not happen overnight. Even the United States, once the world’s unquestioned leader in attracting international funds, cannot bounce back immediately. More than a year after the onset of the 2002 corporate scandals, Wall Street is still trying to regain the trust of its many disillusioned investors, both at home and abroad.
In the United States, efforts have been made by both the government and its citizens to restore the credibility of the market and assure the public that the nation is serious about eliminating foul play within corporations. Shortly after the Enron scandal became public, several initiatives were put forth to improve the monitoring practices within corporations. Congress passed legislation to eliminate corporate fraud by requiring more careful governmental supervision from both outside and within a corporation and strengthening requirements on what companies must disclose to investors. In addition, the Securities and Exchange Commission has been more diligent in its efforts by adopting new regulations, such as one outlining the standard of conduct that must be followed by all attorneys representing corporate clients.
Corporate governance reform has gained momentum in other countries as well. The 1997 economic crisis played a major role in prompting corporate governance reforms throughout Asia and Latin America.
Many countries within Latin America have been plagued by a lack of corporate and government transparency largely as a result of the prominence of family-owned companies and the extent of government intervention. But Chile, for example, has passed legislation that gives increased protection and rights to minority shareholders, which can serve as an example for other lawmakers in the region.
In Korea, a minority shareholders’ movement that began in 1998 continues to raise awareness about the importance of corporate governance. The movement has also recently created a research center devoted to this topic in order to investigate the issue more thoroughly.
In China, instead of enacting immediate reforms at the national level, the government has set up a special governance zone (SGZ) in Shenzhen to experiment with anti-corruption reforms. A successful reform program there can serve as a model for the rest of the country.
But the significance of the experiment goes beyond that. Anti-reform bureaucrats often resist international best practices by claiming differences in culture, history, or tradition. Once anti-corruption reform succeeds in one SGZ, it will leave officials resistant to reform with one less excuse. It will also help galvanize popular demand for country-wide reforms.
Along with these individual country efforts, the IMF, the World Bank, and other international institutions have become more aggressive in assessing the adequacy of the existing standards and codes of financial supervision as well as the conduct of fiscal and monetary policies in their member countries. They have also become more persistent in advocating the international best practices in these areas.
None of the reforms can so far claim complete success; perhaps they never will. But the revelation of corporate scandals and the financial crises in the developing countries have persuaded many people around the world that “Enronitis,” in its various guises, can seriously damage people’s confidence in a financial system and retard economic development. An invigorated, worldwide reform effort, which is already under way, will reduce the chance of future economic devastation that could result from poor public and corporate governance.
The Brookings Institution is committed to quality, independence, and impact.
We are supported by a diverse array of funders. In line with our values and policies, each Brookings publication represents the sole views of its author(s).
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[description] => BIS Other | 22 August 2022PDF version (2,458kb) | 135 pagesThis volume is a compilation of the special guest speeches and two high-level panels featured in the virtual conference "Green Swan 2021: coordinating finance on climate" held on 2–4 June 2021 and co-organised by the BIS, the Bank of France, the International Monetary Fund and the Network of Central Banks and Supervisors for Greening the Financial System. The views expressed are those of the speakers and do not necessarily reflect the views of the BIS, the co-organisers or the institutions represented at the conference.Related informationBook: The green swanPodcast: Luiz Pereira da Silva speaks about "green swan" risksPodcast: Is green the new black?
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[description] => Welcome remarks by Dr Jens Weidmann, President of the Deutsche Bundesbank and Chairman of the Board of Directors of the Bank for International Settlements, at the 3rd IMF Statistical Forum, Frankfurt am Main, 19 November 2015.The views expressed in this speech are those of the speaker and not the view of the BIS.Central bank speech | 20 November 2015by Jens WeidmannPDF version (102kb) | 4 pages1. IntroductionDear Mr. Zhu,Dear Otmar Issing,Ladies and gentlemen,Good morning and welcome to the 3rd IMF Statistical Forum. It is probably safe to say that the Bundesbank has seldom had the opportunity to welcome such a large body of international statistics experts.The objective over these two days is to bring together data producers, policy makers, academics and other users to discuss how to further improve the provision of statistics for micro and macroeconomic analyses.For central banks this is of vital importance. Monetary policy ultimately depends on the availability of good statistics. The monetary and economic analyses that precede any deliberation on the appropriate monetary policy stance are built on a large amount of data on monetary aggregates, financial market data, inflation expectations or labour market indicators.I am therefore particularly glad that the Bundesbank is hosting the first IMF Statistical Forum to be held outside Washington.And, when I tell you that the Bundesbank is attaching great importance to statistics, I am not merely paying lip service to you.The importance the Bundesbank attaches to statistics and statistical methods is shown, for instance, by the fact that Carl Friedrich Gauss, one of the most influential statisticians of all time, was portrayed on the 10 Deutsche Mark banknote for a long time.Building on the work of Carl Friedrich Gauss, statistical methods have been perfected and the process of data collection has been refined again and again.Often, the great progress made in the field of statistics has been driven by new demands. If you will, the supply of data and new methods has always responded to changes in demand.Governments, for example, have always had a demand for statistics on the wealth of their citizens, as this helped them to collect taxes. In the 17th century, this led Sir William Petty, an Englishman, to count chimneys in order to draw inferences about the wealth of an economy. His works can be seen as the foundation of modern social and economic statistics.But to find examples of how the supply of statistics has responded to demand one does not have to go back as far as the 17th century. In the 1930s, the Great Depression provided another big push for the development of statistics. At that time, the economic crisis had left its scar on workers, consumers and companies in the United States and Europe. Politicians were desperate for data allowing them to describe and analyse the economic situation. In 1930, the United States Congress therefore declared the estimation of national income to be a governmental task.And, in the recent past, the financial and economic crisis again defined new requirements for statistics.One of the lessons of the financial crisis is that stable consumer prices do not automatically guarantee financial stability. And we have also learned that just because individual banks are sound, one cannot conclude that the entire banking system is stable.Risks for the stability of banks can arise, for instance, if individual banks are too big to fail, too interconnected to fail or if many small institutions are exposed to the same risks.This insight has led governments and central banks around the world to assume macroprudential mandates. The objective is to ensure that the financial system as a whole can fulfil its central macroeconomic function, even in times of financial market stress.But the new task of macroprudential supervision and regulation brings with it new demands for statistics: We need, for instance, to identify suitable indicators that signal when "financial stability" is in danger. This task is not to be underestimated as financial stability is a more complex concept than price stability.And today we still know little about the effectiveness of macro prudential instruments. In evaluating the effect of these new instruments, we are often only able to conduct cross-country analyses that stretch over comparatively short periods of time.To improve our understanding of macro prudential measures, we need to go beyond the use of aggregated statistics: The US experience, for instance, shows that a loosening of credit restrictions for subprime borrowers can only be identified if micro data are available.We also need data allowing us to better understand the financial links between different banks.And to ensure that the right conclusions are drawn from the data, we should make more anonymised micro data available to the public - at least as far as it is possible with regard to our commitment to protect the confidentiality of data pertaining to individual banks, firms or citizens.2. The 3rd IMF Statistical Forum: ProgrammeThe demands for new data that come from regulators, central banks and supervisory bodies are also reflected in the programme for this conference: In the first session, you have the opportunity, for instance, to discuss how micro data can be used to evaluate the effects of regulatory changes.The second session addresses the questions of how and what micro data collected by public authorities can be made available to the public via data hubs.And the third session looks at how data can be used to understand financial interconnectedness, for example by linking a buyer and a seller of a security or by identifying who is lending money to whom.But this conference is not only about financial stability: The fourth session examines the statistical challenges associated with the measurement of the macroeconomic effects resulting from changes in the price of natural resources. The recent decline in the oil price and its consequences for inflation and financial markets may serve as an example for the importance of this topic.Last but not least, the fifth session is concerned with the measurement of the material conditions of households.By including this session in the conference, the programme committee has proven to have the right instinct concerning topical issues: This October, the Royal Swedish Academy of Science decided to award the Nobel Prize in Economics to Angus Deaton. Angus Deaton was awarded the prize not least for his extensive research into consumption and poverty in developing countries.3. Responding to new demands: The Bundesbank's Research Data and Service CenterLadies and Gentleman, the demand for new and better statistics is not only reflected in the programme for this conference. It has also already left its mark on the organisation of the Bundesbank.The Bundesbank is not only a user but also a large producer of high quality statistics. Aggregate data that are relevant for macroeconomic analysis are regularly published in our Monthly Report and our time series database.But we also collect a large amount of micro-level data. These sometimes highly sensitive data range from banks' monthly balance sheet statistics to micro data on foreign direct investment. To meet data protection rules, we can only make these data available to the public under certain restrictions.To facilitate access to these data, last year we established our Research Data and Service Center. It is located in the 20th floor of the Trianon tower here in Frankfurt and provides workspaces for 12 guest researchers. A staff of 12 persons advises these guest researchers on data selection and data access.The Center does not lift restrictions on data access in place to meet data protection rules, but it makes it easier for non-commercial researchers to use the data to the largest possible extent.4. The Panel on Household Finances as an example for the use of micro dataOne example of the many sets of micro data available in the Research Data and Service Center is our Panel on Household Finances. It provides survey data on households' balance sheets, pension incomes, employment and demographic characteristics of German households. The second wave of the survey was conducted in 2014 and the first results of this second wave will be published at the beginning of next year. Similar panels are now surveyed in all member states of the euro area under the guidance of the ECB, allowing empirical analyses to exploit variations not only over time but also across countries.Monetary policy makers can gain important insights from these data. They allow us, for instance, to draw conclusions about the number of liquidity constrained households. Such information cannot be obtained from aggregate data on household debt alone, because highly indebted households may still have access to bank credit if they possess sufficiently valuable assets. In the end, central banks can therefore better analyse the effectiveness of the lending channel.By being able to obtain information on the asset and liability side of households' balance sheets, we are also better able to identify financial stability risks.But the Panel on Household Finances does not only yield important insights for central bankers. It is also a great treasure trove for academic researchers. To date, 60 researchers in Germany and more than 150 users abroad are using the anonymised data from the Panel on Household Finances. Their projects cover a broad range of topics. There are, for instance, projects on the impact of monetary policy on income distribution, on the importance of residential property for retirement saving or on measuring poverty and consumption.So it is probably fair to say that the Panel on Household Finance is one example where the demand for deeper analysis is already producing new statistics and important insights.The advance of modern information technology in all areas of society means that we are able to analyse ever larger data sets. But does this justify collecting every possible statistic?There is no doubt that more data and new data processing technologies can facilitate the work of researchers, supervisors and statisticians. But it increasingly also raises serious questions of data protection. And it also requires taking into account that the burden of collecting data and preparing it for processing has ultimately to be borne by businesses, banks and households. The famous saying, "there is no free lunch", holds for data collection too.But maybe, this aspect will already be addressed during this conference.5. ConclusionLadies and gentlemen, you have two very interesting days ahead of you and I do not already want to strain your attention too much. I wish you all a very successful conference and hope that the discussions will be intensive and informative.About the authorJens WeidmannMore from this authorRelated informationMore speeches from "Deutsche Bundesbank"Country page: Germany
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[description] => By analysing this data, we evaluate firms' treatment of their customers and track changes in their performance over time. We also use this information in our supervision of firms and markets, and to identify any potential concerns about specific financial products.
Download the aggregate complaints data (XLSX)
In preparing this publication, we identified a discrepancy in our calculations which resulted in an overstatement of the total number of accounts in the product groups Banking and Credit Cards and Investments. This figure is used in calculating the relevant contextualisation metric in Figure 2. We have made the necessary updates for this and future publications. Previous publications will remain unchanged.
In 2022, we revised the product group context figure calculation methodology to reduce errors in firm reporting. Be careful when comparing data with previous years.
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[description] => In meetings in various international capitals this summer—from a gathering of defense ministers in Singapore to a meeting of economic policy heavyweights and CEOs in Paris—discussions frequently revolved around the impact of technology. Of course, technological developments have long had implications for the global economy and international security, whether the advent of gunpowder or the railways, or the mastery of radio or nuclear fission. But with the “return of history” we may also be witnessing a return—after an anomalous period of positive-sum progress—of the geopolitics of technology. The scale and speed of this technological change makes it difficult to completely internalize the opportunities and challenges that lie ahead for the world’s major powers.
Essentially, different approaches to technological development, and specifically the use of data, threaten to divide the world and shape the contours of geopolitical competition, contributing further to the securitization of technological competition. Instead of a “clash of civilizations,” we could be in for a “clash of automations.”
The iPhone era
The past two to three decades may well have been an aberration. They were marked by an acceleration of globalization: the faster, cheaper, and more efficient flow of goods, people, capital, information, and energy. This period witnessed rapid advances in broadband and satellite telecommunications, accelerated microprocessor speeds, more efficient energy use, the evolution of global financial markets, and the dispersal of manufacturing supply chains. The apotheosis of this world was the iPhone.
But there was an inherent compromise at the heart of the iPhone era of globalization. The United States and other advanced economies remained world leaders in innovation, deriving benefits from the resulting intellectual property and their marketing power. Meanwhile, actual manufacturing of these products shifted to lower income countries, notably China, and also parts of East and Southeast Asia. Lower cost services—software development, research, and back-end work—were outsourced to places like India. The global economy grew and everyone benefited, even if some—such as China, the United States, and India—benefited more than others.
The next wave of technologies
But the new era of technologies, many of which are already emerging, may not simply build upon these developments—rather, in counterintuitive ways they may in fact undermine the globalizing effects of earlier breakthroughs. To date, many new developments are simply buzzwords to most consumers, so it is important to break down what the new set of technological developments will encompass. They can be grouped into six broad areas. The combinations of these technologies may well form the basis of what some have described as the Fourth Industrial Revolution.
Computing and storage, both of which will increasingly migrate to remote servers (the “cloud”), bringing down the cost and increase the scale of data storage. This could have potential implications for security and communications, especially features such as distributed record-keeping (blockchain) and new developments in data storage.
Telecommunications, specifically the developments of a fifth generation (5G) of infrastructure, which may operate up to 20 times faster than existing systems, with low latency (delay in data communication). This will enable a vast array of applications, including driverless cars and machine-to-machine communications.
Artificial intelligence, specifically machine learning, which involves fast and accurate pattern recognition by feeding vast troves of data to computers in order to “teach” them. This can then be applied to language, visual imagery, and other domains to resemble a form of intelligence.
Automation, including the online integration of physical objects: cyber physical systems (CPS) or the “internet of things” (IoT). Think health monitors, remotely-managed factory robots, or internet-enabled security systems.
Manufacturing, including in materials, optics, sensors, and additive manufacturing (“3D printing”).
Energy, particularly renewable and mobile energy sources and smarter management systems.
When combined, these changes are already beginning to affect every aspect of globalization. The emerging sectors in which this will be felt directly by consumers include social media for information, financial technologies (“fintech” e.g. digital payments) for capital flows, e-commerce (both wholesale and retail) for goods trade, e-services (including peer-to-peer businesses, automation, and digital identification) affecting mobility and social services, and changes to the sourcing and management of energy. Most “unicorns”—start-ups valued at over $1 billion—would fall in one or more of these domains. Consider QQ, Stripe, Rakuten, Oyo, or Tesla. Today’s tech giants are already investing heavily in future technologies from which start-ups are benefiting: Google in machine learning, Samsung in 5G, Amazon and Alibaba in automation, and so forth.
Three approaches to data
Underlying most—although not all—of these changes will be a simple philosophical choice: Who will own, control, and manage users’ data? Access to data will ultimately determine the quality of products and market share. Decisions on whether private companies, the state, or users themselves have ownership over individuals’ data will have tremendous implications for the future of the global economy and for geopolitics.
Broadly, three different approaches to this issue have emerged. In the United States, major companies like Facebook, Netflix, Google, and Amazon retain access to vast amounts of consumers’ data which they have successfully monetized. This reflects a culture in which private sector-led innovation predominates, with a focus on research and development, design, and marketing. This model has allowed the U.S. tech sector to retain its international competitiveness (the five most valuable publicly traded companies today are U.S.-based tech firms), although often at the expense of consumer rights and privacy.
A second model is embodied by the European Union, in which citizen and consumer rights are given priority, even at the cost of companies’ competitiveness. The European Union’s General Data Protection Regulation (GDPR), which gives individuals control of their personal data, best captures this ethos.
The biggest change, however, is the emergence of a third model in China, defined by a form of state-backed technological competition in which the government has greater access to citizens’ data. When combined with a protected market and significant financial resources, Chinese firms such as Huawei, Tencent, Alibaba, ZTE, and Xiaomi are now able to compete with U.S. and European tech giants. In certain areas, digital payments and 5G, Chinese firms have surged ahead of competitors from other countries.
Although all three models reflect a tendency to promote national champions—based on the comparative advantages of U.S., European, and Chinese societies—the dynamics that underpinned the iPhone phase of globalization is fraying. The likely outcome is a more fractured and competitive technological landscape. This could well mark the emergence of what one European economist recently called the “Huawei phase” of globalization: a phase that could in fact witness globalization’s retreat.
The Re-Securitization of Technology
The geopolitics of these emerging technological developments are already being felt. China continues to project the benefits of its model. Beijing is no longer content to restrict it to its own territory: For the continuing success of a firm like Huawei, it will have to be able to compete in the global marketplace.
This is resulting in a backlash. Europe is opting to double down on its approach, and regulate tech companies into submission. By contrast, the United States has adopted a more confrontational attitude, including cracking down on exports of technology in 14 critical areas. 5G telecommunications—an area in which U.S. firms are non-competitive—has become a priority political issue for the White House, which has explicitly targeted Chinese companies such as Huawei. This is motivated less by concerns about spying, but rather by the belief that 5G will soon underwrite a wide array of critical infrastructure—port management, transportation fleets, and electrical grids. Consequently, giving a foreign state-backed company access to the backbone of one’s economy is a non-starter. Other countries, such as Japan and Australia, have reached similar conclusions. As these decisions are already making clear, the re-securitization of technology is underway.
The Brookings Institution is committed to quality, independence, and impact.
We are supported by a diverse array of funders. In line with our values and policies, each Brookings publication represents the sole views of its author(s).
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[blurb] => RegTechs: Feedback from First Experiments – Paris Dauphine University, Paris, 27
November, 2018
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[description] => Speech by Mr Mario Draghi, President of the European Central Bank, at the Autorité de contrôle prudentiel et de resolution (ACPR) Conference on Financial Supervision, Paris, 18 September 2018.The views expressed in this speech are those of the speaker and not the view of the BIS.Central bank speech | 18 September 2018by Mario DraghiPDF full text (73kb) | 6 pagesIt has long been understood that deeper financial integration would lead to a better functioning of Economic and Monetary Union.1 And when the euro was first introduced there were encouraging signs that this integration was taking place. Price-based indicators of financial integration showed a pronounced increase, and the standard deviation of interbank lending rates across the euro area fell to close to zero.2 Quantity-based measures of financial integration only adjusted sluggishly, as crucial parts of the banking sector, such as retail banking, remained mainly national.Financial integration proved to be shallow and reversible. At the outbreak of the crisis, interbank markets fragmented along national lines and threatened the integrity of the single currency, laying bare the existing fault lines in our Monetary Union.One of these fault lines was the fragmented system of national supervision and resolution. The tendency of supervisors to promote and defend national champions often prevailed over the Union’s pursuit of efficiency and stability. Measures deployed during the crisis, such as liquidity ring-fencing may have focused on securing domestic financial stability, but they neglected the adverse external effects on other countries. Domestic policies thus tended to reinforce negative spillovers and exacerbate systemic risk across the euro area.The Banking Union addresses these shortcomings by pooling national financial policies at the EU level. It has two main objectives: ensuring that banks are sound; and encouraging deeper integration in the banking sector.3European Supervision makes a significant contribution to these objectives. Stronger and uniform supervision leads to resilient banks and provides a more coherent policy framework for cross-border banking.The benefits of European supervisionEuropean supervision brings three important benefits when compared with the fragmented system of national supervision.First, European supervision harmonises supervisory practices. It has merged the 19 national approaches into one single supervisory method. The Supervisory Review and Evaluation Process allows supervisors to treat all banks equally by measuring risks against the same yardstick and setting capital requirements accordingly.Risk assessments have become more harmonised and systematic, significantly improving the consistency with which capital add-ons are applied across banks. The correlation between banks’ risk profiles and capital requirements increased to 82% in 2017, from just 40% in 2014. In other words, banks with equivalent risk profiles in the euro area now face similar capital requirements.Second, European supervision adopts a system-wide perspective when monitoring and mitigating risks. Supervisors can draw on a comprehensive dataset and information on banks across the euro area. On this basis, experienced staff from 28 different countries can make comparisons, spot common weaknesses and monitor potential channels of contagion.This has two benefits. It helps address systemic risks, as better analysis of cross-border linkages and spillovers improves the coherence of macro-prudential policies set by national authorities and the ECB, which contributes to reducing excessive risks and cross-border externalities.4And it supports the identification of bank-specific risks. For example, supervisors have developed analytical tools to carry out detailed, comparative assessments of banks’ business models. Comparisons within peer groups have helped identify bank-specific issues early on, which are then addressed with each bank individually.The third benefit of European supervision is that it reduces fragmentation in the supervisory framework. In the past, broad discretion in applying EU rules led to significant national differences in key prudential aspects, such as the definition of funds, or capital and liquidity requirements. The resulting divergences in the capital strength of banks undermined confidence in their soundness.European supervisors identified 175 options and discretions (O&Ds) available under EU law, 130 of which are available to national supervisors and are now applied in a uniform way across the euro area. More harmonised rules have helped re-build confidence in banks and reduce compliance costs for cross-border groups.However, the remaining O&Ds exercised by national legislation still stand in the way of a level playing field for banks, and so further legislative action is still needed.Similarly, the decision as to whether a bank should be resolved or liquidated is made more difficult by different insolvency rules. As a result, some harmonisation of national insolvency rules is needed to make European resolution more effective.Overall, these three qualitative benefits of European supervision have been instrumental in making banks more resilient.Substantial risk reduction has also taken place. The CET 1 ratio of banks supervised by the ECB increased by 300 basis points between the end of 2014 and the end of 2017 and funding and liquidity are now more stable. In the same period, banks raised their leverage ratios from 4.9% to 5.8%, catching up with their US peers.Banks’ improved strength helps them withstand potential shocks. Recent ECB analysis, as published in the ECB’s latest Financial Stability Review, has shown that the majority of banks would maintain average capital buffers over 10% in the event of an adverse shock such as a sharp repricing of risk premia or a strong economic slowdown.5Improving European supervision to foster banking integrationDespite having a single supervisor and more harmonised rules, the banking market in Europe remains fragmented. 86% of euro area bank lending to firms and households was domestic in 2017. And cross-border consolidation, which is one way to increase cross-border lending, has recently reached historic lows.6More efforts are needed if we want to reap the benefits of an integrated market that helps share risks through the private sector and improve macroeconomic stability in the monetary union.In the United States for example, retail banking integration has led to a significant increase in the number of multi-state banks. That was not always the case. For example, following the oil price collapse in the mid-1980s, almost every bank in Texas failed, creating a state-wide credit crunch. One reason was that that banks were not allowed to operate across states, so the balance sheets of local banks were completely concentrated on their home state.7In a more integrated US banking sector, banks have geographically more diversified loan-books and deposit bases. By offsetting losses made in crisis-hit states with gains in other states, US banks are more resilient to local shocks and can keep their lending stable.8As a result, US credit markets smooth out a quarter of local shocks, which is significant given banks’ much smaller role in financing the economy compared to capital markets. In the euro area by contrast, risk-sharing through credit markets is much less advanced, despite the predominantly bank-based nature of the economy. Only 12% of local shocks are smoothed through credit markets.9 Research finds that during the sovereign debt crisis Italian banks tightened their lending and increased interest rates more than foreign banks operating in Italy. 10So what are the obstacles standing in the way?Of course, there are fundamental legal, judicial and cultural differences between countries, which hinder cross-border integration. But there are also two important obstacles that exist in the area of supervision.The first is related to legacy assets, which have weighed on cross-border lending over the past years.11 Banks with high levels of legacy assets have reduced their cross-border exposures in an effort to shore up impaired balance sheets. They have also kept their lending low as their ability to build up capital is limited. Similarly, low profitability and uncertainty regarding the valuation of legacy assets reduce the appeal of cross-border M&As, as banks still expect larger gains from internal restructuring and cost cutting.Significant progress has been made in reducing legacy assets, which include non-performing loans (NPLs) and level 2 and 3 exposures.Over the past three years, the NPL stock of significant banks decreased by one third. 12 Targeted supervisory action helped banks to draw up ambitious reduction plans and governance structures for the disposal of NPLs.13 And more uniform supervisory standards and stricter classifications make it less likely that new NPLs will emerge.14But while NPLs are washing out as the economy strengthens, supported by our accommodative monetary policy, the NPL ratios of euro area banks are still higher than those of US banks. Further efforts are needed from banks, supervisors and regulators to reduce the remaining stock of NPLs, especially in those countries where the NPL ratio remains high.European supervision also needs to continue and extend its work on the valuation of level 2 and 3 exposures.The share of Level 1, 2 and 3 assets on the balance sheets of significant institutions has come down from above 30% to 23% of significant institutions’ total assets. Level 3 assets decreased from €188 billion to €132 billion, constituting less than 1% of significant institutions’ total assets. Although the average share of Level 3 assets on the balance sheet of the largest euro area banks is now lower than that of US banks, some banks in the euro area still have high shares of Level 3 assets, if compared with international competitors, hampering further bank consolidation in the EU.It is crucial that banks have sound and effective valuation and risk management frameworks in place. Therefore, sustained supervisory efforts are needed to identify and address potential problems with banks’ valuation and classification methods.15 Dedicated inspections were performed with the objective of evaluating the soundness and effectiveness of the valuation framework, the controls over the pricing models used to produce fair values, and the adequacy of the classification of positions measured at fair value. Supervisory efforts remain high with on-site inspections, deep dives and benchmarking exercises already planned or ongoing.The second obstacle to cross-border integration lies within the prudential framework.At present, regulatory capital cannot be freely allocated across subsidiaries of cross-border groups. Banks are required to comply with capital requirements on a standalone basis and waivers can only be applied to domestic banking groups.Similarly, while the free movement of liquidity across borders is made possible by cross-border waivers, the practical application of these waivers is hampered by the remaining national prerogatives in the regulatory framework which allow national authorities to apply large exposure limits on intragroup lending and ring-fence liquidity.For example, the requirement to comply with the liquidity coverage ratio at individual level locks up liquidity in cross-border subsidiaries of G-SIBs of up to €130bn. Some of this liquidity could potentially be freely allocated if impediments, such as large exposure limits on intragroup lending, were removed and euro area waivers granted.16 The effects may be significant, given the importance of intra group lending in the euro area, which in 2017 accounted for 70% of cross-border lending.The free movement of funds is a precondition for a single banking market. With the establishment of European supervision, there is less reason to restrict this free movement. European supervision is able to identify and address financial stability risks posed by cross border groups17, reducing the need for national safeguards. And this is all the more true as national safety nets for resolution and deposit protection are gradually being shifted to the EU level.Removing the obstacles to the free movement of funds could improve financial integration by allowing banks to allocate resources efficiently across countries. US banks, for instance, rely on intra-group funding to respond to local shocks and manage the credit growth of their subsidiaries, allowing them to keep their lending and income streams more stable to economic fluctuations.18Other regulatory factors are also hampering cross-border integration. Currently, the international regulatory framework does not treat the euro area as a single jurisdiction for the purposes of calculating capital surcharges (G-SIB buffers). In other words, intra-euro area cross-border loans from euro area banks are considered foreign loans, leading to higher systemic risk scores and capital requirements relative to their international peers. Against this background, it is crucial that reforms to complete the banking union do not lose steam, so that the euro area can be treated as a single jurisdiction in the international G-SIB framework.ConclusionAs much as the global financial crisis has exposed weaknesses in the regulation and supervision of banks around the world, in the EU such weaknesses were exacerbated by fragmentation. From the early stages of the crisis the banking sector fragmented along national lines, driven by diverging macroeconomic conditions in different countries and by governments’ diverging responses in dealing with failing banks. Differently from the US, common resolution frameworks backstopped by public money were absent. Governments that could do so, because of their sound budgets, massively bailed out their failed banks. An opportunity for bank consolidation was lost, but their economies were spared a credit crisis after a financial crisis.In other countries where bailouts were not possible due to constrained finances or new regulatory restrictions introduced by the Bank Recovery and Resolution Directive (BRRD), the crisis lasted much longer. European supervision and the European framework for managing bank failures, of which the BRRD is an important part, have made such a cause of fragmentation, namely the different countries’ responses to banking crises less likely today. But more needs to be done.Progress in completing the Banking Union – namely, first harmonising options and discretions, completing resolution, and laying the groundwork for the creation of an effective deposit insurance – is essential and I am confident that significant steps in this direction will soon be taken.But let’s keep in mind that fragmentation starts with the decision by banks not to operate in regions where the risk-return of lending is judged to be insufficient to remunerate their invested capital Ultimately, what ensures a steady flow of bank lending to the economy, even in times of unforeseen stress or disruption, is a growth-friendly environment, which can only be assured by the appropriate government policies.1 Report to the Council and the Commission on the realisation by stages of Economic and Monetary Union in the Community (Werner Report), 1970; Report on economic and monetary union in the European Community (Delors Report), 1989; Padoa-Schioppa T. (1999), “EMU and Banking Supervision”, International Finance, Vol. 2, No 2, pp. 295–3082 ECB (2008), Financial Integration in Europe, April.3 See: About the Single Supervisory Mechanism4 European Central Bank (2016), “Chapter 1 – Topical issue: The ECB’s macroprudential policy framework”, Macroprudential Bulletin, Issue 1.5 The 10% average requirement refers to the average total capital “supervisory demand” without systemic buffers (i.e. Pillar 1, Pillar 2 and capital conservation buffer). For further information, see: ECB (2018), Financial Stability Review, May.6 ECB (2017), Financial integration in Europe, May.7 See Hane, G. (1998), “The Banking Crises of the 1980s and Early 1990s: Summary and Implications”, in FDIC Banking Review, Vol. 11, No 1.8 Retail banking integration significantly weakened the relationship between local capital and local credit supply: See Krozner, R. and Strahan, P. (2014), “Regulation and Deregulation of the U.S. Banking Industry: Causes, Consequences, and Implications for the Future", in Economic Regulation and Its Reform: What Have We Learned?, National Bureau of Economic Research.9 Furceri, D. and Zdzienicka, A. (2015),“The Euro Area Crisis: Need for a Supranational Fiscal Risk Sharing Mechanism?”, Open Economies Review, Vol. 26, No 4, pp. 683–710; Nikolov, P. (2016), “Cross-border risk sharing after asymmetric shocks: evidence from the euro area and the United States”, Quarterly Report on the Euro Area, Vol. 15, No 2.10 Bofondi, M., Carpinelli, L., and Sette, E., “Credit supply during a sovereign debt crisis”, Banca d’Italia Working Papers, No 909, April 2013.11 Schmitz, M. and Tirpák, M. (2017), “Cross-border banking in the euro area since the crisis: what is driving the great retrenchment?”, Financial Stability Review, November, pp. 145–157.12 From 7.5% in early 2015 to 4.8% in early 201813 ECB (2017), Guidance to banks on non-performing loans, March.14 ECB (2017), Addendum to the ECB Guidance to banks on non-performing loans: Prudential provisioning backstop for non-performing exposures, October.15 Dedicated inspections were performed with the objective of evaluating the soundness and effectiveness of the valuation framework, the controls over the pricing models used to produce fair values, and the adequacy of the classification of positions measured at fair value. Supervisory efforts remain high with on-site inspections, deep dives and benchmarking exercises already planned or ongoing.16 ECB (2018), Financial integration in Europe, May.17 For example, a number of safeguards are introduced when applying cross-border liquidity waivers (e.g. minimum requirements on high quality liquid asset holdings for significant subsidiaries) in order to mitigate concerns in host countries. These safeguards may be reassessed in light of supervisory experience and the ongoing development of institutional mechanisms within the banking union, to ensure the safety and freedom of cross-border intragroup flows.18 Cetorelli, N. and Goldberg, L. (2011), “Liquidity Management of U.S. Global Banks: Internal Capital Markets in the Great Recession”, Federal Reserve Bank of New York Staff Reports, No 511, August; De Haas, R. and Van Lelyveld, I. (2008), “Internal capital markets and lending by multinational bank subsidiaries”, Working Paper Series, No 105, European Bank for Reconstruction and Development, January; Reinhardt, D. and Riddiough, S. J. (2015), “The Two Faces of Cross-Border Banking Flows”, Bank for International Settlements, DecemberAbout the authorMario DraghiMore from this authorRelated informationMore speeches from "European Central Bank"Country page: Euro area
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[description] => Speech by Mr Benoît Cœuré, Head of the BIS Innovation Hub, at the Eurofi Financial Forum, Ljubljana, 10 September 2021.BIS, Innovation Hub speech | 10 September 2021by Benoît CoeuréDistinguished guests, ladies and gentlemen.Thank you for inviting me to speak here today. We all experienced how the pandemic accelerated the shift to virtual events, but I am pleased that today we are gathering in person. Yet the world is not returning to the old normal. Payments are a case in point. The pandemic has accelerated a longer-running move to digital. Mobile and contactless payments are already part of our daily lives; QR codes and "buy now, pay later" options are gaining popularity; gloves, badges and Olympic uniforms with payment functions are being prepared for the Beijing Winter Olympics; and the tech-savvy generation will soon dream about money and payments for the metaverse.Alongside these developments, the world's central banks are stepping up efforts to prepare the ground for digital cash – central bank digital currency (CBDC).1 They have a job to do – delivering price stability and financial stability – and they must retain their ability to do it.Let me explain.Central bank money has unique advantages – safety, finality, liquidity and integrity. As our economies go digital, they must continue to benefit from these advantages. Money is at the heart of the system and it has to continue to be issued and controlled by trusted and accountable institutions which have public policy – not profit – objectives. Central bank money will have to evolve to be fit for the digital future.So what are the priorities now? Know where you are going – as Dag Hammarskjöld once said2, "only he who keeps his eye fixed on the far horizon will find the right road". And get going. Let me elaborate.Why do we need to know where are we going? Because today, the financial system is shifting under our feet.Big techs are expanding their footprint in retail payments. Stablecoins are knocking on the door, seeking regulatory approval. Decentralised finance (DeFi) platforms are challenging traditional financial intermediation. They all come with different regulatory questions, which need fast and consistent answers.Banks are worried about the implications of CBDCs for customer deposits. Central banks are mindful of these concerns and are working on answers. They see banks as part of future CBDC systems. But make no mistake: global stablecoins, DeFi platforms and big tech firms will challenge banks' models regardless.Stablecoins may develop as closed ecosystems or "walled gardens", creating fragmentation. With DeFi protocols,3 any concerns about the assets underlying stablecoins could see contagion spread through a system. And the growing footprint of big techs in finance raises market power and privacy issues, and challenges current regulatory approaches.4Will the new players complement or crowd out commercial banks? Should central banks open accounts to these new players, and under which regulatory conditions? Which kind of financial intermediation do we need to fund investment and the green transformation? How should public and private money coexist in new ecosystems – for example, should central bank money be used in DeFi rather than private stablecoins?We urgently need to ask ourselves these kinds of questions about the future. This is the far horizon for the financial system but we are approaching it ever faster. Central banks need to know where they want to go as they embark on their CBDC journey.CBDC will be part of the answer. A well-designed CBDC will be a safe and neutral means of payment and settlement asset, serving as a common interoperable platform around which the new payment ecosystem can organise. It will enable an open finance architecture that is integrated while welcoming competition and innovation.5 And it will preserve democratic control of the currency.This brings me to my second message: the time has passed for central banks to get going. We should roll up our sleeves and accelerate our work on the nitty-gritty of CBDC design. CBDCs will take years to be rolled out, while stablecoins and cryptoassets are already here. This makes it even more urgent to start. In the design thinking methodologies we use in the BIS Innovation Hub, the ideal product stands in a sweet spot at the intersection of desirability, viability and feasibility. When applied to CBDCs, these translate into three dimensions: consumer use cases, public policy objectives and technology.We have to ask ourselves why consumers would want a CBDC and what would they want it to do? The recent European Central Bank (ECB) public consultation showed that they value privacy, security and broad usability.6 In order to meet consumers' expectations, CBDCs need to be made to work most conveniently. Payment data must be protected. Digital functions that are not available with cash can be developed, such as programmability or viable micro-payments.Then CBDCs should meet public policy objectives.7 Central banks exist to safeguard monetary and financial stability for the public good. CBDCs are a tool to pursue this through enhancing safety and neutrality in digital payments, financial inclusion and access, innovation and openness. Important questions remain. How can CBDC systems interoperate, and should offshore use be discouraged?Technology opens up design choices. System design will be complex. It involves a hands-on operational and oversight role for central banks and public-private partnerships to develop the core features of the CBDC instrument and its underlying system. These features are: ease of use, low cost, convertibility, instant settlement, continuous availability and a high degree of security, resilience, flexibility and safety.8 Complex trade-offs will be addressed by central banks including how to balance scale, speed and open access with security; and how to balance offline functionality with complexity and security.Across the world, central banks are coming together to focus on their common mission. Charged with stability, they will not rush. They want to move fast, but not to break things. Consultations with payment systems and providers, banks, the public and a broad range of stakeholders have begun in some countries. To build a CBDC for the public, a central bank needs to understand what they need, and work closely with other authorities. The BIS Innovation Hub is helping central banks. We already have six CBDC-related proofs of concept and prototypes being developed in our centres, and more to come.9The European Union is uniquely placed to face the future. You can build on a state-of-the-art fast payment system, on the strong protections provided by the General Data Protection Regulation and on the open philosophy of the Second Payment Services Directive. The ECB's report on a digital euro sets the stage.A CBDC's goal is ultimately to preserve the best elements of our current systems while still allowing a safe space for tomorrow's innovation. To do so, central banks have to act while the current system is still in place – and to act now.I thank you for your attention.1 On central banks' preparedness for CBDC, see C Boar and A Wehrli, Ready, steady go? Results of the third BIS survey on central bank digital currency, BIS Papers No 114, January 2021.2 See D Hammarskjöld, Markings, 1963.3 DeFi protocols refer to the smart contracts that perform the functions in a DeFi platform.4 See A Carstens, S Claessens, F Restoy and H S Shin, "Regulating big techs in finance", BIS Bulletin No 45, August 2021.5 See Bank for International Settlements, "CBDCs: an opportunity for the monetary system", Annual Economic Report 2021, June.6 See ECB, Eurosystem report on the public consultation on a digital euro, April 2021.7 See Group of central banks, Central bank digital currencies: foundational principles and core features, October 2020.8 See Group of central banks, op cit.9 These are: Projects Helvetia, Jura and Arena in the BIS Innovation Hub Swiss Centre, Projects m-CBDC Bridge and Aurum in the BIS Innovation Hub Hong Kong Centre, and Project Dunbar in the BIS Innovation Hub Singapore Centre, see www.bisih.org.About the authorBenoît CoeuréMore from this author
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[url] => https://www.brookings.edu/articles/taiwans-democracy-and-the-china-challenge/
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[description] => Executive Summary
Taiwan has gotten high marks when it comes to holding clean elections and protecting political rights. The public strongly supports democracy in principle and by and large approves the island’s system in practice. When it comes to performance, however, the political system does not do so well. This is partly because of a set of structural factors. Selecting the president and legislature on a majoritarian basis fosters a degree of polarization and complicates the crafting of policy compromises. Periodically, social and political forces seek to circumvent the institutions of representative government (via mass protests, for example). They can block what they oppose but are unable to solve the problems that provoked their action in the first place. Another reason is that the issues to be addressed are not easy. Taiwan’s economy is maturing; young people lack employment opportunities; the population is aging; and the birth rate is very low. The most challenging issue is China and its ambitions regarding Taiwan. So, the stakes for Taiwan’s democracy are high. A failure to perform well would be a tragedy.
Introduction
Generally, Taiwan gets high marks for its democracy. It was a poster child for the global “third wave” of democratization that occurred in the 1980s and 1990s. Its transition from authoritarian rule to a representative, electoral system was gradual and peaceful.1 Today, U.S. government officials regularly praise the island’s political progress. The State Department’s annual report of human rights practices says that civil and political rights and the rule of law are well protected.
These positive ratings do have a basis. Elections are free, fair, and highly competitive. In presidential races, turnout usually exceeds 70%. There have been three presidential transfers of power, an indicator of democratic consolidation. The party system is institutionalized, with two large, distinctive parties — the Kuomintang (KMT) and the Democratic Progressive Party (DPP).2 Each is supported by small parties and groupings, producing two political camps. The KMT leads the Blue camp and the DPP the Green camp (named for the colors of their party flags). Civil society organizations have proliferated and pursue their objectives seriously. Polling organizations facilitate a permanent plebiscite on leaders and government policies.
Public views concerning the political system
Despite all these favorable attributes, the island’s public has decidedly mixed views about their democratic system. In the World Values Survey in 2012, 40 to 60% of Taiwan expressed confidence in the central government, civil service, armed forces, and the courts, but rated the press at 28.4%, the Legislative Yuan (LY, the parliament) at 27.6%, and political parties at 22.4%.3
The Asian Barometer Survey has conducted several surveys of public attitudes that probe the degree of satisfaction about Taiwan’s democracy in various ways. The following is the set of responses in the 2014 “wave,” the last one to be done, in declining levels of positivity:
88% supported the idea that democracy is still the best form of government, whatever its problems.
84% thought that “democracy is suitable for our country.”
76% believed that democracy is capable of solving problems in society.
68% thought that Taiwan was a democracy, though some thought it had “minor problems.”
63% were satisfied with the way democracy worked in Taiwan.
63% believed that “democracy was always preferable.”
Unfortunately, these are the last iterations of the World Values Survey and the Asian Barometer Survey. Hence, it is impossible to know whether people in Taiwan have revised their views in the interim, for better or for worse. My best guess is that if opinion has changed, it would be in a negative direction, as politics on issues like China, pensions, same-sex marriage, and so on, became more contentious.
Performance
That two out of three respondents were generally satisfied with their political system is not a bad approval rate. Yet most intriguing were these responses to two other questions:
Only 23% thought that democracy was more important than economic development.
16% believed that protecting political freedom was more important than reducing economic inequality.
That is, performance is more important than process. Democracy is not valued for its own sake, but rather whether its outcomes satisfy what people value.
There is no denying that on a range of issues, the Taiwan political system’s response to policy problems has been suboptimal.
That these survey questions imposed a forced choice on respondents may have biased the results against democratic process. But there is no denying that on a range of issues, the Taiwan political system’s response to policy problems has been suboptimal. These include the government budget; maintaining economic competitiveness; ensuring good jobs for young people; energy security, preserving the environment, and food safety; the generosity of retiree pensions; marriage equality; transitional justice (how far to go in holding accountable the authoritarian KMT regime of the past); judicial reform; and, last but definitely not least, China. On each of these issues, the players — the political leadership, central and local government agencies, political parties, the business community, civil society, and the public — and how they interact varies, depending on the nature of the problem to be addressed. But the results are often policy swings, chronic contention, or even gridlock.
Structural factors
These issues often yield less than satisfactory outcomes because they are very difficult to solve. After all, as Taiwan’s export-led economy matured, the growth rate has declined. As the population has aged and the birthrate dropped, the working population is shrinking in size relative to the number of children and retirees that depend on them. Companies did sustain profits by moving production to China, but changes in the Chinese business environment (e.g. increasing wage demands) have posed new business challenges. Moreover, Beijing seeks to change the status quo in its favor.
Majoritarianism and its consequences
Not only are policy issues substantively complex, certain structural features of Taiwan’s democratic system affect the conduct of politics and complicate policy formulation. A key one is the majoritarian character of the legislature. Beginning with the 2008 election, members of the LY have been elected in two ways (each voter casts two ballots). 64.6% of the 113 members are elected from single-member districts on a “first-past-the-post” basis (the same system as in the United States). The remaining 35.4% are selected on a party basis.4
The result has been a majoritarian system, which has some built-in advantages. The winner-take-all principle tends to produce fewer large parties. Fewer parties mean fewer policy programs from which voters must choose, while too many proposals can produce confusion and gridlock. Legislators chosen from single-member territorial districts are more likely to be responsive and accountable to their constituents than legislators who are picked in multi-member districts.
Yet an electoral system that combines single-member districts and a first-past-the-post rule is actually less representative of voters’ preferences than some alternatives. It almost guarantees that candidates of two major parties will win most of the legislative seats, and that the winning party will get more seats than its share of the vote. Thus in 2016, the KMT and the DPP won 91% of the total LY seats. In the single-member races, DPP candidates got 44.6% of the vote, but won 68.5% of those seats. KMT candidates received 38.9% of this vote and 30.8% of the seats. The same distortion occurs to a lesser degree in the party vote. In 2016, the DPP won 44.1% of the party vote and got 52.9% of those seats. In this contest, the KMT secured 26.9% of the votes and 32.3% of the seats. The presidential election, which is held on the same day as the balloting for the LY, is also on a winner-take-all basis, which reinforces the majoritarian nature of the system.5 Thus, the KMT controlled the presidency and the legislature from 2008 to 2016, and the DPP will do so from 2016 to 2024.6
When one Taiwan party dominates the government for one or two presidential terms, it creates a number of incentives for political polarization, fostering phenomena that do not necessarily contribute to good, representative government:
The majority party is tempted to try to push through as much of its preferred policy agenda as possible and to eschew compromise with the minority.
As power shifts from the KMT to DPP and back again, there are fairly wide swings in policy on at least some issues, with each new administration trying to reverse the agenda of its predecessor, rather than making adjustments to a shared consensus position.
Politics is adversarial, as politicians in each party adopt a “you live, I die” (nihuo, wosi) attitude towards people in the other party.
Because the parliamentary minority grows frustrated at its ability to accomplish much of its program, it adopts tactics designed to disrupt regular legislative order and to create a fighting image in the media. Seizing control of the speaker’s dais is a favored tactic.
Another countermeasure is creation of additional, small parties that put forward alternative agendas and seek to gain enough parliamentary seats to gain bargaining power over policy. Taiwan has had a series of third parties since 1993. Many are created as vehicles for the ambitions of an ambitious politician.7 (These parties have often begun well, but over time their influence subsides.)
A majority party that fears it is about to lose the next election may pass laws while it is still in power in order to make it harder for the opposing power to effectively govern should it win.
In addition, majoritarian rule fosters frustrations among groups outside the LY, in the broader political system at large. The consequences can complicate the operation of representative government.
First, when activist elements in the public oppose the policies of the majority party but see little hope of ending its dominance through electoral means, they have mounted large public protests in the name of the higher good. In these campaigns, they sometimes have the support of the opposition party.
Second, the DPP has long advocated the use of referendums to register the public will. Its initial assumption, no doubt, was that elections to the presidency and the LY were stacked in the KMT’s favor. Legislation was passed in 2003 to authorize the use of referendums, but the two parties have argued over the value and rules for this mechanism ever since. When the DPP won the LY in 2016, it soon passed legislation making it easier to put policy ideas to a referendum vote. In 2018, however, the KMT hoisted the DPP on its own petard by proposing and winning referendums that undermined the Tsai administration’s policies.
Third, from 2018 to 2020, Taiwan also saw a burst of populism, mainly in the form of a KMT politician named Han Kuo-yu. Han ran for mayor in Kaohsiung Municipality, pitting himself as the champion of the common people against Taiwan’s political and economic elites. He won the mayor’s race easily and then was picked as the KMT’s candidate in the 2020 presidential race, where President Tsai Ing-wen defeated him handily.
Each of these gambits reflects a dissatisfaction with the performance of representative government under two-party dominance and attempts to circumvent the normal operation of government.
Factors reducing polarization
Yet Taiwan politics is not a society-wide battle between two sharply divided camps. The public is not as polarized as politicians are. On social values, there is broad uniformity. There is strong agreement that, in principle, democracy is the best political system. The World Values Survey in 2012 found that by and large respondents tended to take a centrist position on issues such as income inequality, private versus government ownership of business, and whether the government or the people themselves should be responsible for people’s welfare.8 People generally agree that economic development, education, and cross-Strait relations are the issues on which the government should focus.
Most significantly, on some issues there are divisions within the major parties which impede them from operating as a unified, disciplined bloc, at least on those issues. The Blue and Green camps are divided into subcamps, with the overall spectrum running from the Deep Blues, through the Light Blues and Light Greens, and then to the Deep Greens. The Deep factions tend to the extreme while the Light ones are more moderate. Within each camp, there have been struggles for power between “Deep” and “Light,” and the results of those struggles can affect politics at large. If the Light factions in each major party are dominant, then inter-party cooperation becomes possible. If the Deep factions are dominant, then zero-sum confrontation is more likely.9
The Deep-Light differences within the Green and Blue camp are not always significant. Generally, the policy issues under debate define which actors are involved and how politics are conducted. Some matters are negotiated within the legislature and between it and the executive, outside of the public eye. Others matters evoke polarization between the major parties. Still others create Light-Deep splits. But the issue that is most divisive within and between parties and at election time is how to address the challenge China poses to Taiwan. It is an issue that is substantively difficult and the one where the stakes are the highest.
The China issue
In a November 2019 report for Brookings’s Global China project, I detailed Beijing’s policy towards Taiwan. To summarize, Beijing seeks to transform the island into a special administrative region of the People’s Republic of China (PRC), using the same formula that it employed for Hong Kong — “one country, two systems” (1C2S) — which would terminate the Republic of China government. It has hoped to achieve this end through persuasion but has not ruled out the use of force. Simultaneously, it has opposed what it perceived (or misperceived) as attempts by Taiwan leaders to create an independent country.
Beijing believed the election of Ma Ying-jeou as Taiwan’s president in 2008 offered the best opportunity to begin movement to unification. It hoped to build on deepened economic interdependence to reach political understandings that eliminated ambiguities about Taiwan’s legal status and the direction of cross-Strait relations. Ma deflected PRC requests for political talks, yet his economic policies stimulated concerns among Taiwan citizens about a dangerous slippery slope. Consequently, economic relations stalled. Then, in 2016, the DPP, led by Tsai, won the presidency and control of the LY, a significant setback for Beijing. China responded with neither accommodation nor military action, but by mounting a campaign of intimidation, pressure, marginalization, and penetration of Taiwan politics by providing support for political organizations and traditional media and manipulating social media. The goal may have been to secure Tsai’s defeat in the 2020 election, but that didn’t happen. So far, therefore, Beijing has failed to advance its policy objective.
Unquestionably, how Taiwan leaders formulate a strategy for preserving Taiwan equities in the face of Beijing’s goals and tactics is not easy. Should it be a combination of accommodation, cooperation, and opposition to independence? Or should it be a mix of economic diversification (less dependence on the PRC market), closer reliance on the United States, improvement of Taiwan’s military capabilities, and an emphasis on democracy to demonstrate the public’s opposition to unification? These are tough calls. If there were an easy solution, it would have emerged long ago. The 2019-2020 crackdown on Hong Kong’s protest movements has only increased opposition to any 1C2S arrangements.
Meeting the China challenge is made all the more difficult because decisions must be processed through Taiwan’s democratic system… Yet divisions between and within camps constrain any effort to forge a coherent policy.
Yet meeting the China challenge is made all the more difficult because decisions must be processed through Taiwan’s democratic system. Fundamentally, that is a good thing because it guarantees that any major change in the status quo will require public consent.10 Yet divisions between and within camps constrain any effort to forge a coherent policy. The Blue camp has more confidence in its ability to manage the China risk, while the Greens have a darker view of PRC intentions (and of the commitment of the Blues to Taiwan’s interests). Then there are divisions within the camps. The “Deep Blue” tend to adhere to the KMT’s long-time anti-independence stance and favors unification of some sort, while the “Light Blue” are more comfortable with Taiwan’s maintaining political distance from China, even as it secures benefits from economic ties with the mainland. The “Deep Green” favor a more radical approach to securing autonomy through measures that call for Taiwanese independence, while the “Light Green” are conscious about both the potential for conflict and the need to sustain the benefits of cross-Strait economic relations. The only thing the two camps generally agree is that they must rely on the United States to deter Beijing and keep Taiwan safe.11
Polarization and initiatives to circumvent representative government have affected policy towards China and complicated the formulation of effective policy. Consider these examples:
Generally, public discussion of China policy has been conducted on a simplistic basis, reducing it to arguments over identity (Chinese vs. Taiwanese vs. both) and over long-term outcomes (unification vs. independence vs. the status quo), without in either case defining the terms used. A key issue of debate within the two parties is whether the government should accommodate Beijing’s demand that it accept the 1992 Consensus, an ambiguous formula concerning cross-Strait relations. (Less discussed is whether it is appropriate at all for the PRC to impose conditions on Taipei.)
In the 2008 election campaign, the DPP not only promoted Taiwanese identity, a staple of election contests, but by proposing a referendum on membership for Taiwan in the United Nations, which created concern in Beijing and Washington that it was moving to independence.
In 2014, the Sunflower Movement mobilized to oppose a draft cross-Strait agreement on trade in services out of fear it would ultimately induce Taiwan’s political capitulation. With the DPP’s aid, activists took over the seat of representative government, the chamber of the LY, and caused the agreement to be set aside. To end the occupation, the LY leadership agreed to pass a bill supervising the negotiation of any economic agreement with the mainland (as of late 2020, no legislation was enacted).
In 2018, the KMT promoted a referendum restricting the import of Japanese food products produced in the area of the 2011 Fukushima nuclear accident, while elements in the DPP initiated one that would use “Taiwan” as the name of the island’s Olympic team, in violation of an international understanding. The first passed and the second failed.
In 2019, the DPP became worried that it was going to lose the 2020 presidential and LY elections and that a KMT government would make excessive concessions to Beijing. It used its majority to pass a law that made it almost impossible for any government to negotiate political agreements.12
These actions addressed important policy matters, but their effect has made policymaking more difficult. Whatever the substantive problems with the service trade agreement, effectively suspending the approval process was a poor way to solve them. The KMT’s 2018 referendum delayed for two years new economic agreements with Japan, which would have helped diversify the Taiwan economy. Although the Olympic referendum failed, it created unnecessary alarms in Beijing and a serious, albeit temporary, division within the DPP.
In different ways, Taiwan’s executive branch has been constrained from negotiating with Beijing, even if it might be in Taiwan’s interests to do so and even if the issue of the 1992 Consensus were dealt with. Economic talks are unlikely as long as the bill promised in 2014 on supervision of economic agreements is passed or abandoned (intra-DPP disagreements have kept it in limbo). The 2019 law regulating the negotiation of political agreements creates such a high bar it is doubtful one could ever get approved. These obstacles can only raise concerns in China that Taipei is not serious about addressing cross-Strait differences.
Conclusion
As noted, intra- and inter-party splits, protests, referendums, and populism reflect dissatisfaction with the performance of Taiwan’s system of representative democracy. This is not unique to Taiwan, of course. Other democracies share this performance dysfunction, including the United States. Taiwan does face an array of policy problems, some stemming from its being an advanced economy and aging society. The government budget must somehow allocate scarce resources among economic competitiveness, pensions and health care, and defense. On energy security, debates over conflicting priorities — ensuring supply for manufacturing, reducing environmental pollution, finding the right mix between fossil fuels and renewables, limiting emission of greenhouse gasses, and keeping energy prices low — have stymied formulation of a sustainable policy.
China’s policy ambitions add a unique and weighty layer of difficulty. Debates fester over the degree to which China constitutes a threat; what mix of accommodation, self-assertion, deterrence, and alignment with the United States is appropriate; what definition of Taiwan’s legal status is appropriate; how to sustain a coherent policy over time; and how to ensure sufficient resources and political support for the strategy adopted. It is a welcome development that a series of presidential elections have strengthened the consensus supporting a cautious, status-quo policy, yet the simplistic approach to public discussion of the China challenge limits serious discussion of the dilemmas involved. In short, difficult problems do not easily yield easy solutions, but an open yet divided political system makes it much harder.
Despite the high marks that Taiwan’s democratic system often receives for its election system and protection of political rights, it must be assessed in light of the policy challenges it faces and what is at stake. High stakes increase the need for superior performance. And without question, the PRC’s ambitions for Taiwan imposes a high-stakes challenge for the island’s leaders and its people. The outcome will likely define the island’s long-term future. That being the case, does Taiwan’s democratic system mitigate difficult policy dilemmas or exacerbate them? Does it facilitate consensus on how to approach the challenges of the future, or does it intensify the disagreements and create gridlock?
This analysis of Taiwan’s polarized and majoritarian system and the ways in which that at least some citizens have expressed their dissatisfaction with representative democracy suggests that on the tough issues, the public could be better served by its elected politicians. That statement is not meant to impugn their character, but rather to point to features of the system that make it harder for them to tackle the tough issues. That a majoritarian system overrepresents the majority and underrepresents the minority does not facilitate compromise, particularly when the minority party is weak. The history of the KMT’s past authoritarian rule, memories of which still shape the political consciousness of the older generation, exacerbates polarization. There is a structural character to the island’s political dysfunction.
There are, however, times when Taiwan’s system performs well. Far and away the best example is the response to the spread of the coronavirus. At the end of 2020, Taiwan, with a population of 23 million people, had registered about 800 cases and only 7 deaths. Much of the credit goes to the public health authorities, which successfully employed border controls, testing, contact tracing, and quarantines to keep the number of cases low. They had learned from problems in dealing with the SARS epidemic of 2003. In addition, the leadership of the Tsai administration was united, serious, and transparent. Members of the public, who had been socialized to use masks when they get a cold, did not need official persuasion to do the same when it came to the coronavirus. Members of the LY did not politicize the issue, perhaps because they understood the stakes. In short, the political leadership, the technocracy, politicians, and the public worked together to create an exemplary result. All concerned understood the stakes of failure.
Taiwan’s structural impediments to good policy performance are not easily fixed. Any alternative to majoritarianism would have its own defects, and it would require a constitutional amendment to institute (a non-starter). If there is a way to mitigate the current division, it probably will require the leaders of the two political parties to set boundaries on their competition: in assessing the nature of policy problems, particularly with respect to China; in working harder to forge compromises to address those problems; and in setting aside the prevailing zero-sum political culture. This way out seems unlikely, given the chronic, interparty contention over the China issue. Yet the stakes involved are very high and the cost of failure would be severe. If chronic political strife makes a consensus policy decision impossible, a decision has been made anyway.
Bringing about Taiwan’s democratic transition thirty years ago was far from easy, but it gave citizens a say on their future that they had never had. Difficult as today’s policy challenges are, it would be a tragedy if the system of representative government was unable to chart a favorable path forward for the people the system is supposed to serve.
The Brookings Institution is committed to quality, independence, and impact.
We are supported by a diverse array of funders. In line with our values and policies, each Brookings publication represents the sole views of its author(s).
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[name] => Taiwan’s democracy and the China challenge
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[description] => Remarks by Mr Fernando Restoy, Deputy Governor of the Bank of Spain, at the dinner event organised by the European Savings and Retail Banking Group (ESBG), Madrid, 17 November 2016.The views expressed in this speech are those of the speaker and not the view of the BIS.Central bank speech | 30 November 2016by Fernando RestoyPDF full text (111kb) | 5 pagesGood evening.It is a pleasure to have the opportunity to participate in this event and to address this eminent group of bankers. I am grateful to Isidro Fainé and José María Méndez for inviting me. I hope that you have now got your breath back and recomposed yourselves after viewing Picasso's impressive and to some extent disheartening masterpiece, Guernica. You certainly need a strong mind to discuss banking issues nowadays.I imagine that probably much of the agenda of your regular meetings is devoted to exchanging experiences on how financial institutions such as those participating in the European Savings and Retail Banking Group (ESBG) are addressing the current challenges affecting the entire financial sector in the current post-crisis period. Allow me to attempt to make a modest contribution to that discussion. About the authorFernando RestoyMore from this authorRelated informationMore speeches from "Bank of Spain"Country page: Spain
[keywords] => the European Savings Fernando Restoy Bank of Spain"Country Guernica Remarks Isidro Fainé José María Méndez Picasso Fernando RestoyPDF the Bank of Spain Madrid Spain Retail Banking Group banking sector remarks esbg addressing bank spain dinner european savings retail fernando restoy challenges
[name] => Fernando Restoy: Challenges facing the retail banking sector
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[description] => (1) Problem Definition: In recent years, manufacturing firms in developing economies have made significant efforts to move up the production value chain by adopting foreign technology through licensing. However, there is negligible empirical evidence of the relationship between technology licensing and productivity growth in developing economy manufacturing firms (licensee firms), the focal relationship of interest in this study. We examine whether and how the relationship between technology licensing and productivity growth in the short run is affected by the challenges and constraints inherent in the contexts developing economy firms operate in. We do so by investigating the moderating role of formal workforce training program in a firm, and the corruption level and the infrastructural constraint level in the firm’s external environment.
(2) Academic/Practical Relevance: Although the adoption of foreign technology by developing economy manufacturing firms is often driven by the goal to strengthen their capabilities in the long run, prior research provides a limited understanding of the performance consequences of technology licensing in the short run, which is an important business reality. Our study serves to address an important gap in research and practice by shedding light on some of the unique challenges and constraints that licensee firms in developing economies face as a consequence of foreign technology licensing.
(3) Methodology: The empirical analyses are conducted using matching and fixed-effects regression on a multi-industry data set from the World Bank comprising detailed firm-level information from over 16,000 manufacturing firms across 25 developing economies in South Asia and East Asia. To strengthen the causal inference of the results and rule out alternative explanations, we use several alternative matching techniques and empirical methods addressing selection bias and unobserved heterogeneity.
(4) Results: Our results indicate that the adoption of foreign technology by developing economy manufacturing firms has a substantial short-run disruptive effect on firm operations with productivity growth declining by 4.5 percentage points in these firms relative to comparable firms that do not use foreign technology licensing. Toward mitigating such disruptive effects, we find that formal workforce training programs attenuate the negative relationship between technology licensing and productivity growth. However, infrastructural constraints in the external business environment amplify this negative relationship. Intriguingly, our results suggest that corruption in the firm’s external environment acts as an “efficient grease,” attenuating the negative impact of technology licensing on productivity growth.
(5) Managerial Implications: Our results provide compelling evidence on not only the presence of but also the large magnitude of the disruptive effects of technology licensing on productivity growth. The findings offer important insights for manufacturing firms and policymakers in developing economies on how to mitigate these negative effects. The results highlight opportunities for policymakers to (a) encourage firms to have formal workforce training programs, (b) reduce infrastructural constraints in the business environment, and (c) institute regulatory practices that can substitute for the effects of corruption.
[date] => 2020-10-10
[name] => Technology Licensing and Productivity Growth: Evidence from Manufacturing Firms in Developing Economies
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[TAX_DOMAIN_2_text] => Artificial Intelligence (AI) use by regulated firms - supervisory oversight
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[description] => The live testing service would be a new component of the FCA’s AI Lab, which has been supporting firms with the development and deployment of AI and would help to fill a testing gap slowing firms’ adoption of AI.
The live testing service would allow firms to collaborate with the FCA while they check that their new AI tools are ready to be used. It would also provide the FCA with intelligence to better understand how AI may impact UK financial markets.
The live testing service will provide regulatory support to firms who are ready to deploy consumer or market-facing AI models. The proposed live testing service would run for 12 to 18 months, with plans to launch in September 2025.
The proposal builds on the FCA’s new 5-year strategy which sets out how the regulator will support growth by enabling innovation and ensuring the continued competitiveness of the UK’s world-leading financial services through a tech-positive approach. It will also support the FCA to be a smarter regulator by embracing data and technology to be more effective and efficient.
Jessica Rusu, the FCA’s chief data, intelligence and information officer, said: ‘Under our new strategy, we’ve committed to being increasingly tech positive to support growth. We want financial firms and their customers to benefit from AI, so we’re providing a safe space to test how they plan to use it.’
The deadline for feedback to the Engagement Paper has been extended to 13 June 2025.
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[description] => The Financial Conduct Authority (FCA) is urging over 55s to take their time to check that investment ‘opportunities’ are legitimate before they hand over their money. This comes as new research by the FCA reveals a fifth (22%) of over 55s, with above average incomes, suspect they were targeted by a fraudulent investment scam in the past three years, rising to a third (32%) of those aged 75 and over.
On average, victims of investment fraud lost £32,0001 ;each last year. Recent pension freedoms and low interest rates offering poor returns on savings are making over 55s an increasingly attractive target for fraudsters. The new research is part of the FCA’s ScamSmart campaign, helping to protect consumers from investment fraud. The campaign features an interactive tool, the FCA Warning List, that helps investors find out more about the risks associated with an investment, and check a list of firms the FCA knows are operating without its authorisation.
Despite the high number of people potentially contacted by these scams, one in eight (14%) of over 55s who have invested in financial products (such as stocks and shares) spend little or no time researching them before handing over money. Over 75s, who are most likely to say they have been contacted by an investment scam, are also the group most likely to do little or no research (26%)2. The most common check carried out before investing in a financial product was to look at a company’s website (41%). However, investment fraudsters and unauthorised firms are known to create highly professional-looking websites to entice victims, reinforcing how other checks need to be done to make sure an investment is genuine. Far fewer (27%) sought professional, impartial advice, a check the FCA encourages consumers to do before investing.
Interestingly, more time and effort was being spent checking other high cost purchases, even though the money being spent is less. The average cost of major building work in our survey was £25,000, compared to the average of £36,000 spent on financial investments such as stocks or shares. Despite this, significantly more people (47%) said that they researched building work carefully and extensively, compared to those researching financial investments to the same extent (38%).
Over half (55%) of those who have invested in financial products did so on their own, rather than making the decision with family. This is more than any other major financial decision listed such as buying a house, a car or a significant holiday. Fraudsters will often encourage their targets to keep the investment a secret to avoid friends and family dissuading them from investing.
To avoid being a victim of investment fraud, the FCA advises consumers to, at the very least:
Mark Steward, Director of Enforcement, FCA, comments:
“Making a significant financial investment is an important decision - be prudent, do your homework and be especially on guard if contacted out of the blue by someone you don’t know. Fraudsters are targeting our growing over 55 population because they are more likely to have money to invest. They may pressure you to make a quick decision or try to make you feel stupid for not taking up their bogus offers.
“No investment decision should be rushed. Be sceptical. Be suspicious. Ask questions and get answers you can verify. And remember, if you receive an unsolicited call about an investment opportunity that sounds too good to be true then it probably is. The best thing to do is hang up.”
Nick Hewer, who is supporting the campaign, added:
“Duped by cold-callers, fake websites and online adverts, I am outraged at the persistent threat investment scams pose on society, especially those over 55 who are the prime target for these callous criminals. I have been targeted by these scammers myself so I’m not surprised to see how many other people have also been approached. The amount of money that is being lost by victims is extremely worrying, which makes it all the more important that this issue is tackled.
“If you are contacted by someone offering an investment out of the blue, just put the phone down. The FCA Warning List is a fantastic resource for those who are unsure about an investment offer – in a nutshell, check, check and check again!”
Figures from Action Fraud released in October 2016.
Figure based on 42 respondents aged 75 and over who were involved in investing in a financial product in the past 3 years.
On 1 April 2013 the FCA became responsible for the conduct supervision of all regulated financial firms and the prudential supervision of those not supervised by the Prudential Regulation Authority (PRA).
The FCA has an overarching strategic objective of ensuring the relevant markets function well. To support this it has three operational objectives: to secure an appropriate degree of protection for consumers; to protect and enhance the integrity of the UK financial system; and to promote effective competition in the interests of consumers.
From June 2016 to November 2016, the FCA received 2,142 reports of scams or unauthorised firms to its website.
From May 2016 to November 2016, the FCA received 216,1660 visitors to the ScamSmart website.
All figures, unless otherwise stated, are from YouGov Plc. The total sample size was 1,004 GB adults aged 55+, in social grade ABC1, with a gross household income of £30,000+ and/ or savings of £5,000+. Fieldwork was undertaken between 3rd - 11th November 2016. The survey was carried out online.
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[description] => Regulation needs effective supervision; but regulated entities may deviate with unobserved actions. For identification, we analyze banks, exploiting the European Central Bank’s asset-quality-review (AQR) and supervisory security and credit registers. After the announcement of the AQR, reviewed banks reduce riskier securities and credit (also overall securities and credit supply), with the largest impact on riskiest securities (rather than riskiest credit), and with immediate negative spillovers on asset prices and firm-level credit supply. Exposed (unregulated) nonbanks buy the risk that reviewed banks shed. The AQR drives the results, not end-of-year effects. After the AQR compliance, reviewed banks reload riskier securities, but not riskier credit, with medium-term negative firm-level real effects (costs of supervision/safe-assets increase).
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[description] => The decisions cover various sectors and will provide certainty to firms and their clients and counterparties. The decisions where the FCA is the lead regulator are:
Firms should consult the Treasury’s publication
Link is external
for the full list of decisions.
In some instances, the decisions will enable EEA firms to continue to access the UK market. It is important firms check the potential impact of these decisions on their business.
In some cases, firms will have to take action to benefit from the equivalence provisions. In other cases, including where the Treasury has already introduced a transitional regime to allow continued firm access after the transition period, firms might not need to take any action at this stage.
Equivalence provisions occur in several pieces of EU legislation and have been onshored into UK legislation. Equivalence consists of a determination that the regulatory or supervisory regime of another jurisdiction is recognised as being equivalent to the corresponding UK regime, and allows UK authorities to rely on supervised entities’ compliance with equivalent rules or supervision in that jurisdiction.
Below we summarise some of the decisions, and what this means for firms.
Under this decision, UK firms will be able to apply for the margining and/or clearing exemption for intragroup transactions where their intragroup counterparty is located in the EEA and, if granted, may benefit from the exemption on a non-time limited basis. However, UK firms will still need to be aware that their EEA intragroup counterparties may not be entitled to reciprocal exemptions under the EU EMIR requirements and should check the position on this.
A separate transitional regime has already been provided under UK EMIR for intragroup exemptions from clearing and margin for UK to EEA and UK to third country intragroup transactions.
Following this equivalence decision, intragroup exemptions between UK firms and their EEA group entities will not need to make use of this transitional regime but will need to follow the process as detailed below.
The transitional regime will continue only for intragroup exemptions from clearing and margin between UK firms and their third country group entities where no equivalence has been determined.
To benefit from any new intragroup exemptions from clearing and/or margin, UK firms must submit an application (margin exemption) or a notification (clearing exemption) to the FCA. This should be based on the relevant conditions and timing set out in the UK EMIR and the processes prescribed by the FCA.
UK firms that have already been granted intragroup exemptions from margin and clearing with their EEA group entities will be required to reapply or renotify the FCA following this equivalence decision. However, to avoid unnecessary burden we intend to streamline this process.
Further details on the process will be published shortly.
Read more about EMIR notifications and exemptions.
Under this decision, UK firms will be able to consider EEA trading venues as regulated markets under Article 2A of UK EMIR. This confirms the classification of derivative transactions on these markets in relation to requirements under UK EMIR.
Firms do not need to take any action to benefit from this decision. The FCA will publish a list of all regulated markets under UK EMIR, including equivalent third country markets, before the end of the transition period.
Read more about UK EMIR.
Under this decision, EEA firms who have not previously submitted a notification for a market maker exemption under UK SSR can now do so without needing to be a member of a UK trading venue and can, instead, submit a notification to us based on being a member of an EEA trading venue.
EEA firms wishing to benefit from this exemption need to have notified the FCA 30 days before they intend to do so. EEA firms who joined a UK trading venue and notified the FCA previously do not need to take any further action.
Read more about the market making exemption and the notification process, and the market making exemption from the end of the transition period.
Under this decision, EEA credit rating agencies registered with ESMA and whose credit rating activities are not of systemic importance to the financial stability or integrity of UK financial markets may apply for certification with the FCA. UK firms using ratings for regulatory purposes will be able to use credit ratings issued by an EEA CRA that is certified with the FCA and has no presence or affiliation in the UK.
Firms can already make use of the separate transitional regimes provided by UK CRAR, notably the temporary registration regime available to EEA CRAs wishing to issue ratings in the UK after the end of the transition period.
EEA firms considering applying for certification must contact the FCA by emailing cra-registration@fca.org.uk.
Read more about UK CRAR.
Under this decision, EEA benchmark administrators will be able to access UK markets and UK supervised entities can continue to use their benchmarks on that basis.
The Government is proposing to extend the current transitional period for all third country benchmarks set out in UK BMR from the end of 2022 to the end of 2025 in the recently published Financial Services Bill. Under the existing transitional arrangements, UK supervised entities are permitted to use all third country benchmarks until the end 2022 without further action from the EEA benchmark administrator. If the Bill is enacted, this period will extend to the end of 2025.
EEA benchmark administrators will need to notify the FCA if they wish to benefit from the decision. Further details on the process will be published in due course on our page about how to get authorised or registered as a benchmark administrator.
Read more about UK BMR.
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[TAX_DOMAIN_2_text] => Digital assets/cryptocurrencies oversight
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[updated_at] => 2025-12-02T22:47:29.000Z
[description] => Read DP25/1
We want to develop a safe, competitive, and sustainable cryptoasset sector. Long-term confidence in cryptoassets depends on clear regulation to promote market integrity and appropriate consumer protection.
We are seeking input into how the unique aspects of cryptoassets should be considered in our future regulatory regime. We want an open discussion on the features of the future regime, with this latest Discussion Paper (DP) seeking views on how we regulate trading platforms, intermediaries, staking, lending and borrowing, and decentralised finance. We are also seeking feedback on the use of credit to purchase cryptoassets.
These proposals have been informed by extensive engagement with the cryptoasset industry, consumers, traditional finance participants, other regulatory regimes and input from policy roundtables held in April and May 2024. These proposals also reflect feedback from the 2023 Treasury Consultation.
This DP is the latest policy publication in our crypto roadmap which provides a clear timeline for consulting on future cryptoasset regulation. Other areas in the roadmap include market abuse, and admissions and disclosures, stablecoins and custody, and prudential considerations.
This DP will be of interest to a wide range of organisations and individuals that participate in the cryptoasset sector. This includes:
Send us your feedback by 13 June 2025. We will consider feedback to decide our next steps. We will consult on any proposals in this DP if we propose to adopt them as part of our final rules.
You can send your comments to us using our online response form or by emailing: dp25-1@fca.org.uk.
Under the government’s plans, our regulatory remit for cryptoassets will expand from the current Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs) and Financial Promotions regime to a more comprehensive crypto regime.
On 29 April 2025, the Treasury published a draft of forthcoming statutory provisions
Link is external
to create new regulated activities for cryptoassets, and an explainer document detailing the intended policy outcomes of these provisions.
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[updated_at] => 2025-12-02T22:47:29.000Z
[description] => Press release | 08 July 2013The Basel Committee on Banking Supervision today released a Discussion Paper on the balance between risk sensitivity, simplicity and comparability within the Basel capital standards.In response to the financial crisis, the Basel Committee introduced a range of reforms designed to substantially raise the resilience of the banking system against shocks. In addition to these reforms, during 2012 the Committee commissioned a small group of its members (the Task Force on Simplicity and Comparability) to undertake a review of the Basel capital framework. The goal of the Task Force was to identify opportunities to remove undue complexity within the framework, and improve the comparability of its outcomes. The creation of the Task Force acknowledged that the framework has steadily grown over time as risk coverage has been expanded and more sophisticated risk measurement methodologies have been introduced.The paper being released today discusses the reasons behind the evolution of the current framework, and outlines the potential benefits and costs that arise from a more risk sensitive methodology. The paper also discusses ideas that could possibly be explored to further reform the framework with the objective that it continues to strike an appropriate balance between the complementary goals of risk sensitivity, simplicity and comparability.The purpose of the discussion paper is to seek views on this critical issue so as to help shape the Committee's thinking. At this stage, the Committee has not made a decision to pursue any of the ideas presented; the paper is being published to elicit comments and feedback from interested stakeholders, which will help the Committee refine its thinking in this area. Furthermore, the Committee remains firmly of the view that full, timely and consistent implementation of Basel III remains fundamental to building a resilient financial system, maintaining public confidence in regulatory ratios and providing a level playing field for internationally active banks. Adopting the Basel III reforms (higher and better quality capital, improved risk coverage, capital buffers, and liquidity and funding requirements) in accordance with the internationally-agreed transition period deadlines is itself an important step in improving the consistency of bank regulation globally.Mr Stefan Ingves, Chairman of the Basel Committee and Governor, Sveriges Riksbank said: "The Committee is keenly aware of the current debate concerning the complexity of the current regulatory framework. For that reason, the Committee set up a Task Force last year to look at this issue in some depth. The Committee believes that it would benefit from further input on this critical issue before deciding on the merits of any specific changes to the current framework. The paper being released today is designed to encourage discussion amongst, and solicit views from, a broad set of stakeholders."The Committee welcomes views on the issues outlined in this paper. Comments should be submitted by Friday 11 October 2013 by e-mail to baselcommittee@bis.org. Alternatively, comments may be sent by post to: Secretariat of the Basel Committee on Banking Supervision, Bank for International Settlements, CH-4002 Basel, Switzerland. All comments may be published on the website of the Bank for International Settlements unless a respondent explicitly requests confidential treatment.BackgroundThe Basel Committee, in response to the financial crisis that began in 2007, introduced a number of reforms to substantially raise the resilience of the financial system to shocks. While some of these measures strengthen the bank capital adequacy framework itself, others are designed to complement it in ensuring the soundness of banks. These measures include the introduction of a leverage ratio, an additional capital surcharge for global systemically important banks (G-SIBs), a proposed framework for measuring and controlling large exposures, and minimum liquidity and funding standards. The Committee has also introduced a comprehensive regulatory consistency assessment programme with a view to ensuring consistent implementation of Basel III across banks and jurisdictions. Related informationFull publication: The regulatory framework: balancing risk sensitivity, simplicity and comparability - discussion paper
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[updated_at] => 2025-11-05T18:34:55.000Z
[description] => BIS Quarterly Review | September 2018 | 23 September 2018by Benjamin H Cohen, Peter Hördahl and Dora XiaPDF full text (205kb) | 13 pagesWe review methods and models for estimating term premia on long-term government bonds. We then use these models to estimate term premia on US and euro area bonds and explore their recent behaviour. Although the models produce different estimates for the level of term premia, they largely concur on the trends and dynamics. While low (and sometimes negative) term premia have helped to keep yields unusually low, recent yield movements have tended to reflect shifts in expected short-term rates rather than in the premia. We find that co-movements in real term premia (rather than inflation risk premia or expected rates) have contributed to co-movements between yields in the United States and the euro area.1JEL classification: G10, G12.Yields on long-dated bonds are made up of two parts: the returns expected from comparable, shorter-dated instruments over the same time period, and an additional component, or term premium. This term premium is normally thought of as the extra return (a risk premium) that investors demand to compensate them for the risk associated with a long-term bond. But it may also be influenced by supply and demand imbalances for a specific instrument, or several other factors. Typically, expected interest rates and term premia are extracted using models based on a small number of risk factors, under the assumption that consistency is maintained between yields at different maturities through the absence of arbitrage opportunities. The models are estimated from market data, in some cases supplemented by survey data and macroeconomic indicators.In this Special Feature, we examine some methods and models used to distinguish these different bond yield components. We focus on benchmark government bonds for the United States and the euro area. Both of the corresponding yield curves benefit from deep, liquid markets with a broad range of maturities, and act as benchmarks for the pricing of many other assets worldwide.We then make use of this decomposition to study recent drivers of US and euro area yields. In recent years, government bond yields have not always responded predictably to macroeconomic or monetary policy news. Long-term yields in the United States remained stubbornly low even as the Federal Reserve initiated a series of interest rate hikes away from zero starting in late 2015. From mid-2016, as growth prospects have picked up, yields in both the United States and in Europe have trended higher, but long-term yields have not always kept up with those at the short-term end. Analysts have debated the causes and implications of a flat, or even downwards-sloping, term structure at a time of broadly robust growth.Key takeawaysWe review various models that aim to separate the expectations and term-premium components of bond yields.Applied to 10-year government yields in the United States and euro area in recent years, the models produce different estimates for the levels of the term premia, but broadly agree on the trends and dynamics.Historically, term premia have tended to be more closely correlated across the two economies than are expectations of short-term rates.The various models we study give different estimates for the levels of estimated term premia, but they tend to agree on the general trend and dynamics. In particular, all estimates point to an overall downward trend in term premia both in the United States and in the euro area since the 2007-09 Great Financial Crisis (GFC). Premia have increased somewhat recently, but are still well below pre-GFC levels. The models also tend to find that premia are highly correlated across currencies, while interest rate expectations are not. Changes in rate expectations, especially for real (inflation-adjusted) interest rates, have driven yields at times, including those of US Treasuries in the last year or two. But low term premia have also contributed to the recent puzzling behaviour in yields and the term structure, including through international spillovers.The first section discusses the basics of term premia models and explores how they are used to separate the various components of market yields. The second and third apply these insights to benchmark 10-year government bond yields in the United States and the euro area. The fourth asks what correlations across the different estimated components can tell us about the drivers of US and euro area rates. The last section concludes.Methods for estimating term premiaAs mentioned above, long-term interest rates can be broken out into a part that reflects the expected path of short-term interest rates and a term premium.2 In standard finance theories, the latter part represents the compensation, or risk premium, that risk-averse investors demand for holding long-term bonds. This compensation arises because the return earned over the short term from holding a long-term bond is risky, whereas it is certain in the short term for a bond that matures over the same short investment horizon. While some types of investor, such as pension funds, may consider long-term bonds less risky given their long-term liabilities, most other investors would tend to view them as more risky.More generally, though, the term premium would reflect this type of compensation for risk only if markets were perfectly functioning and frictionless. In reality, a number of other influences may affect bond yields, and thus the estimated expectations and term premium components. One such influence is supply-demand imbalances, such as those brought on by outsize official sector purchases of government bonds in recent years. Such effects may be compounded by burgeoning demand for long-term bonds from insurance and pension funds, as they try to hedge duration risk, especially in an environment of falling yields (Domanski et al (2015)). Sometimes institutional factors might lead to outsize investor demand for specific maturities, creating a "preferred habitat" effect that will be reflected in term premia (Modigliani and Sutch (1966), Vayanos and Vila (2009)).One simple way of estimating the term premium is to subtract a survey measure of the average expected short rate from the observed bond yield. There are some drawbacks with this approach, however. Survey data are not updated frequently and (typically) include only a limited set of forecast horizons. Surveys may not always represent actual expectations of market participants, for instance because forecasters compete for business or for influence through their calls or because one or more large players have a disproportionate impact on the market.The modern term structure literature provides an alternative way of disentangling term premia and interest rate expectations.3 The starting point is the assumption that bonds are priced in a way that precludes arbitrage opportunities across all maturities. In other words, the pricing is assumed to make it impossible to form a portfolio consisting of bonds with different maturities that generates a riskless profit.Typically, these models represent the time-series dynamics of bond yields with simple vector autoregressions. Restrictions are then imposed to reflect the no-arbitrage assumption across the entire maturity spectrum, giving rise to alternative, risk-neutral dynamics for yields. The differences between the actual ("objective") and the risk-adjusted dynamics reflect market participants' risk preferences. By exploiting these two dynamics, it is possible to decompose yields into expectations of future interest rates and term premia.Much of the term structure literature has relied on models where a small set of yield-based factors is assumed to drive bond yield movements. One example is the model proposed by Adrian et al (2013, henceforth ACM), which uses principal components of bond yields as pricing factors.4 The factors are weighted sums of yields with weights derived through statistical techniques. These models are appealing for their simplicity. That said, the yields so derived are prone to overreacting to changes in the general level of interest rates because they rely only on yield information. In particular, they may tend to interpret a change in interest rates as evidence that the steady-state (long-run) interest rate has changed correspondingly. This leads to exaggerated movements in distant-horizon interest rate projections.But there are alternative approaches. Precisely because term structure models try to capture the very high persistence of yields, ie their tendency to be highly correlated over time, some researchers have included interest rate survey data in the models, even as they recognise the shortcomings of such data.5 Kim and Wright (2005, henceforth KW) use one such model to estimate US term structure dynamics based on survey data on future three-month interest rates. Just as in the previous set of models, however, the factors driving interest rates are derived only from interest rates themselves.Other models include macroeconomic factors in addition to, or instead of, yield factors. These macroeconomic factors are motivated by what investors are likely to care about when pricing bonds. Typically, they include inflation and some measure of economic activity.6 Whatever the choice of factors used, these typically also represent the risk factors in the pricing model, ie the factors that determine the size and the dynamics of risk premia. An example of such a model is the one used by Hördahl and Tristani (2014, henceforth HT), which includes data on nominal and real (index-linked) yields, inflation, and a measure of economic slack ("output gap"), as well as survey data on future short-term interest rates and future inflation rates.With more data and assumptions, we can obtain still more detail about the components of long-term yields. Specifically, we can split the term premium into two parts: a real risk premium - the compensation required to bear risk associated with variable future short-term real interest rates - and an inflation risk premium, which is related to uncertain future inflation developments.7 And one can separate the expectations component into a part that reflects average expected future short-term real interest rates, and another that captures expected average inflation until the bond matures.As with any estimation exercise, there are important caveats. For one thing, all term premia estimates are model-dependent, and also subject to parameter uncertainty. Second, previously estimated term premia will change over time as the model parameters are updated, insofar as the most complete and up-to-date information is seen as useful in capturing earlier developments in model-implied expectations and premia. Third, macro data revisions will lead to changes in estimates based on models that use macro data. In some cases, such as with potential output series that are used to calculate the output gap, revisions can at times be substantial. Revisions of estimates therefore complicate the real-time performance of these models. And models that rely on unobserved variables such as the output gap are sensitive to the estimation of those variables, for instance, the measurement of trends as more data become available.Moreover, any model should be seen as a useful simplifying tool, but one that does not necessarily capture various real-life influences. An example of the latter is the recent experience with policy rates stuck at the zero lower bound (ZLB) or, in some cases, below zero (see eg Wu and Xia (2016, 2018)). For a number of reasons, zero or negative interest rates are likely to behave differently from positive ones. Models that do not explicitly take into account the probability of hitting the ZLB are good approximations when interest rates are far away from it. But, when interest rates are close to it, such models might generate interest rate forecasts below the bound as well as biased term premia estimates.US term premia estimates and recent developmentsWe start off by comparing estimates of term premia on 10-year US Treasury bonds obtained from the three term structure models discussed above. These are the ACM yield-factor-only model, the KW yield-factor model with additional information from surveys, and the HT macro-finance factor model that also includes survey information.Graph 1 plots the premia estimates from each of these models. The left-hand panel also plots a model-free alternative estimate, calculated as the 10-year yield minus the corresponding 10-year average short-rate expectation, as reported once a year by the Survey of Professional Forecasters (SPF).The graph illustrates how different methods can generate different levels of the term premia. Estimates derived from the ACM and the HT models can differ by as much as 200 bps. The discrepancy partly reflects the assumptions embedded in these estimates, as discussed above.8Nonetheless, these models broadly agree on the trends and dynamics of premia. All estimates suggest a general downward trend since the GFC. The trend accounts for a large share of the overall evolution in the 10-year yield (Graph 1, right-hand panel). All the models would agree that rising 10-year US Treasury yields in 2017-18 largely reflect an increase in the expected short rate over the subsequent 10 years. Correlations of monthly changes in premia estimates from different pairs of models range from 0.77 to 0.92.What might explain the fall in term premia since the GFC? Two potential contributing factors could be declining uncertainty about the projected path of short rates, and demand pressures from central banks and other price-inelastic purchasers of Treasuries.The general decline in the term premium during 2009-13 coincided with a smaller dispersion of survey expectations about future rates (Graph 2, left-hand panel). This reduced uncertainty may reflect forward guidance and other Fed communications policies. The fall in dispersion may also have reflected the smaller distance of short-term rates from zero, combined with the perception (reinforced by the Fed's forward guidance) that any rate increases were unlikely in the near term.9 This pattern ended around the time of the 2013 "taper tantrum", when comments from Fed officials led the market to expect an imminent removal of monetary accommodation.Purchases by the Fed and by the official sector outside the United States also played a role. The post-GFC downward trend in the term premium coincided with a sharp rise in the Fed's and foreign official holdings of Treasuries, in line with the notion that demand pressures from these sources helped to push down yields (Graph 2, centre panel).In addition, the downward trend of the term premium in the decade since the GFC may have been linked to the more appealing risk properties of bonds. Specifically, bond yields tended to fall in response to any sign of setbacks in the economic recovery as investors raised their expectations of further monetary stimulus or pushed back the expected start of policy normalisation. As often happens after a severe crisis, awareness of "tail risks" rose, and with it the desire to insure against such risks. Hence, in the GFC's aftermath, bonds took on some insurance-like properties. As a result, investors may have been willing to hold bonds even as the term premium fell towards zero or became negative. The resulting flight to safety boosted the demand for safe assets. Tighter regulatory requirements may also have played a role, such as for banks' holdings of liquid assets or collateralisation of derivatives positions.We can uncover some further general properties of term premia when we look over a longer time span. For one thing, term premia are normally countercyclical - although, as discussed above, tail risk concerns helped keep term premia low after the GFC. In other words, they tend to rise when output is below potential or the economy is in recession, as investors seek higher compensation for being exposed to interest rate risk in bad times (Graph 2, right-hand panel). The fall in term premia during the current recovery represents a return to this pattern. And near-zero term premia are not unprecedented: for much of the 1960s, the premium hovered just above zero. From 1961 to 2018, however, the average according to the ACM model (which can be estimated over the longest time period) was around 160 basis points.In addition to term premia, each modelling approach produces estimates of average expected short-term interest rate over any given horizon. All four measures discussed above show falling 10-year average expected short rates after the GFC (Graph 3, left-hand panel). The ACM model, which relies exclusively on yield information, displays a sharper initial decline, followed by an earlier rise. All four measures agree that the average expected short rate increased in 2017 and 2018.When we decompose the US 10-year yield further into real and inflation-linked components, we find that much of the initial decline in long-term yields during and after the GFC was due to a sharp drop in average expected real interest rates as the crisis unfolded. This was followed by a more gradual decline in expected real rates during the great recession that followed (Graph 3, right-hand panel). This observation is in line with the notion that investors' perception of the natural rate of interest may have fallen significantly during this time. Moreover, although the real risk premium remained elevated during and immediately after the Lehman collapse, it declined sharply as the Fed progressively eased monetary policy via unconventional measures. The decomposition also suggests that much of the rise in long-term yields in 2017-18 has been due to higher expected future real interest rates. By contrast, expected future inflation, the real risk premium and the inflation risk premium have changed little, with the real risk premium remaining unusually low.Euro area estimates and recent developmentsSimilar to US Treasury yields, the euro area's benchmark long-term government bond yields declined more or less steadily during the GFC and its aftermath.10 However, in 2014, euro area yields started to fall more rapidly than those in the United States. This was largely due to the market's anticipation of the ECB's asset-buying Public Sector Purchase Programme (PSPP) and its subsequent implementation (from early 2015). With a brief interruption, when they jumped in May-June 2015,11 euro area yields continued to decline until the second half of 2016. Since then they have risen only modestly, even as US yields have increased more decisively.To an even greater extent than for the United States, much of the decline in euro area yields up to mid-2016 reflected falling term premia (Graph 4, left-hand panel). The timing of this fall underscores the important role that supply-demand imbalances such as the ECB asset purchases (and the related market expectations) can play. Moreover, with economic growth weak, the hedging properties of core euro area sovereign bonds became particularly valuable to investors, leading them to tolerate even deeply negative term premia.As for the United States, term premia estimates for the euro area differ depending on the model used, though they agree on the overall trend and dynamics. The centre panel of Graph 4 displays 10-year premia estimates calculated following the ACM methodology, alongside the HT model estimates and estimates from a model used by the Bank of France.12 These estimates are less correlated than for US models. While the correlation of changes in premia between the HT and the ACM model is around 0.55, the premia estimated by the Bank of France are essentially uncorrelated with the other two. Apart from limited correlations, these estimates also differ in their overall levels. Towards the end of the sample period, the difference between the HT and ACM estimates is around 140 basis points. Since 2016, Consensus Economics has published quarterly long-term interest rate forecasts that can be used to back out model-free 10-year term premia estimates. These estimates (dots in Graph 4, centre panel) are closer to the HT premia and the Bank of France estimates, whereas the ACM estimates differ from the survey measure by around 100 basis points in recent quarters.It is not clear exactly what lies behind the wide range in premium estimates across models. But one reason why the HT model tends to produce considerably lower estimates may be that it relies on an array of data types, whereas the ACM model uses only nominal yield data. As noted above, a model that relies only on yield information may be more prone to interpret the very low level of interest rates in the past few years as evidence that the steady-state interest rate level has fallen substantially due to the highly persistent nature of interest rates. The HT model, by contrast, is further disciplined by the inclusion of real yields, macroeconomic data and survey expectations. Consistent with this, as noted, the HT average expected short-term interest rate is closer to the expectations expressed by survey respondents (Graph 4, right-hand panel).Just as in the United States, euro area term premia have been influenced by official sector asset purchases (Graph 5, left-hand panel) as well as the output gap (centre panel). A rise in official holdings likely helped to keep euro area bond yields low, but the steady (and clearly announced) pace of purchases makes it difficult to tie short-term fluctuations in the premia to these purchases. While weak macroeconomic performance may well have played a role after the GFC (for example, by pushing investors to safe assets), the steady narrowing in the euro area output gap since 2014 has been accompanied by a further drop in the term premium.We can gain further insights into the movements of euro area bond yields by decomposing the 10-year yield into its four components (Graph 5, right-hand panel). According to the HT model, while the drop in the euro area yield during the GFC was mainly due to falling average expected real interest rates, much of the sharp drop in 2014-15 seems to have been due to a rapidly falling real term premium. In contrast to the United States, where (except for a spike in 2012) inflation risk premia were more or less stable after the GFC, the fall in euro area yields was reinforced by a drop in the inflation risk premium. In other words, insofar as the ECB PSPP placed downward pressure on yields, it did so by lowering term premia, and more so on nominal than on real bond yields. In 2017 and 2018, modest increases in expected interest rates and in the inflation risk premium component led to a moderate increase in bond yields, although a decline in the real term premium offset much of the effects of changes in the other components. For US yields, by contrast, rising expected real rates have been accompanied by relative stability in the other components and have been largely passed through into nominal yields.Cross-country correlationsTerm premia are typically highly correlated across sovereign yields in different countries, contributing to significant co-movements in the yields.13 Term premia in the euro area and the United States have indeed followed one another closely in recent years. The rolling one-year correlation between monthly changes in US and euro area term premia has typically hovered between 0.6 and 0.9, although it has displayed wider swings since the GFC (Graph 6, left-hand panel). In particular, the rolling correlation dropped markedly after the Lehman collapse in 2008, at the peak of the euro area sovereign debt crisis in 2012, and as the ECB launched its bond purchase programme in 2015. However, there was a clear surge in the correlation of term premia around the time of the taper tantrum in 2013, when rising global premia reflected declining global risk appetite as the outlook for US monetary policy became less certain. The high correlation is largely driven by the real components. Correlations of real risk premia tend to be much higher than those of inflation risk premia (centre panel).Looking back further in time, US and euro area term premia typically tend to be more correlated than the respective expectations components (Graph 6, left-hand panel). Historically, the term premium correlation has generally been above 0.5, reaching at times up to 0.93. In contrast, the correlation of interest rate expectations between the United States and the euro area has fluctuated between 0 and 0.6. This correlation has even fallen below zero during some periods, including 2003-04, when the fed funds rate was lowered to a then record-low 1%; the 2013 taper tantrum; and late 2015, when the Fed made its first post-GFC rate hike, with the ECB not moving in tandem. The low correlation of interest rate expectations reflects low correlations of both expected real rates and expected inflation (Graph 6, right-hand panel).ConclusionsYield curve models can offer a number of insights about the drivers of movements in US and euro area benchmark yields over the past several years. The estimated term premia can differ sharply depending on the model used but, in most cases, they have trended downwards since the GFC. While low term premia have helped to keep yields low, recent yield movements have tended to reflect shifts in expected short-term rates, particularly for the United States in 2017-18. Real risk premia, rather than premia for inflation risk, appear to have generally played an important role, while expected real rates have had a greater effect on expected short rates than expected inflation has.What drives the term premia? We have identified a number of possible factors, including uncertainty, official sector purchases, the business cycle and regulation. But the relative impact of these factors can shift over time and is very hard to measure. Moreover, other factors may also be at work. Sound estimation methods for the bond yield components are an important first step in understanding how these factors play out in bond markets and the wider economy.ReferencesAng, A and M Piazzesi (2003): "A no-arbitrage vector autoregression of term structure dynamics with macroeconomic and latent variables", Journal of Monetary Economics, vol 50, no 4, pp 745-87.Adrian, T, R Crump and E Moench (2013): "Pricing the term structure with linear regressions", Journal of Financial Economics, vol 110, no 1, pp 110-38.Dai, Q and K Singleton (2000): "Specification analysis of affine term structure models", Journal of Finance, vol 55, no 5, pp 1943-78.Domanski, D, H S Shin and V Sushko (2015): "The hunt for duration: not waving but drowning?", BIS Working Papers, no 519, October.Duffie, D and R Kan (1996): "A yield-factor model of interest rates", Mathematical Finance, vol 6, pp 379-406.Hördahl, P and O Tristani (2014): "Inflation risk premia in the euro area and the United States", International Journal of Central Banking, vol 10, no 3, pp 1-47.Hördahl, P, O Tristani and D Vestin (2006): "A joint econometric model of macroeconomic and term structure dynamics", Journal of Econometrics, vol 131, no 1/2, pp 405-44.Joslin, S, K Singleton and H Zhu (2011): "A new perspective on Gaussian dynamic term structure models", Review of Financial Studies, vol 24, pp 926-70.Jotikasthira, C, A Le and C Lundblad (2015): "Why do term structures in different currencies co-move?", Journal of Financial Econometrics, vol 115, no 1, pp 58-83.Kim, D and A Orphanides (2007): "The bond market term premium: what is it, and how can we measure it?", BIS Quarterly Review, June, pp 27-40.--- (2012); "Term structure estimation with survey data on interest rate forecasts", Journal of Financial and Quantitative Analysis, vol 47, pp 241-72.Kim, D and J Wright (2005): "An arbitrage-free three-factor term structure model and the recent behavior of long-term yields and distant-horizon forward rates", Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System, no 2005-33, August.Modigliani, F and R Sutch (1966): "Innovations in interest rate policy", American Economic Review, vol 56, no 1/2, pp 178-97.Monfort, A, F Pegoraro, J-P Renne and G Roussellet (2017): "Staying at zero with affine processes: An application to term structure modelling", Journal of Econometrics, vol 201, no 2, pp 348-66.Riordan, R and A Schrimpf (2015): "Volatility and evaporating liquidity during the bund tantrum", BIS Quarterly Review, September, pp 10-11.Rudebusch, G and T Wu (2008): "A macro-finance model of the term structure, monetary policy, and the economy", Economic Journal, vol 118, no 530, pp 906-26.Vayanos, D and J-L Vila (2009): "A preferred habitat model of the term structure of interest rates", NBER Working Papers, no 15487, November.Wu, J and F Xia (2016): "Measuring the macroeconomic impact of monetary policy at the zero lower bound", Journal of Money, Credit and Banking, vol 48, no 2/3, pp 253-91.--- (2018): "The negative interest rate policy and the yield curve", BIS Working Papers, no 703.1 The authors would like to thank Claudio Borio, Phurichai Rungcharoenkitkul, Hyun Song Shin and Philip Wooldridge for comments and Bilyana Bogdanova and Nicholas LeMercier for research assistance. The views expressed in this article are those of the authors and do not necessarily reflect those of the BIS.2 See also Kim and Orphanides (2007) for a review of key concepts and methods.3 See eg Duffie and Kan (1996), Dai and Singleton (2000) and Joslin et al (2011).4 In principal components analysis, a set of time series (such as bond yields of different maturities observed over time) is used to generate a second set of series (principal components), which are not correlated with (orthogonal to) each other and which, as a group, capture a large share of the variation in the original series. The first principal component usually accounts for the most variation in the underlying variables; each additional principal component allows a more accurate rendering of the original series.5 See eg Kim and Orphanides (2012).6 Examples include Ang and Piazzesi (2003), Hördahl et al (2006), and Rudebusch and Wu (2008).7 Typically, this requires inflation data in addition to yields, in order to construct a real stochastic discount factor alongside the nominal one. Moreover, data on real (index-linked) bond yields are helpful to pin down the dynamics of real yields, but not strictly necessary. The Hördahl and Tristani (2014) model uses real yield data in addition to nominal yields, macro factors and survey information.8 The discrepancies are not, however, explained by fitting errors implied by the models, as these models tend to fit the yield data very well. For example, the standard deviation of the residual between the observed 10-year yield and the corresponding yield from the HT model is below 9 basis points over the January 1981 to July 2018 sample period.9 Towards the end of this period, policy rates and some bond yields did fall below zero in a few economies, including the euro area, although not in the United States.10 Benchmark government bond yields in the euro area are often proxied by government bond yields in France or Germany, as the credit risk of these bonds is deemed to be negligible.11 This episode corresponded to a short-lived deterioration in market liquidity. See Riordan and Schrimpf (2015).12 These models make use of different euro area benchmark rates: the HT model uses 10-year French government bond yields, the ACM model 10-year German government bond yields and the Bank of France 10-year OIS rates on EONIA. However, these benchmark rates are very close to each other, with an average absolute difference of around 25 basis points.13 See eg Jotikasthira et al (2015).About the authorsBenjamin H CohenMore from this authorPeter HördahlMore from this authorDora XiaMore from this author
[keywords] => F Xia EONIA Piazzesi the BIS.2 See V Sushko Mathematical Finance Philip Wooldridge OIS the United States Domanski the Federal Reserve the Federal Reserve System PSPP Nicholas LeMercier ECB Peter Hördahl fed Journal of Finance US Treasuries the Bank of France.12 Riordan Germany Duffie Hyun Song Shin HördahlMore Phurichai Rungcharoenkitkul Schrimpf linear Consensus Economics Modigliani the Survey of Professional Forecasters Journal of Financial Economics Xia Graph 4 Journal of Econometrics Vayanos Benjamin H Cohen Journal of Financial and Quantitative Analysis Review of Financial Studies Hördahl et al Claudio Borio Journal of Money, Credit and Banking Kim and Orphanides Treasuries ZLB 926-70.Jotikasthira GFC H Zhu Rudebusch American Economic Review US Treasury aftermath.10 However BIS Working Papers Wu Finance Lehman ACM the United States.10 Benchmark BIS Quarterly Review Dora XiaPDF Kim Journal of Monetary Economics Joslin et al Great Financial Crisis Jotikasthira et al Dai and Singleton Kan (1996 Fed Sutch K Singleton Journal of Financial Econometrics Bilyana Bogdanova Hördahl and Tristani H S Shin US KW Board of Governors F Pegoraro the Bank of France Public Sector Purchase Programme France Wright International Journal of Central Banking NBER Working Papers monthly changes euro bonds term premia helped yields models estimate term term rates future
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[description] => The International Grand Committee on Big Data, Privacy, and Democracy, a unique collaboration between lawmakers determined to bring greater accountability to large online platforms, convenes in Ottawa this week. The members of parliament that make up the grand committee hail from a number of countries concerned about the effects of information technology on their nations’ social and political life, including Argentina, Canada, Chile, France, Germany, Ireland, Latvia, Singapore, Ukraine, and the United Kingdom. With many of these countries confronting upcoming elections, their lawmakers gather to question representatives from Facebook, Google, and Twitter on data security, user privacy, and foreign influence campaigns.
This grand committee meeting is the latest sign that the international mood toward large technology companies has permanently shifted from its early enthusiasm toward profound concern. When activists used social media to organize the Arab Spring protests, information technology was heralded as a tool for democratic progress. In the intervening years, events from Russia’s online influence campaign ahead of the 2016 U.S. presidential election to the livestreamed massacre at two mosques in Christchurch, have spawned a global “techlash.” Calling out the ways in which information technology poses a serious threat to democratic societies, an international chorus has declared the end to an era of self-regulation.
A new report by myself and Brookings Senior Fellow Bill Galston outlines the major political and economic threats posed by today’s largest online platforms. In it, we lay out the laws and proposals taken up in countries outside the U.S. and consider the ways in which the U.S. might follow or deviate from actions pursued elsewhere to rein in big tech.
While Australia, Canada, the European Union, France, Germany, New Zealand, and the United Kingdom among others have passed new laws regulating online privacy and harmful content, commissioned reports on disinformation and journalism in the digital age, and levied steep fines against tech firms, the United States remains notably absent from this international movement. Not one of the 130 U.S. lawmakers asked to participate in today’s grand committee meeting accepted the invitation. Just two weeks ago, the U.S. refused to sign onto the “Christchurch Call,” a non-binding agreement between governments and tech companies to better police the harmful content that too often makes its way online. With the U.S. on the sidelines, other countries have become the de facto regulators of American tech companies, introducing new rules governing online advertising and digital privacy, taking a tough approach to protecting competition in the technology sector, and issuing fines against companies that exploit their market power to entrench their dominance.
The political threat
When it comes to monitoring online political advertising, a number of countries have either introduced or proposed rules requiring online platforms to create a publicly searchable database of political advertisements. While Russia’s online influence campaign during the 2016 U.S. presidential campaign revealed how actors interested in interfering with the democratic process could leverage online platforms to micro-target voters ahead of elections, U.S. lawmakers’ efforts to advance their own transparency requirements have stalled even as the 2020 U.S. presidential election looms.
An international push to enumerate individual privacy rights for the digital age has also gained steam. For years, tech companies have been able to collect, use, and share users’ data largely unconstrained and high-profile data breaches—such as Cambridge Analytica—have highlighted the inability of some of the largest tech companies to protect users’ information from misuse. In response, the European Union passed the General Data Protection Regulation, a comprehensive data privacy law that has made the EU the global leader on digital privacy issues. Lawmakers in Australia and Canada are considering adopting a similar privacy framework.
In the U.S., the Federal Trade Commission will soon conclude its investigation of whether Facebook violated its consent decree when the social network failed to prevent Cambridge Analytica from gathering personal data without users’ consent. Facebook expects the Commission will issue a $5 billion fine, the largest any U.S. regulator has levied against a technology company even though the fine represents just six percent of Facebook’s cash reserves. Enforcement, however, is not a substitute for legislation. At a time rife with partisan gridlock, a number of lawmakers in both parties are interested in passing a comprehensive data privacy law.
U.S. lawmakers, however, are reluctant to consider measures regulating harmful content online, concerned that such regulation might violate Americans’ right to free speech. A number of other countries have taken a different tack, recognizing the large and powerful platforms bad actors have at their disposal to post and disseminate violent and extremist content, fake news, and disinformation. In the wake of the Christchurch mosque massacres, Australian lawmakers passed a law that subjects online platforms to huge fines and tech executives to jail time if violent material is not removed from platforms in a timely manner. Eighteen governments and five companies recently signed onto the pledge crafted by New Zealand Prime Minister Jacinda Ardern and French President Emmanuel Macron to work together to prevent the publication and spread of harmful content online. In a bold proposal, the United Kingdom Government has called for establishing a new regulatory body tasked with monitoring harmful content online.
The economic threat
A number of countries recognize that online platforms are not only a tool for bad actors interested in weakening democracy through the spread of extremist content and fake news, but also indispensable business partners in the circulation of legitimate, journalistic content that is essential for supporting a healthy democracy. Yet, as online platforms use journalistic content to attract and engage users, many of whom have come to rely on social media as a primary source of news, platforms threaten the economic viability of media organizations whose content they circulate. Driven by a concern that platforms’ dominance in digital advertising has hurt news outlets’ bottom lines, reports commissioned by Australia’s competition enforcement agency and the British government argue that online platforms pose a serious threat to the provision of news and propose ways to sustain journalism. U.S. lawmakers, meanwhile, have not focused on the industry’s survival in the digital age.
Activity conducted across the digital economy mirrors this imbalance between content creators and online platforms, as platforms confronting little competition are able to exploit their market position. While market dynamics in the digital economy inherently favor the largest players, some tech companies have deliberately undermined competition, leading to a tech sector dominated by just a few big actors. Competition enforcement agencies, from the European Commission to Germany’s Bundeskartellamt are investigating how to modernize enforcement to better promote competition in the digital economy, including thinking of data as a new and important source of market power.
U.S. antitrust authorities and lawmakers are leading a similar effort domestically. The consumer welfare standard that guides antitrust enforcement in the U.S. has failed to capture concentration in the tech sector as dominant technology companies have evaded scrutiny by offering their services for free or at a low cost. The Federal Trade Commission is beginning to consider how to examine competition in the technology sector while a number of U.S. lawmakers have called for modernizing antitrust enforcement for the digital age.
For years, U.S. lawmakers feared intervening in one of the most dynamic sectors in the economy. However, few can deny the mounting evidence revealing large technology platforms exacerbate political vulnerabilities that threaten a healthy democracy and the tech sector’s concentration slows and stifles innovation. As U.S. lawmakers and enforcers consider regulatory and antitrust action of their own, they can draw on the experience of other democratic governments around the world. The “Big Tech Threats: Making Sense of the International Backlash Against Online Platforms” paper released today, can serve as a guide.
The Brookings Institution is committed to quality, independence, and impact.
We are supported by a diverse array of funders. In line with our values and policies, each Brookings publication represents the sole views of its author(s).
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[description] => Remarks by Mr Agustín Carstens, General Manager of the BIS, at the Markus' Academy, Princeton University's Bendheim Center for Finance, Basel, 6 May 2021.BIS speech | 06 May 2021by Agustín CarstensPDF full text (691kb) | 12 pagesAs public institutions, central banks are naturally concerned about inequality. The recent trend of rising inequality is largely driven by structural factors such as globalisation and technological change, and is not a monetary phenomenon. However, monetary policy can have an impact on the distribution of income and wealth over shorter horizons, since prolonged periods of high inflation and recessions disproportionately hit the most disadvantaged. Hence, the best contribution monetary policy can make to an equitable society is to try to keep the economy on an even keel by fulfilling its mandates of stable prices and sustainable economic activity. Mandated tasks have become increasingly challenging over the past decades, due to changes in the nature of the business cycle: low and less responsive inflation, and the growing role of financial factors. Monetary policy faces difficult trade-offs that it cannot address on its own. Other policies, notably prudential, fiscal and structural, must play their part. Central banks can also facilitate a more equitable society by wearing their non-monetary hats, not least as prudential authorities, guardians of payment and settlement systems, and promoters of financial development and inclusion. These functions help to broaden opportunities and reduce barriers to growth and development, fostering a more equitable distribution of income.About the authorAgustín CarstensMore from this author
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[blurb] => Participants collaborated to develop a cutting-edge API builder for financial supervision, Leveling the AI Readiness Playing Field: API Innovation Hackathon
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[description] => The 2024 API Innovation Hackathon, part of the annual SupTech Week organised by Digital Transformation Solutions through the Cambridge SupTech Lab, ran virtually from December 2 to December 13, 2024 with:
- 104 Participants
- 18 Registered teams
- 16 Countries represented
- 20 Mentors
- 3 Awarded teams
The hackathon focused on developing a cutting-edge API builder for financial supervision, leveraging open standards and tools to revolutionise regulatory frameworks. The goal was to create efficient, adaptable, and future-ready solutions that enhance financial authorities’ ability to manage data and intelligence flows.
Background
Financial authorities around the globe are starting to leverage next-generation suptech – including GenAI – for interactive chatbots, dynamic risk management systems, and other advanced suptech applications. Despite advancements in analytics through AI and Machine-Learning, many financial authorities are limited in the aggregate data they receive through compliance filings. Application Programming Interfaces (APIs) facilitate the automated ingestion and validation of granular data, ensuring clean data is in place and allowing everyone to harness benefits in the form of actionable and trustworthy results. Currently, financial authorities are required to provide comprehensive funding for the development and design of APIs, starting from scratch for each use case. The adoption of API standards, enabling tools and open source software can play a critical role in driving inclusive growth, fostering competition and innovation, and enhancing financial inclusion
Solution
Schema
Streamlining the development of data standards, utilising tools such as FINOS’s Morphir, OS-C, and Legend.
Builder
Crafting API documentation and libraries with tools like Swagger’s open-source editor and the Open API Specification.
Intelligence
Demonstrating how unified APIs can drive deeper and more efficient analysis, powered by the GovSpace Data Gymnasium www.govspace.io.
Access the Solutions Showcase: https://www.youtube.com/watch?v=Q0eVhlr-ZJM&list=PL9lvJiV1f-gZ789IV39E7ty9YkJ907AJ3&index=32
Watch the Awards Ceremony: https://www.youtube.com/watch?v=es_IgB9M52c&list=PL9lvJiV1f-gZ789IV39E7ty9YkJ907AJ3&index=39
Awards
Best data schema design
Recognises the team with the most effective approach to data standards and schema development. Team BOT – For seamlessly integrating financial and environmental risk data, enabling smarter, more resilient financial decision-making.
Best API builder
Awarded to the team with the most innovative, saleable and functional API solution. Team AI-Phalanx – For building APIs and dashboards to track progress on climate finance indicators, integrating IMF climate finance data, and defining API schemas per Open API standards.
Best use of open standards
Honours the team that best utilises open standards and tools to enhance their API solution. Team SupTech Newbies – For creating tools to detect and prevent mis-selling practices, protecting consumers and supporting financial system integrity.
People’s choice award
Voted on by participants and mentors, this award recognises the most popular solution.
Judging Criteria
Innovation and creativity
Novelty and uniqueness of the data schema, API builder, and intelligence solutions.
Practicality and usability
Ease of use and practical application in suptech environments at financial authorities.
Harmonisation with other stakeholders
Consideration for cost and time efficiencies for regulatory compliance and regtech integrations within supervised entities.
Impact and scalability
Potential impact on financial supervision and scalability of the solution, including incorporation of machine-readable regulation.
Technical excellence
Adherence to open standards and use of open tools.
Participation
Participants brought a wide range of expertise, including data engineers, database architects, product developers, data visualisation designers, data scientists, data analysts, and business analysts. The event welcomed teams from 16 countries, showcasing a truly global reach: Canada, Egypt, Germany, Ghana, Greece, India, Japan, Kenya, Nigeria, Saudi Arabia, South Africa, South Korea, Sudan, Uganda, United Kingdom, United States of America.
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[description] => Opening remarks by Mr Eddie Yue, Chief Executive of the Hong Kong Monetary Authority, at the launch ceremony for Project Ensemble Sandbox, Hong Kong, 28 August 2024.The views expressed in this speech are those of the speaker and not the view of the BIS.Central bank speech | 29 August 2024by Eddie YuePDF full text (8kb) | 4 pagesGood afternoon everyone, and a warm welcome to you all to the launch ceremony of the Project Ensemble Sandbox. Today's event marks a significant milestone in our journey towards creating a dynamic and innovative digital asset ecosystem in Hong Kong. I don't think it's an overstatement to say that we are living through a transformative era in the financial industry. The rise of digital money and new technologies is reshaping the financial landscape. The central bank community has responded with its own innovation efforts around central bank digital currencies, or CBDCs, which have the potential to underpin the new digital economy.Since 2017, the HKMA has been at the forefront of research and innovation on CBDCs, with projects like mBridge, which has recently reached the Minimum Viable Product (MvP) stage, and e-HKD, which will commence its Phase 2 Pilot Programme shortly.But we recognise that CBDCs will not, and should not, be the only force driving innovation. Tokenisation, which like CBDCs often rides on blockchain technology, also provides the foundation for innovative pilots looking at how financial transactions can be conducted through the tokenisation of commercial bank money and both financial and real-world assets. Tokenisation has the potential to make financial transactions more efficient, more transparent and less costly, and may represent the future of finance.Today, I would like to outline the role that the Ensemble Sandbox is intended to play within the HKMA's broader vision of cultivating a dynamic digital asset ecosystem in Hong Kong.Project EnsembleWe launched Project Ensemble in March this year with the aim of supporting and advancing the development of the tokenisation market in Hong Kong.At the core of Project Ensemble are two key elements: collaboration and the sandbox. As the establishment of the Architecture Community shows, the Project brings together industry participants, regulators and innovators to shape the future of digital assets. Meanwhile, the Ensemble Sandbox is a new financial market infrastructure that facilitates the full life cycle of a tokenised asset transaction: from the creation and trading of tokenised assets, through payment and settlement using tokenised commercial-bank deposits, to final interbank settlement through CBDC issued by the HKMA.The Sandbox serves four major purpose:First, it enables industry participants to explore the use case for tokenised assets in a controlled environment;Second, it allows industry participants to test and review the technical compatibility among digital assets, tokenised deposits and CBDCs;Third, the technical parameters and design protocols of the pilot use case will serve as important inputs in setting common industry benchmarks for tokenisation; andAnd finally, it promotes innovative use cases that contribute to resolving pain points in financing the real economy, including in supply chain financing.The Sandbox will also cover cross-border payment functionalities. In relation to this, I would like to highlight our recent collaboration with the Banque de France, where our Sandbox and their equivalent system have been successfully connected. Pilots have been done to demonstrate that atomic cross-border settlement can be performed through the linked systems. Under the MoU signed between the two institutions, we will continue to experiment with innovative cross-border pilots in CBDCs and tokenisation.Central banks are well positioned to lay the foundations for the tokenisation ecosystem. But for the trend to take off, we need industry innovators to actively participate, to try out new use cases, and to assess their commercial viability and scalability. We need to get into this together. Our theme today – "Tokenising Together, Today and Tomorrow" or four "T"s as our team calls it - is more than just a slogan. It embodies the essence of Project Ensemble, and represents a strategic path for collaboration. Allow me to elaborate on how we plan to put these four "T"s into action.Tokenising Together"Tokenising Together" captures the spirit of "co-creation", which is central to Project Ensemble. The word "Ensemble" indicates cohesion and unity, which reflects our wish to unite industry efforts to push forward Hong Kong's tokenisation market. In fact, the participation of so many of you today is a clear example of how such an "Ensemble" is already being brought to life.Since the establishment of the Architecture Community in May, we have been working closely with Community members to co-develop the Sandbox architecture and interoperability standards, which are foundational to the successful launch of the Sandbox.I would like to congratulate all our banks in the Architecture Community on successfully integrating their tokenised deposit infrastructure with the Sandbox, paving the way for payment-versus-payment (PvP) and delivery-versus-payment (DvP) experiments in the coming months.Beyond the Sandbox's evolution, Project Ensemble has also drawn the attention of a broad spectrum of stakeholders from the finance and tech areas, including central banks, financial entities, tech corporations, and local startups. Within just five months, we have seen a wave of enthusiastic feedback suggesting innovative use cases that promise to address many of the current operational challenges in finance and trade.Among these use cases, those involving the tokenisation of investment assets are of particular interest. And here I would like to express our appreciation of the SFC's support in reviewing the legal and regulatory frameworks for asset tokenisation, which has been essential to our tokenisation efforts. I would like to thank Julia and her team for their support and look forward to her sharing in a moment.Tokenising TodayLet me now turn to the notion of "Tokenising Today". As we embark on a journey that could make transformative changes for the future, it is essential to take decisive steps today.The launch of the Sandbox is a significant step forward towards harnessing the power of blockchain technology and smart contracts. We see the Sandbox as a pioneering financial infrastructure and a collaborative platform to test and refine different use cases, covering areas ranging from fixed income and investment funds, liquidity management, green and sustainable finance, to trade and supply chain finance.But the potential of the Sandbox extends far beyond these initial applications. It is designed in a way that will enable it to support various forms of digital money and digital assets, and ensure seamless integration with other financial infrastructures in the future.Tokenising TomorrowAnd this brings me to the notion of "Tokenising Tomorrow". Our actions today are guided by the vision of cultivating a vibrant digital asset ecosystem in Hong Kong. The pilots under the Sandbox are just the beginning. We envision a future where these initiatives evolve into tangible real-life applications that will potentially transform our financial landscape. In order to prepare for this early, we are already actively working to evolve the Sandbox into a robust, production-ready financial infrastructure that will support real-money tokenised transactions in Hong Kong in the future.Over the years, the HKMA has built an efficient multi-currency platform with extensive domestic and overseas linkages, which has proved essential to growing our global financial business and underscores our legacy of innovation in financial infrastructures. However, to remain competitive in an ever-evolving landscape, we must continuously build upon this rich heritage. As financial technology takes centre stage in the future of finance, we invite you to join us in showcasing Hong Kong's innovative mindset and ability to conduct pioneering work in the tokenisation market. By doing so, we not only reinforce Hong Kong's status as a premier international financial centre, but also create an environment for new business opportunities, talent and expertise. Our commitment to innovation will continue to draw global players and skilled professionals to our city, fostering a vibrant digital asset ecosystem. Together, we can position Hong Kong as a leader in the financial technology revolution, ensuring that we remain at the forefront of the global financial landscape.Thank you.About the authorEddie YueMore from this authorRelated informationMore speeches from "Hong Kong Monetary Authority"Country page: Hong Kong SAR
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[description] => Welcoming remarks by Dr Jens Weidmann, President of the Deutsche Bundesbank and Chairman of the Board of Directors of the Bank for International Settlements, at the G20 conference "Digitising finance, financial inclusion and financial literacy", Wiesbaden, 25 January 2017.The views expressed in this speech are those of the speaker and not the view of the BIS.Central bank speech | 25 January 2017by Jens WeidmannPDF version (50kb) | 6 pages1. IntroductionYour MajestyYour excellenciesHonourable members of the G20 delegationsLadies and gentlemenWelcome to Wiesbaden and specifically to the G20 conference on "Digitising finance, financial inclusion and financial literacy"!We are deeply honoured and privileged to have with us today Queen Máxima of the Netherlands. Thank you, Your Majesty, for joining us at this conference.It is a coincidence, but a very apt one, that this conference is being held at Schloss Biebrich. This baroque castle served as the ducal residence for the independent Duchy of Nassau between 1816 and 1866. The House of Nassau, in turn, is the parent house of the Dutch Royal Family, as you can tell from the dynasty's name, which is Huis van Oranje-Nassau.That being said, Queen Máxima most certainly did not come here today to visit a castle that once belonged to her husband's ancestors.Rather, she is here to deliver a speech in her capacity as the United Nations Secretary-General's Special Advocate for Inclusive Finance for Development.2. The German G20 presidencyFinancial inclusion is without doubt an important topic because it can influence the extent to which financial services and innovations can improve our lives. And that's an aim we should all be interested in.In an effort to improve the long-term global economic conditions for all, the agenda of the German G20 presidency is geared towards three objectives: building resilience, improving sustainability, and assuming responsibility. To this end, Germany has set three main priorities for discussions between finance ministers and central bank governors and among the G20 working groups.Strengthening the resilience of national economiesShaping digitalisationPromoting investment, particularly in AfricaWe would like to invite you to discuss all these topics in an open and constructive atmosphere of mutual trust and cooperation. In our view the success of the G20 process depends on the conviction that international cooperation and an open markets approach provide benefits for all countries and peoples involved.It is key for our policy to provide new chances for everybody in our societies by driving forward inclusive global growth. Let's keep this in mind.Coming back to this year's programme, I would like to mention three additional conferences which will provide a forum for analysing background topics and fostering an exchange of views between academics, practitioners and official bodies. Our conference today is one of them.Unlike the main meetings, conferences like today's are an opportunity to take a broader perspective - not only in terms of topics but also with regard to countries' experiences. They allow us to invite representatives from non-G20 countries and to learn from them.Over the conference dinner this evening, for example, we will be hearing a speech from Deputy Prime Minister Mateusz Morawiecki of Poland, which is a very advanced economy in the field of electronic banking. And in a workshop tomorrow, Patrick Njoroge, governor of the Central Bank of Kenya, will share with us his country's broad experience in matters of digital financial inclusion.3. Opportunities and risks of digital financeLadies and gentlemenMore than 20 years have passed since Bill Gates famously said that "Banking is necessary, banks are not".While banks still exist - and I am sure they will continue to do so -, recent developments have shown that non-banks are just as capable of providing bank services. And that is not least due to the huge strides made in the field of information and communications technology (ICT), which has opened up a whole new world of possibilities for designing and distributing financial services.And this has even transformed traditional banking business. Online banking, for example, has become the main point of access for many bank customers.Digital finance, and the fintech industry in particular, have experienced very rapid growth in recent years on the back of both supply-side and demand-side forces.On the supply side, technological progress plays an important role, but so, too, do efforts to drive down the costs of financial services. These forces are being propelled by the increasing availability of ICT infrastructure, the provision of unique access points to financial services, and the growing number of digital natives.And on the demand side, "always on" customers are increasingly expecting to be able to bank with a minimum of fuss, whenever and wherever they like.Digital finance opens up a host of opportunities, but we should not neglect the risks it entails. But how can we capitalise on these opportunities without losing sight of the potential risks? That is a key question of this conference - one that will be addressed by a panel discussion and also by Bank of England governor Mark Carney in his keynote speech this afternoon.From an economic point of view, digital finance can deliver a wealth of benefits. First of all, digital financial services can bring about significant efficiency gains. Digitalisation can also stoke competition within the financial system and raise the contestability of financial markets. Some commentators even argue that digitalisation has the potential to revolutionise financial services and infrastructure.The key buzzword here is "disruptive". And many believe the most disruptive potential is to be found in blockchain or distributed ledger technology, which promises to allow payment transactions and securities settlement to bypass banks and central counterparties altogether.Originally developed for the bitcoin virtual currency, this distributed ledger technology, it would appear, has turned out to be a multi-purpose tool. And even central banks - which aren't typically known for being early adopters of new technologies - are currently doing experimental research on the potential use of blockchain.The Bundesbank, for example, has recently launched a joint project with Deutsche Börse to develop a blockchain-based prototype of a securities settlement system. But even apart from radically transforming the payments and securities settlement infrastructure, digitalisation enables newcomers to mount a challenge against incumbent market players.Data-driven technologies can boost the transparency of the financial system and thus reduce information asymmetries. Big data analysis, for example, can improve the estimation of default risks even in the absence of a longstanding bank-customer relationship.An increasing number of suppliers of financial services is particularly good news for households and enterprises lacking access to traditional sources of finance. In the end, this might drive up the number of projects that receive financing.Online crowdfunding or peer-to-peer lending platforms might enable investment projects which would otherwise be too risky or too small for traditional banks, to go ahead.In general, digital finance facilitates access to financial services. And this benefit is not confined to tech-savvy consumers in advanced economies. Indeed, digital technologies can be key drivers of financial inclusion in less developed countries, too.In Kenya, for example, the share of people with a financial account rose from 42 % in 2011 to 75 % in 2014. Over the same period, the respective global figure rose from 51 % to 61 %.In tandem with the mounting ubiquity of cell phones, mobile money accounts have gained popularity, particularly in Sub-Saharan Africa. In some countries, there are even more adults with a mobile money account than a conventional bank account.1Financial inclusion is thought to be conducive to promoting economic growth and lowering inequality.2 Financially included people are in a better position to start and develop businesses, to invest in their children's education, to manage risks, and to absorb financial shocks.On the other hand, there is a trade-off between financial inclusion and financial stability. Expanding access to financial services - especially to credit - at too fast a pace and with too little control exposes economies to stability risks, and households to the risk of over-indebtedness. The Indian microfinance crisis in 2010 showed us what can happen if too many households have access to credit despite being subprime borrowers.And that is why financial literacy is so crucial. People with access to finance need a basic understanding of financial concepts like compound interest and risk diversification.Surveys, however, provide some worrying results. According to an International Survey of Adult Financial Literacy Competencies, which was commissioned by the G20 and published by the OECD, overall levels of financial literacy, as indicated by knowledge, attitudes and behaviour, are relatively low.3And another study, the S&P Global Financial Literacy Survey, which was supported by the World Bank, reveals that two out of three adults are not financially literate, albeit with major variations across countries.4 While more than half of adults are financially literate in most of the advanced economies, that goes for fewer than one-fifth of people in some developing or transformation countries.Tomorrow's workshop on "Digitising finance and financial literacy" moderated by Annamaria Lusardi, who is one of the authors of the S&P Survey, will discuss how financial literacy could be improved.Another OECD report on financial literacy among G20 economies will be prepared for release during the course of the German G20 presidency in 2017.Financial literacy is of key importance for individuals, for societies, and even for central banks.Effective monetary policy communication relies on a basic grasp of concepts such as inflation and interest rates. You can only really follow the monetary policy debate, say, if you understand the idea of the real rate of interest, because real interest rates determine investment and consumption decisions.Surveys show that a basic understanding of economic concepts and a degree of knowledge about monetary policy are essential for inspiring trust in central banks. And trust, ladies and gentlemen, is the core asset of central banks.Central banks also rely on people's appreciation of price stability, because, ultimately - as Otmar Issing, former chief economist at the Bundesbank and the ECB, once put it - "every society gets the rate of inflation it deserves and basically wants".Central banks, then, would be well-advised to promote economic and financial literacy. And let me also mention in this regard that the Bundesbank extensively overhauled and revamped its Money Museum recently. Our museum provides information about money, its history and the tasks facing today's central banks in straightforward, generally understandable language.Incidentally, one of the most popular exhibits at the new Money Museum is a 12.5 kg bar of gold from the Bundesbank's vaults, which visitors are invited to touch and feel. While this exhibit may be of minimal educational value, it does show that even in the age of digital finance and dematerialised money, people still appreciate tangible values.4. The potential impact of digital finance on financial stabilityLadies and gentlemenThere are, of course, other aspects of digital finance which have a bearing on financial stability.Herding behaviour, for example, could be amplified by automated advisory services in portfolio management. Robo advisors might exacerbate financial volatility and pro-cyclicality if the assets under management reach a significant level, which is not yet the case.Traditional banks in many countries are currently suffering from dwindling profitability due, most notably, to the low-interest-rate environment. Disintermediation, however, could intensify the problems of narrow profit margins. This might be the flipside of the mounting competition unleashed by the more widespread use of digitised financing. And decentralisation might make it more difficult to tell who is exposed to whom, and to detect where financial risks ultimately lie.Another point worth noting is that fintech business models have not yet run through an entire credit cycle. Experience with digital finance in economic downturns is very limited.That being said, it is quite obvious that regulating fintechs and the entire digital financial industry smartly without hindering financial innovation is warranted. That's why the objectives of the German G20 presidency include taking stock of the different regulatory approaches. Our aim is to develop a set of common criteria for the regulatory treatment of fintechs.Fintechs should not base their business models on regulatory loopholes. Using lax regulation to attract business is a mistake that was already made before the latest financial crisis. Whatever we do, we need to avoid a regulatory race to the bottom. Rather, we should go for a level playing field.To quote the words of the former ECB President Jean-Claude Trichet who said in 2010: "(-) the crisis has exposed the risk of regulatory arbitrage, shedding a more negative light on the competition among different systems and rules."Getting a clearer picture of fintechs' business activities is essential if we are to better understand whether and in what way they might pose a threat to financial stability. It is therefore an important endeavour of the Financial Stability Board to further investigate and promote data availability. Without reliable data, any assessment of risks is unfeasible.Another threat - and certainly not just to financial stability - comes from cyber risks.The more market infrastructures rely on digital technologies, the more vulnerable our interconnected global financial system becomes to criminal attacks, be it from computer hackers, cyber saboteurs or even terrorists.Cyber criminals have repeatedly targeted financial institutions around the world, including central banks. There are plenty of financial institutions I could name whose defences have been successfully breached. The damage unleashed by successful attacks goes beyond the financial loss incurred. Cyber-attacks can potentially undermine peoples' trust in the financial system.So to avoid jeopardising the positive impact of digital finance, it will be crucial to address these risks and for banks to manage their IT and cyber risks with as much diligence as they do their traditional banking risks.Cybersecurity risks will be a major item in a talk this afternoon with Thomas de Maizière, German Federal Minister of the Interior. And a research dialogue tomorrow will also address the topic of cyber security.5. ConclusionLadies and gentlemenThe history of information technology is strewn with bad predictions.IBM chairman Thomas Watson, for example, is alleged to have said in 1943, "I think there is a world market for maybe five computers". Ken Olsen, co-founder of Digital Equipment Corporation, said in 1977 that "There is no reason anyone would want a computer in their home". And Bill Gates, one of whose predictions I quoted earlier in my speech, promised at the 2004 Davos meeting, "Two years from now, spam will be solved."So bearing these remarks in mind, I am a bit reluctant to make any projections of my own about the future of digital finance. But still, it wouldn't seem foolish to predict that digital technologies and fintechs have the potential to fundamentally change the market for financial services with their innovative business models.Central bankers and regulators, then, need to carefully monitor the changing market environment and respond, as and when appropriate, to new and different types of risk in order to ensure that the benefits of digital innovation are fully reaped.How can we harness the benefits of digitalisation and simultaneously mitigate the risks it involves?This is the key question of this conference. And I am pleased that so many leading experts have agreed to take part. I'm absolutely certain that our exchange of views will provide important stimulus for discussions at our official G20 meetings.And now it is a great privilege for me to give the floor to Her Majesty Queen Máxima of the Netherlands.Queen Máxima has served as the United Nations Secretary-General's Special Advocate for Inclusive Finance for Development (UNSGSA) since 2009.In this capacity, Queen Máxima, an economics graduate with a professional track record in the financial sector, advises the Secretary-General and works worldwide to make financial services more accessible.In 2011, she was invited to become honorary patron of the Global Partnership for Financial Inclusion (GPFI). The GPFI is an inclusive platform for all G20 countries, interested non-G20 countries and relevant stakeholders to carry forward work on financial inclusion, including the implementation of the G20 Financial Inclusion Action Plan.On that note, Queen Máxima, we very much look forward to hearing what you have to say and thank you for joining us today.Your Majesty, the floor is yours.1 A Demirguc-Kunt et al (2015), "The global findex database 2014: measuring financial inclusion around the world", World Bank Group Policy Research Working Paper, No 7255.2 R Sahay et al (2015), "Financial inclusion: can it meet multiple macroeconomic goals?", IMF Staff Discussion Note 15/17, International Monetary Fund, Washington.3 OECD (2016), "OECD/INFE international survey of adult financial literacy competencies".4 L Klapper, A Lusardi and P van Oudheusden, "Financial literacy around the world: insights from the Standard and Poor's Ratings Services global financial literacy survey".About the authorJens WeidmannMore from this authorRelated informationMore speeches from "Deutsche Bundesbank"Country page: Germany
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[description] => Purpose –The paper‟s purpose is to contribute to the existing body of work in the area of Islamic finance (IF) by examining its activities in Australia and evaluating the country‟s current regulation and supervision of Islamic financial market (IFM) to cater the need of IF for Muslims living in Australia. Design/methodology/approach – The method employed in this study is a mixture of direct observation from legal and regulatory perspectives and author‟s association with IF industry in Australia. However, Islamic legal context remains the only theoretical basis of the study. Findings –Through examining the above, the paper proposes regulatory changes to the Australian regulatory regime and recommends establishing an Islamic bank (IB) to meet the Islamic banking and finance needs of Muslims living in Australia. Research limitations/implications – The paper concentrates on examining the regulation of IF in Australia in terms of financing instruments and institutional risk management of Islamic financial institutions (IFIs). However, it has not been supplemented by any empirical work, nor have been attempted to evaluate the economic efficiency and profitability or otherwise, of IF in Australia. Originality/value – Besides the direct policy recommendations and suggestions for further research provided for authorities concerned, the paper sheds new light on how the legal and regulatory challenges of IF in Australia are met for its substantial growth.
[date] => 2018-10-13
[name] => Current Regulation and Supervision for Islamic Financial Market: Evidence from Australia
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[description] => Speech by Dr Sabine Mauderer, Member of the Executive Board of the Deutsche Bundesbank, at the Bocconi School of Management Conference "Sustainability disclosure: red tape or strategic tool for the future of business?", Milan, 24 June 2025.The views expressed in this speech are those of the speaker and not the view of the BIS.Central bank speech | 02 July 2025by Sabine MaudererPDF full text (13kb) | 4 pagesCheck against delivery 1 IntroductionLadies and Gentlemen,It is a pleasure to be here to talk about the role of sustainability disclosures, especially in times of political headwinds. Climate change, nature loss and the green transition of our economies have significant macroeconomic impacts that can translate into various economic and financial risks.If we stick to current policies, global GDP could be 15 % lower by 2050 compared to a world without climate change.1 This is the outcome of our latest NGFS long term scenarios. And even in the short term, the impact on GDP could be substantial. Our recent publication of short-term scenarios shows that delaying the transition by just three years could cost almost 1 % of global GDP by 2030.2Failing to identify climate and nature-related risks and to manage them properly can have serious consequences. For the real economy and therefore also for individual financial institutions and the financial system as a whole. So, understanding and managing these risks is essential.2 Why sustainability disclosures matterI am sure many of you are familiar with the principle "you can only manage what you can measure". Transparency and high-quality data are the foundation for effective risk management. Reliable data allow corporates and financial institutions to assess financial risks posed by climate change and nature loss. Banks need to understand whether their corporate clients rely heavily on fossil fuels or ecosystem assets like water. ECB research shows that more than one-third – over €1.3 trillion – of bank loans to non-financial corporations in the euro area are to sectors that are exposed to high risk of water scarcity. Dry soils can reduce agricultural yields or low rivers might constrain electricity generation.3 Similarly, insurers have to know whether those assets, they insure, are vulnerable to extreme weather events. For corporates, on the other hand, it is also important to know vulnerabilities in their supply chains, either related to water scarcity or other ecosystem services. Also, the pharmaceutical industry heavily relies on plants to produce and develop drugs. Sustainability disclosures help companies identify these financial risks and build more resilient and sustainable supply chains.Corporates that identify and address sustainability risks early can benefit. At the same time, knowing those ecological risks can help companies to develop innovative, clean technologies. This can provide a competitive edge in the market and open up new business opportunities. And we all know, this is what Europe needs more than ever. Finally, robust disclosure practices can send a signal to financial stakeholders and may make it easier for companies to access funding and attract investments. 3 Challenges As you can see, there are strong merits to sustainability disclosures. Unfortunately, substantial data gaps persist. This makes it difficult for financial institutions and corporates across industries to integrate climate and nature risks into their risk management and decision-making processes. In recent years, we have seen encouraging progress in closing these data gaps, especially with regard to climate data. With the Taxonomy and the Corporate Sustainability Reporting Directive (CSRD), the EU has been the first mover on transparency regulations, intended to become a role model for many other regions. However, as you all know, the EU's regulatory framework has faced criticism. One of the main criticisms relates to complexity. Sustainability reporting frameworks require a deep understanding of technical and regulatory details. Companies perceive the rules as too complicated and have expressed concerns about the high reporting burden, especially small and medium-sized enterprises. True is, that the EU taxonomy encompasses hundreds of pages. This is difficult to handle. As a result, other regions have refrained from adopting the European approach. Instead, China, Malaysia and other countries have adopted a more principle-based approach to sustainability disclosure. So the question is, what is the right approach for Europe? The answer is not black or white. A differentiated approach is needed. On the one hand, we see that Europe's economy needs to become more competitive. Uncertainties around global tariff policies and overcapacities from China add to the already low growth and low productivity in Europe. So it is important to reduce burdens for corporates, if there are alternatives. On the other hand, I mentioned earlier, European corporates and financial institutions are exposed to climate and nature-related risks. So, transparency is crucial to identify potential risks and manage them properly. Finally, we all know that there is the need to drive transformation towards low-carbon industries, globally. Otherwise we might end up in a hot house world scenario with all consequences. Europe has great opportunities to become a global leader in offering solutions, not only in the clean tech industry. But other regimes seek the same opportunities, esp. China. So, Europe needs to make its mind up. 4 A way forward – pragmatic solutions neededGoing forward, it is crucial to strike a balance between the need for comprehensive information and the reporting burden on companies. Pragmatic solutions are needed.First, we are living in a world that keeps changing in many ways. Therefore, overly detailed rules might become outdated quickly, whereas general principles might be more sustainable. Principle-based approaches that focus on overarching principles rather than detailed rules, may provide an alternative, esp. for SME's.At the same time, it is important to admit that there may be some downsides to principle-based approaches. They may leave room for different interpretations or misinterpretations of information. My second point on a pragmatic approach is international alignment of standards. This is crucial to reduce regulatory burdens and ensures that data are comparable. One notable development in this direction has been the work of the International Sustainability Standards Board (ISSB). The ISSB has created a global baseline for sustainability disclosures. There are many benefits of aligning disclosure regimes across borders. It minimises the reporting burden for international companies and allows investors to compare. ISSB baseline standards have allowed many jurisdictions to make significant strides with regard to sustainability disclosures.Many countries all over the world, such as Brazil, Canada, Australia, Kenya and Malaysia have adopted disclosure frameworks that are based on and aligned with the ISSB standards. Others such as India, Hong Kong and the United Kingdom plan to do so. This is a promising development. So we might want to see al closer a closer alignment with ISSB standards in Europe.Consistent standards and formats are also essential for nature-related disclosures. While the chief focus in sustainability disclosures has been on climate change, it is crucial to recognise and consider the twin crises of climate change and nature loss. Both crises are deeply interconnected and can reinforce each other. Nature-related disclosures are still in their early stages. Challenges include a lack of standardised metrics.The Taskforce on Nature-related Financial Disclosures (TNFD) has taken a promising first step by developing a framework to report nature-related information. The ISSB is currently also exploring the development of new standards focusing on biodiversity.Future frameworks should build on lessons learned from the development of climate-related standards. Third, the use of new technology will also be key. Technological advances, such as artificial intelligence and machine-readable reporting, have the potential to revolutionise the way we collect, analyse and share sustainability data. This can help corporates to build their sustainability disclosures on information that they are already collecting for other purposes, such as financial reporting. Let me briefly give you two practical examples. First, the Bundesbank, the BIS Innovation Hub, the Banco de España and the ECB have launched "Project Gaia". This is an AI tool that extracts climate-related indicators from public corporate reports, which helps to analyse climate risks in the financial system.Second, on a recent trip to Japan, I visited a company that is working on AI-based solutions to assist businesses in sustainability reporting. It offers a platform where companies can easily and quickly enter financial and non-financial data needed for sustainability reports. Harnessing new technologies can improve the quality and availability of the data needed to effectively manage climate and nature-related risks.5 Conclusion Ladies and Gentlemen, Addressing the challenges related to sustainability disclosures and data requires collaboration across multiple stakeholders. We must develop solutions that are both ambitious and practical. The stakes are high – for the financial sector and for the resilience of our economies and societies. Without a healthy climate and a healthy planet, there can be no healthy economy. Thank you. 1 Network for Greening the Financial System (2024): NGFS long-term scenarios for central banks and supervisors, 5 November 2024.2 Network for Greening the Financial System (2025): NGFS short-term scenarios for central banks and supervisors, 7 May 2025.3 European Central Bank: The European economy is not drought-proof, 23 May 2025. About the authorSabine MaudererMore from this authorRelated informationMore speeches from "Deutsche Bundesbank"Country page: Germany
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[description] => Speaker: Sarah Pritchard, Executive Director, Markets
Event: The Future of UK Financial Regulation Summit
Delivered: 8 February 2022
Note: This is a drafted speech and may differ from the delivered version
I’m pleased to be addressing this City and Financial Global summit today with the opportunity to discuss the future of UK financial services regulation and in particular the opportunities that lie ahead for financial markets. This is a topic which is really important to us in our role as the UK’s conduct regulator (not forgetting that we are Europe’s largest prudential regulator by number of firms).
Before I dive in, I’d like to introduce myself. For anyone who doesn’t know me, I am Sarah Pritchard, the FCA’s Executive Director for Markets. I have overall responsibility for the FCA’s market integrity objective and I co-lead the FCA’s Supervision, Policy and Competition Division with Sheldon Mills. I have had a mixed career across the public and private sector, having worked alongside the FCA as a government partner, been regulated by the FCA while working in industry, and dealt with the FCA as a lawyer in private practice earlier in my career.
All of that experience has shown me how important it is for the regulator to set out clear expectations and outcomes against which progress can be measured. Alongside that sits the importance of partnering with industry, other regulators and government partners when setting the policy framework and rules which set the standards for the UK.
Our statutory objectives are to protect consumers, support market integrity and promote competition in the interests of consumers – and in doing so we have 2 key tasks – to make markets work better and to stop and prevent serious misconduct which leads to harm.
This morning I will speak briefly about the FCA’s priorities, the Future Regulatory Framework
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(FRF) and what you can expect to see from us in the months ahead.
Last July our CEO, Nikhil Rathi, set out our vision for change and the future of the FCA. We want to become a more innovative, assertive, and adaptive regulator. One that is data-led. One that partners more effectively with others to deliver the outcomes that are needed to protect consumers and promote market integrity. And one that is much more outcomes focused – we want to be a regulator that thinks clearly about the outcomes we are seeking to achieve when setting the regulatory framework, and one that monitors progress.
To be innovative and adaptive, we know that we will need to stay abreast of the changes in the world around us – particularly changes driven by technology, innovation, and climate change - and reflect those considerations in the regulatory agenda. In doing so, we will need to work with government partners, other regulators and industry (both through our statutory panels, individually and via trade associations) to inform our rules, so that we can ensure that they will deliver the outcomes that are needed to protect consumers, and ensure a well-functioning market.
Since we set out our vision 6 months ago I hope you will have seen some signs that we are already doing this:
It is fair to say people do not typically think of a regulator as innovative or particularly adaptive – but that is our vision. In a recent speaking event I did I talked about 'keeping things simple' – this prompted a number of sidebar comments saying that this was refreshing but unusual for a regulator. But our rather simply expressed ambition of being innovative, assertive and adaptive means challenging ourselves to do things differently. I hope you have seen us seeking to do so in the last few months. From the outside, I would welcome your views on whether the FCA you interact with looks and feels different in the months ahead.
I’m grateful to Her Majesty’s Treasury for setting out the government’s vision for the Future Regulatory Framework
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. The FCA welcomes the government’s consultation- which as you know includes a proposal to transfer significant pieces of onshored legislation into our Handbook. The consultation presents an opportunity to create a rulebook which meets the specific needs of the UK market, while still remaining anchored by the high international standards which the UK has done so much to shape.
As I mentioned earlier, our statutory objectives are to promote market integrity, protect consumers, and ensure competition in the interests of consumers. The FRF proposals would give us, and the Prudential Regulatory Authority
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(PRA), a secondary objective that will require us to operate in a way that facilitates the long-term growth and international competitiveness of the UK economy – growth that should be consistent with the government’s commitment to achieve a net zero economy by 2050.
We welcome the published proposals and the intent to have a regulatory framework that supports and maintains the UK's status as a leading financial centre - I hope you will have seen some of the work that we are already doing - for example our work on primary market effectiveness and listing reform, leadership on ESG, and continuing work on open banking.
The FCA has a leading reputation for supporting innovation and we take seriously the important role we have to play in the continued future success and integrity of the UK's financial services markets. A secondary competitiveness objective for UK financial regulators strikes an appropriate balance that recognises the important role the FCA plays in supporting long-term growth of the UK economy, as we continue to deliver on our existing core strategic objectives.
In this vein, the FRF is a critical opportunity to adapt the regulatory system so that it continues to enhance the attractiveness of UK capital markets - supporting our position as a world-leading place for savers to invest and for businesses to raise capital.
As the FCA gains new responsibilities for rule-making, we also recognise that accountability is an important topic. We will continue to be guided by our statutory objectives, subject to governance and, of course, accountable to Parliament.
In the last year, there have been some major consultations issued by the government and regulators and some changes already introduced.
In Primary Markets, the FCA has taken steps to improve the functioning of the UK listing regime. Our Primary Market Effectiveness Review built on many of the recommendations made by Lord Hill, and has already introduced changes to rules on free float, SPAC listings and dual class share structures. As we noted in our consultation, there are many other topics that will be considered in the near future, including through work with HMT on prospectus reform and a primary market effectiveness discussion paper.
In secondary markets, the FCA is working to support the government’s Wholesale Markets Review
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. As you know, those proposals include potential changes to the UK commodities regime transparency in fixed income and derivatives markets, and some of the requirements on firms admitted to trading on a potential new category of trading venue. Once the outcomes of HMT’s work are known, we will work to ensure that the rules for capital markets continue to support good outcomes for investors and market participants.
On the buy-side, we see major opportunities to improve the rules applying to UK-domiciled funds. We are committed to work with the government to support their UK Funds Regime Review
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, with the aim of making sure that regulations for UK based-funds based support good outcomes for investors.
We recognise the importance of data in today’s financial markets and in January announced further work to examine in detail the markets for trading data, benchmarks, and credit rating data, to understand whether a lack of competition may be causing harm to market participants. This followed an FCA Call for Input that showed that competition may not be working well in some areas, with the rising cost of market data cited as a concern by many of our respondents.
I’d like to finish by talking about ESG (environmental, social and governance).
As you may know the proposed new secondary statutory objective focusing on growth (a proposal under the FRF) states that sustainable growth should occur in a way that is consistent with the government’s commitment to achieve a net zero economy by 2050.
We expect that sustainable finance will continue to grow as an area of interest, as the world transitions to a zero-carbon future and financial services firms come under closer scrutiny on social issues. The UK already boasts globally-recognised expertise in creating sustainable investment propositions, and the FCA has a role in supporting that.
The FCA published its ESG strategy in November, to coincide with COP26
Link is external
.
That lays out our intent to support positive change in the financial services sector, both through formal rules, but also by working collaboratively with Government, regulatory partners and industry, both domestically and internationally. We want to advance the debate on sustainability and promote the development of the tools the industry needs to manage climate-related and wider sustainability risks, opportunities and impacts. We will also need to redouble work on our innovation agenda, to support the data and technology solutions which underly ESG integration.
There is clear demand for sustainable investment opportunities, with many investors keen to ensure that their portfolio reflects their values on a whole range of sustainability topics. To gain the trust of investors, firms need to ensure that they have a credible strategy to integrate ESG criteria into their investment process, including applying sufficient scrutiny to 'green' or 'sustainable' claims.
Last month, we closed a Discussion Paper on product labelling and product disclosures, with the aim of helping consumers navigate the complex landscape of sustainable investment options. The level of engagement was overwhelming, with around 130 stakeholders providing their views. We are now working towards formal proposals by mid-year.
We are already taking steps to improve transparency through sustainability reporting, implementing in December the second phase of our rollout of climate-related disclosure rules aligned with the recommendations of the Taskforce on Climate-related Financial Disclosures
Link is external
(TCFD). Our regime spans disclosures made by listed companies, asset managers and FCA-regulated asset owners.
We will continue to work with our international partners to deliver consistent global standards, as well as supporting HMT’s Green Finance Roadmap
Link is external
here in the UK. Through this work, we will help investors and other actors along the value chain make informed decisions. And we will encourage companies to strengthen their climate transition plans. We also see an important role for stewardship, increasing engagement by asset managers with investee companies, to support investors’ ESG priorities.
As a foundation for this, we will need to further enhance our internal team, ensuring that FCA intelligence, data and regulatory staff embrace and role model sustainability.
Later this year, we will be publishing our overarching consumer and markets strategies which will set out our priorities and focus over the coming years.
You should expect to see a continued focus on the elements I have covered above, but with a focus also on the outcomes we are seeking, and how progress will be measured.
Those strategies, together with the Regulatory Initiatives Grid which gives a forward look of upcoming consultations and planned publication dates, should help to address the criticism that we have heard, which is that the regulator’s priorities are not understood, and consultations land without the opportunity to meaningfully contribute.
The months and years ahead provide the opportunity to look again at what regulations are right for UK financial markets. The right regulatory regime is a crucial ingredient in retaining our place as a leading global financial centre.
However, to make the most of this opportunity, we need your support and partnership, providing your expertise and experience of financial markets, to ensure that the changes we propose really will improve outcomes for market participants.
We will be continuing to build our team of people. Job vacancies at the end of the last year in the UK were at a record high. We are fortunate that our turnover has remained in line with pre-pandemic levels – and with new roles created through transformation you will see us continuing to hire at pace, attracting highly talented colleagues from private sector, public sectors and other regulators too.
In the last quarter a number of new senior leaders have joined who you will also see more of in the months ahead. Stephen Braviner Roman, a top government lawyer and litigator, has joined as our new General Counsel. Our Interim GC, David Scott, a former Freshfields partner is staying on part time for the transition. Miles Bake is our new Director of Governance (joining from the Bank of England/PRA) and Amit Shanker is our new interim Head of Digital Intelligence Exploitation (previously Chief Data Officer at JLL and Head of Digital Transformation at HSBC). We are recruiting for new senior leaders across Supervision, Competition and Policy, Enforcement – and a new Finance Director will be announced shortly too.
Within the broader organisation we are moving to recruiting campaign style, to ensure we can regularly bring in and attract talent in London, Edinburgh, and Leeds. We have completed the bolstering of our authorisations team, with 95 new colleagues joining to help ensure our gateway is robust, to speed up our authorisations processes and to support new, innovative firms – the gateway plays a key role in supporting a competitive financial system.
We are making major strides towards diversity targets with 47 percent of our SLT being female as of end-January (with a 50 percent target by 2025) up from 43 percent this time last year and at least 15 percent now from an ethnic minority. Recognising that trends may fluctuate monthly, this is a sign of progress.
These senior leaders from a wide range of backgrounds joining the FCA alongside what are expected to be around 200 new joiners to the FCA in the first quarter of this year or very soon thereafter. 60 joined this month and we expect similar or increased levels in both Feb and March. As we evolve to become more innovative, assertive and adaptive, will continue to offer one of the best, if not best, employment package of any UK enforcement agency or regulator and we look forward to continuing to build our people capabilities and our organisation as a whole by recruiting diverse talent, and supporting career growth of our existing colleagues.
Strengthening the UK’s capital markets is a multi-year journey, but it begins today. We are keen to engage with industry as we enter the next phase, including understanding what regulatory reform means for you. Many of the outcomes we all want to see (including market orderliness, cleanliness, and transparency) depend on clear rules, supervised and enforced by an effective regulator. With your help, I am confident that we can achieve this.
[keywords] => Taskforce Amit Shanker SLT the Future Regulatory Framework
Link TCFD SPAC Nikhil Rathi FCA Financial Global ESG Handbook Edinburgh Sheldon Mills Stephen Braviner Roman the Bank of England/PRA Digital Intelligence Exploitation FRF General Counsel Parliament the Regulatory Initiatives Sarah Pritchard HMT’s Green UK Wholesale Markets Review Treasury the Prudential Regulatory Authority
Link Finance Leeds Financial Disclosures
Link Supervision, Competition and Policy, Enforcement London David Scott Digital Transformation Miles Bake JLL Hill Freshfields PRA HMT uk financial regulation new finance director speaker sarah pritchard strengthening uk capital responsibility fca market
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[description] => Keynote speech by Mr Eddie Yue, Chief Executive of the Hong Kong Monetary Authority, at HKIB Annual Banking Conference 2020, Hong Kong, 28 September 2020.The views expressed in this speech are those of the speaker and not the view of the BIS.Central bank speech | 29 September 2020by Eddie YuePDF full text (51kb) | 5 pagesMr Patrick Fung, distinguished guests, ladies and gentlemen,I am delighted to be with you here this morning for the annual banking conference of the Hong Kong Institute of Bankers (HKIB). It is great to see everyone in person, and I am grateful to the organisers for the hard work they have put into making this possible.The past year has been a testing time for Hong Kong as it faced challenges on three fronts. We experienced prolonged social unrest of a kind not seen for many decades. Geo-political tensions and trade wars have raised fundamental questions about globalisation. And, as in the rest of the world, the COVID-19 pandemic is causing severe disruptions to our economy and threatening people's livelihoods.All this turmoil has put our institutions, not least our banks, to the test; they have had to adapt rapidly to constantly changing conditions. Hong Kong's banking sector has largely met these challenges and continues to be resilient.This resilience stems from the fact that our banks entered the current crisis with some of the strongest fundamentals in the world. Through sheer hard work and by learning from past experience, banks have been able to respond to operational challenges posed by both the pandemic and the social unrest. I would like to take this opportunity to thank everyone in our banking community for maintaining services to your customers during these extraordinary times. The speed and agility you have demonstrated in delivering the relief measures has been particularly impressive. The resilience and resourcefulness of our banking sector put us in a strong position to handle the challenges that lie ahead.Despite the ongoing geopolitical tensions, I have no doubt that Hong Kong will continue to perform its special role as an international financial centre. China remains the engine of global economic growth and the biggest provider of savings. The Mainland's opening of its financial sector continues to offer new opportunities for the rest of the world, and Hong Kong is at the nexus of it all. While our banks must continue to stay resilient against the many challenges of our times, they also need to prepare themselves for new opportunities emerging from the transformations now unfolding in our region.In today's conference we are invited to look beyond our present difficulties, to envision a 'Brave New World of Banking' in an age of 'Innovation and Transformation'. I congratulate HKIB on choosing such a forward-looking topic - one to which I have also been giving a great deal of thought. Taking up this theme, I will discuss three big transformations that are already happening, and talk about how the industry and how we at the HKMA are responding to them. The three transformations are: first, the rapid advances in financial technology, or 'fintech'; secondly, the deepening of cross-border banking, particularly in relation to the Greater Bay Area1; and thirdly, the trends in green finance.FintechFirst, fintech and its fast adoption by banks and their customers. Hong Kong is among the fintech leaders in Asia. The COVID-19 pandemic has given new impetus to the use of mobile banking and electronic payment services, the most important technology in times of social distancing.Customers who once relied on face-to-face teller services are now paying their bills and transferring money to family and friends through electronic services. Older generations - who are especially vulnerable to COVID - have proven that they can be tech-savvy. Some 80% of payments under this year's Cash Payout Scheme were made through electronic registration, easily beating our expectations. The Faster Payment System, introduced just over two years ago, now has nearly six million registrations and handles about 400,000 transactions a day - over twice the amount compared with last year.Other initiatives transforming the way banks serve their customers include the recent launch of Hong Kong's virtual banks and the growing adoption of open API2 technology. Retail banks are increasingly adopting artificial intelligence (AI) and big data analytics to provide tailored products and services to customers. These fintech initiatives help promote innovation and competition among banks, while increasing convenience for customers and improving the transparency of choices available to them. But as expected, there are also challenges that come with fintech expansion: cyber-attacks, phishing emails and other scams are reportedly on the rise, a trend that needs to be addressed before it becomes alarming. Banks must continue to stay ahead of fraudsters through constant building and rebuilding of defences, rigorous stress testing, and educating customers about cyber safety. The enhanced Cybersecurity Fortification Initiative, soon to be launched, should provide banks with a robust framework for managing the risks.Growing reliance on data analytics raises questions about data ownership and privacy. As we have seen in some other jurisdictions, AI and machine learning also introduce the risk of discrimination, sometimes in hidden forms. Banks have to guard against this by ensuring ethical, fair and transparent treatment of customers, and by correcting model aberrations using human intuition.We realise that banks are at different stages in their adoption of AI technologies. For this reason, our risk management approach as a regulator is based on high-level principles rather than on detailed prescriptions that might stifle innovation or be disproportionate to the risks involved.Technology is not just about banks and their customers - it is also an important part of banks' relationship with the HKMA. As we are a key part of the technology ecosystem, our aim is to add value by facilitating the industry's technology adoption through a range of initiatives, such as the AML/CFT Regtech Forum and the Regtech Watch newsletter. As a regulator, we are pleased to witness the progress made by the industry in using Regtech to combat longstanding issues - for instance, Natural Language Processing has been adopted to control conduct risk associated with the marketing of financial products, while Supervised Machine Learning can be deployed to more accurately help AML analysts flag suspicious transactions.Understanding and facilitating the technology needs of the industry improves our own setting of supervisory priorities in a forward-looking manner. The HKMA's three-year roadmap for Suptech adoption has identified, as key areas of focus, the need for a knowledge management system to handle structured and unstructured information, and the need for capabilities to analyse granular data. The aim is to make our supervisory work more effective without placing unnecessary burdens on banks. We have begun pilot projects to assess the suitability of various solutions.Cross-border bankingTechnology has enhanced the use of our natural geographic advantage to participate in another major transformation: the growing interaction with the Mainland financial markets, particularly in relation to the Greater Bay Area.As a leading international financial centre, Hong Kong has a long and successful history of serving as a gateway to the Mainland markets. We are the world's largest offshore hub for renminbi business. Schemes launched in recent years, such as Stock Connect and Bond Connect, have expanded opportunities for investors. Last year, trading by international investors through Stock Connect more than doubled compared to the year before; and trading through Bond Connect nearly tripled.And the best is yet to come. Take Bond Connect as an example. Last Thursday, FTSE Russell decided to add Chinese government bonds to its World Government Bond Index from October 2021, on the back of increasing international demand for Chinese fixed income products. This latest move, together with similar steps taken by other major global bond indices earlier, will create huge headroom for Bond Connect to grow. Volume aside, the HKMA is continuously working with the industry and our Mainland counterparts to enhance the scheme through improving trading efficiency, and exploring new products, such as repo and related derivatives, that will help market participants better manage liquidity and risk in bond investment.We also need the right infrastructure to support these rapid developments. The HKMA has already started a multi-year project to revamp the Central Moneymarkets Unit. This will include a number of new services related to Bond Connect to meet the existing dynamic market demand and to position ourselves for the potential Southbound Bond Connect in the future.Closer to home in our own Greater Bay Area, we are looking forward to welcoming a new member to the Connect Family. In June this year, together with our counterparts in the Mainland and Macao, we announced plans for a third two-way cross-boundary scheme: the Wealth Management Connect. The new scheme will further increase opportunities for the industry to meet cross-border demands for wealth management products. Like other Connect schemes, this new scheme will take an incremental approach, starting on a prudent footing. It is important that we have a smooth start, so that it will pave way for a more full-fledged cross-border private wealth management service in the future.The three Connect schemes provide plenty of room for banks to broaden their services. The schemes help enhance Hong Kong's role as an international financial centre as financial institutions expand their presence here to be closer to their clients.Green financeHong Kong has just experienced its hottest summer on record. Around the world there are reports of extreme weather events, widespread forest fires, and rising sea levels. Climate change knows no borders. It is a source of multiple risks - including transition risks and physical risks - that affect the entire financial sector. Addressing this challenge requires coordinated international efforts. At the same time, the rise of ESG3 investment and green banking offers opportunities for financial institutions to develop their business, including cross-border business.Many jurisdictions in this part of the world have in place roadmaps for promoting green and sustainable finance. However, the level of adoption of green finance varies, and adoption is not without challenges.Among the challenges we currently face is the difference in taxonomies that define green economic activities for the purpose of ESG investment. These taxonomies help mobilise capital by reducing the need for financial institutions to conduct their own assessments of environmental impact. At present the two leading taxonomies are those recently developed by the Mainland and by the European Union. The two taxonomies differ in some important aspects, including definitions of economic activities eligible for green investment. Such differences could present impediments in tackling what is a global challenge: this has particular relevance for Hong Kong, which is a regional hub for global institutions committed to responsible investment.It is therefore gratifying to know that in May this year, the Mainland authorities have taken important steps to reconcile some of the critical differences between the two taxonomies. For example, clean coal is no longer considered green in the revised bond catalogue. We expect more harmonisation work to be done by the two sides, though this may take a bit of time.We are making progress on "harmonisation" within Hong Kong, too. This year, the HKMA, together with other financial regulators and relevant Government bureaux, formed the Green and Sustainable Finance Cross-Agency Steering Group. The Steering Group has two main aims: to co-ordinate management of climate and environmental risks to the financial sector; and to help accelerate the growth of green and sustainable finance in Hong Kong. One of the first tasks of the Steering Group is to develop a local green taxonomy that would incorporate the harmonisation work currently being done by the Mainland and EU authorities and take into account local circumstances. The aim is simple: there should only be one local taxonomy for use by all financial regulators in Hong Kong.At the global level, the HKMA is an active member of international and regional networks devoted to addressing climate risk. Through our participation in these networks we are able to contribute to international efforts and to draw on some of the best expertise in these fields. We will do our best to align practices in Hong Kong with international developments.When considering international experience, we have to accept that there is no one-size-fits-all solution. This is something we are keenly aware of as we develop our regulatory approach on green and sustainable banking. While we base this approach on international best practices, we also take into account local conditions, recognising that banks in Hong Kong come in many shapes and sizes, and that their progress in green and sustainable banking varies considerably. We will be flexible, proportionate and inclusive in developing and applying regulatory requirements. It will take time for the less prepared banks to build capacity to address climate-related issues; we are ready to work with them to help them catch up. At the same time, the fast-movers or market leaders are encouraged to make the most of the work they have already done.Building capacityThe three transformations - in fintech, cross-border banking, and green finance - are still quite new for Hong Kong's banking sector. Making the most of the opportunities they bring will require changes to work flows and risk management practices by banks, as well as adjustments in our regulatory approach. Above all, these changes require a wide spectrum of skills, both specialised and general. This summer, HKIB, HKAB4 and the HKMA have jointly undertaken an exercise to take stock of potential talent gaps in the banking industry.That exercise found gaps in three key areas: technological and data skills; banking knowledge - especially about the Greater Bay Area; and specific 'soft' skills, such as creativity and adaptability. It is, perhaps, no coincidence that these are the very skills needed for managing the three transformations I have described, and for leveraging on the opportunities they offer. Shortages in expertise are a worldwide challenge, so we cannot rely on the importing of outside talent alone. Developing the skill sets required takes time and effort. Over the next few years, our banks, our professional associations and our education institutions will have to devote substantial resources to talent development in these areas.We are now working with the industry to narrow the gaps in capacity. The solutions include the reskilling of existing staff through continuing professional development. Importantly, banks need to invest in new talent capable of capitalising on the changes already in progress, and equipped for the challenges that lie ahead. To this end, the HKMA will be working with the universities and the other stakeholders to make sure they are aware of the knowledge and skills needed by the banking industry, so that graduates are prepared to thrive in this 'brave new world of banking'.For more than 50 years, HKIB has played a key role in nurturing talent and professionalism. Your membership is growing at a phenomenal rate. Your rich programme of courses, seminars and special events offers continuing professional development that is directly relevant to the transformations I have described this morning. Today's conference is one of the highlights of the banking year. My colleagues and I look forward to sharing with you, and learning from you as the day progresses. We wish you every success in the year ahead.1 The Guangdong-Hong Kong-Macao Greater Bay Area.2 Open Application Programming Interface.3 Environmental, Social and Governance.4 Hong Kong Association of Banks.About the authorEddie YueMore from this authorRelated informationMore speeches from "Hong Kong Monetary Authority"Country page: Hong Kong SAR
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[name] => Eddie Yue: Opening keynote speech at HKIB Annual Banking Conference 2020
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[description] => Speech by Mr Benjamin E Diokno, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the 17th Professional Insurance and Financial Advisors Association of the Philippines, Manila, 27 February 2020.The views expressed in this speech are those of the speaker and not the view of the BIS.Central bank speech | 05 March 2020by Benjamin E DioknoPDF full text (53kb) | 7 pagesOfficers and members of the Professional Insurance and Financial Advisors Association of the Philippines (PIFAAP), led by its Chairperson, Ms. Esperanza Chong, and President Jeff Gonzales, ladies and gentlemen, good morning.I would like to thank you for this opportunity to talk about BSP's views on the country's economic outlook for 2020 and beyond at PIFAAP's 17th Annual Congress, with the theme, "P2P: From Profit to Purpose."Most of us know the term "P2P" refers to the transport service that brings you from Point A to Point B. This reminds us of how policymaking works at the BSP, where it is important that we are able to assess where the economy is and to know where we want it to be.As the country's central monetary authority, the BSP is firmly committed to fulfilling its price and financial stability mandates as a means of supporting economic growth that is strong, sustainable, and inclusive.It is for this reason that I chose the theme of my presentation today, "Gearing up for the road ahead: With foresight and purpose."Having foresight helps us prepare for the future, in the face of widespread uncertainties. Having a clear purpose enables us to stay the course and not to wobble on our commitment and resolve to move forward amid the challenges that come our way.And there are indeed significant risks and challenges clouding the global and domestic economic environment today. Among the risks currently on our radar screens are the following:On the external front in 2019, the global economy was heavily weighed down by trade policy uncertainties and geopolitical tensions.The IMF, in its World Economic Outlook (WEO) Update released last month (January 20), estimated that the world economy grew by a modest 2.9 percent in 2019. It projects that it would pick up slightly to 3.3 percent this 2020, although it should be noted that this has been revised downward from the October 2019 WEO. This shows that the world economy remains weak.Further on the external front, major risks include:Rising geopolitical tensions, notably between the US and Iran, as well as social unrest in some countries (e.g., Hong Kong, Argentina, Chile, Iran, Iraq, Turkey, and Venezuela), could disrupt activity and hurt already tepid business sentiment;Still high trade barriers between US and China could continue to imperil global supply chains, erode sentiment, and undermine global manufacturing and trade; andRecent coronavirus outbreak which has been declared as "global health emergency" by the World Health Organization (WHO). Growing concern over COVID-19 has likewise weighed down on growth prospects not only in China but globally.On the domestic front, the major risks include: first, failure to address infrastructure bottlenecks, and second, incapacity to enhance disaster resilience amid increased intensity and frequency of natural hazards.As we prepare to overcome these challenges, we should look for new ways of doing things, pursue structural reforms, and strengthen our institutions along the way.As it stands today, the Philippine economy is poised to sustain its 84 quarters of uninterrupted growth despite increased global uncertainties along with emerging domestic challenges.A quick glance at some of the key economic indicators in 2019 show that the country's robust macroeconomic fundamentals remained intact.Real GDP growth grew by 6.4 percent in Q4 2019, supported by accelerated government spending, which resulted in full year growth of 5.9 percent. The full-year outturn was close to the lower end of the national government's growth target range of 6.0 percent - 6.5 percent in 2019.Despite strong headwinds, the domestic economy in 2019 continued to demonstrate resilience and stability, characterized by:Sustained growth momentum;Favorable inflation environment;Ample liquidity and credit;Robust external position;Sound and stable banking system; andModest fiscal deficit.The 2019 GDP growth rate was a tad lower than the revised official growth target range of the national government of 6.0 to 6.5 percent. But what is impressive is that the country has remained one of the fastest-growing economies, not only in Asia, but in the world.On the demand side, the economy continues to be supported by sustained household consumption and quickened in public spending during the second half of 2019. On the supply side, growth was driven still by broad-based expansion of services and industry sectors supported largely by the strong numbers coming from financial intermediation; public administration and defense, compulsory social security; trade and repair of motor vehicles; and construction. Despite the El Niño phenomenon and the lingering effects of African Swine Fever, the agriculture sector managed to grow by 1.5 percent during the year.In 2019, headline inflation was 2.5 percent, well within the government's target range of 2.0-4.0 percent, and was supported mainly by decelerating food inflation. The benign inflation is expected to support consumption demand moving forward.This slide shows the series of BSP policy actions pursued in 2019. The much improved inflation dynamics so far alongside the benign inflation outlook have given the BSP space to reduce policy rate by 25 bps each in May, August, and September 2019, respectively, as a pre-emptive move against the risks associated with weakening global growth.In its most recent monetary policy stance meeting on 6 February 2020, the Monetary Board concluded that a further preemptive reduction in the policy rate to support market confidence was necessary and cut policy rate by 25 bps.It was also noted that the phenomenal spread of the 2019 novel coronavirus could have an adverse impact on the global economy and market sentiment in the coming months.Looking ahead, we expect inflation to gradually rise but remain on a target-consistent path for 2020 and 2021. Inflation expectations also continue to be firmly anchored within the target over the policy horizon. Meanwhile, the risks to the inflation outlook continue to tilt slightly toward the upside in 2020 and toward the downside in 2021. This is depicted in the fan chart on the left-hand side. Upside risks to inflation over the near term arise mainly from potential upward pressures on food prices owing in part to the African Swine Fever outbreak and tighter international supply of rice. Moreover, there continues to be the burden on the economy posed by the ongoing Taal volcano eruption and the aftermath of typhoon Tisoy.However, uncertainty over trade and economic policies in major economies such as China, US and Europe continue to put downward pressure on global demand, thus easing upward pressures on prices of some commodities like oil.Meanwhile, the Philippine banking system remains strong and sound.Philippine banks are sufficiently capitalized and past due ratios have also declined over the years, contributing to greater ability to intermediate funds, manage risk, and increase profitability.The stability and soundness of the banking system is due to a large part to the strategic and progressive financial reform agenda of the BSP in banking supervision, cyber security and technology risk management, anti-money laundering, counter-terrorist financing, and capital market development.We want the Philippine banking system to remain strong in financial intermediation and promoting greater economic activity.The manageable external payments position has provided a strong buffer for the domestic economy against external headwinds.Recently, the balance of payments (BOP) position had a turnaround from a deficit position in 2018, to a surplus of US$7.8 billion for 2019. This may be attributed partly to higher net inflows of foreign direct investments and foreign portfolio investments which was bolstered by favorable investor sentiment.The current account was in a deficit position, in the first three quarters of 2019. But the deficit has narrowed significantly-from a deficit of US$5.8 billion in 2018 down to a deficit of US$992 million in 2019. This development came largely from the lower trade in goods deficit combined with higher net receipts in the trade in services, and in the primary and secondary income accounts.We also have structural sources of foreign exchange, which provide substantial cushion from external shocks.First, foreign direct investments or (FDI) remain resilient. For the period Jan-Nov 2019, it reached US$6.4 billion. It is lower compared to 2018 due to lingering global uncertainty which dampened investor sentiment.Second, overseas Filipino remittances as well as BPO earnings are sustained. Cash remittances reached US$30.1 billion in 2019 an increase of 4.1 percent year-on-year. On the other hand, BPO revenues were recorded at US$16.4 billion for the first three quarters of 2019.Meanwhile, data as of end-January 2020 shows that the country's gross international reserves (GIR) stood at US$86.9 billion.This level of GIR is more than enough to finance 7.6 months' worth of imports of goods and services and payment of primary income. It is also equivalent to 5.4 times the country's short-term external debt based on original maturity.The sustained favorable external debt profile is also another factor supporting the external sector position. The country's external debt metrics have steadily improved. The external debt-to-GDP ratio is 23.7 percent as of end-September 2019, a sharp departure from about 60.0 percent in 2005, before the onset of the Global Financial Crisis (GFC).A large part of the country's external debt remains in medium-to-long term maturity profile supporting a manageable debt repayment schedule over the medium-to-long term horizon.The Philippine economy not only has ample monetary policy space but also fiscal space to respond to any downside risks to growth. The improving fiscal position of the government, supported by the series of fiscal reforms in both tax revenue generation and tax collection, provides the government the resources to increase public investments and support domestic demand.This fiscal space will also help boost private investment via the infrastructure push, and will consequently expand the country's productive capacity to ensure a durable and sustainable growth in the years to come.Moving forward, we are optimistic that the Philippine growth momentum will be sustained.The current administration is in a strong position to push for reforms by leveraging on its strong political capital.Results of institutional and governance reform surveys are positively recognized by independent third-party assessors. The country has indeed made important strides in enhancing its competitiveness over the past years. This is the essence of what we are doing on a pro-active basis, and this is to future-proof the Philippine economy.The country's improved creditworthiness, exemplified by the country's elevation to investment-grade territory, has cemented the Philippines' status as an economy with one of the brightest prospects globally.Our sound macroeconomic fundamentals, supported by structural reforms, have been duly recognized by credit rating agencies. International rating agencies have taken notice of the strides that the country has taken in the areas of economic reform and liberalization that have produced the current growth and stability the country exhibits. Credit rating upgrades mean lower borrowing costs for the country. At investment grade, a country is seen to be fully able to service its foreign debts.Fitch Ratings and Moody's Investors Service kept the Philippines one notch above minimum investment grade. Meanwhile, the latest credit rating upgrades given by Standard and Poor's and JCRA in April 2019 and by the Japan-based R&I credit rating agency just earlier this month place the Philippines only a step away from our targeted single "A" grade in the next two years.Having an A-rating will place the Philippines in the radar of more investors, which bodes well for attracting more job-generating investments.The same optimism is shared by third-party assessors such as the International Monetary Fund (IMF), the World Bank (WB) and the Asian Development Bank (ADB). Not surprisingly, they expect the Philippine economy to remain one of the fastest-growing economies in 2020, not only regionally, but globally. These multilateral agencies expect the Philippines to expand by 6.1 percent to 6.3 percent this year.In fact, some market analysts are even more optimistic. Shortly after the release of the Q4 2019 GDP figure on 23 January, Morgan Stanley, Barclays, HSBC, PNB, and Nomura also released their 2020 projections for the Philippine economy which ranged from 6.0 percent to as high as 6.7 percent.The expectation of sustained growth momentum is not without basis. In fact, there are key structural changes pointing to increased efficiency and productivity of the economy. In these charts we can see the following:the steady improvements in economic efficiency as indicated by the declining incremental capital-output ratio;increasing total factor productivity; andfavorable labor market dynamics given the young population and improvements in the education and skill sets of those in the labor force.Another key factor that lends support to the higher growth potential of the Philippine economy is the country's demographic profile.The IMF predicts the country's dependency ratio to decline steadily until 2050, considerably lower than its regional peers. This implies that the expanding Philippine economy will not fall short of supply of young, skilled, and educated workers. This should also positively affect savings and innovation, leading to an increase in total factor productivity and to longer periods of economic growth.All told, economic indicators suggest that the country has been making remarkable progress towards achieving its goals. Prospects for the domestic economy continue to remain favorable as domestic growth fundamentals are expected to remain intact. GDP expansion is expected to continue to pick up in 2020 due to the robust growth in the services sector and improved external trade conditions.Private demand is expected to remain firm, aided mainly by sustained remittance inflows and stable inflation.As more "Build, Build, Build" projects get completed, the positive spillover effects on private construction would also contribute to economic growth.So what is the BSP's role in upholding this positive Philippine macroeconomic narrative? We remain steadfast in our commitment to effectively discharge of our mandates in order for us to gear up for the road ahead.Achieving our primary mandate of price stability through the effective conduct of monetary policy.Upholding financial stability thru banking supervision and regulation and the pursuit of financial reforms.Ensuring an efficient payments and settlement system thru the operation of real-time settlement system to reduce the cost of exchanging good and services.Our policy and reform agenda involve strategic, complementary and reinforcing efforts in developing deeper money, debt, and FX markets that systematically build the country's resilience by reducing reliance on external funding and insulating the domestic economy from external shocks. At the same time, we are pursuing initiatives to deepen the local debt market. This will go a long way in funding infrastructure and other big-ticket investments.To support our financial inclusion agenda, we are championing an enabling environment for the digitalization of the payments system. Our flagship project is the National Retail Payments System (NRPS) which is expected to boost economic activities by making available an inter-operable, safe, and efficient real-time digital payments system.The passage of Republic Act No. 11211, or an Act Amending Republic Act No. 7653, known as the 'New Central Bank Act' (signed on 14 February 2019) is a significant milestone for the BSP. The pursuit of the BSP mandates were further strengthened with the expansion of the BSP's policy toolkit. The new BSP charter embodies a package of reforms that will further align its operations and global best practices and improve its corporate viability.Specifically,The law restored the central bank's authority to issue its own debt papers as part of its regular monetary operations, establishes a stronger prudential regulatory framework to promote a safe and sound financial system through the expansion of supervisory coverage and authority to prescribe metrics attuned to international standards and practices.The amendment likewise empowers further the BSP to oversee the country's payment and settlement systems (PSS) including critical financial market infrastructures that are vital components of the PSS.Moreover, the amended charter strengthens the central bank's ability to obtain data from any person or entity from the private and public sectors, for policy making and statistical purposes, in line with the pursuit of its mandates.The BSP has identified its legislative priorities in the current 18th Congress.We support amendments to the Bank Secrecy Law to better combat tax evasion and money laundering.We also have the Financial Consumer Protection Bill to consolidate various consumer protection initiatives.And the amendments to Agri-Agra, which are intended to institute agricultural financing reforms, including the expansion of the list of projects and activities that may be financed through bank loans or investments, and broadening of the modes of alternative compliance.In closing, let me leave you with these take-aways.I believe that Philippine economy remains in a position of strength and has built ample buffers to weather volatilities and uncertainties in the global environment.While the Philippines is poised to remain among the fastest-growing economies in the region and in the world, having foresight and being wary of the risks and challenges in the horizon, dictate that we should not be lulled into complacency. It remains prudent that we balance our optimism with a certain degree of caution. We assure you that we at the BSP will endeavor to stay ahead of these domestic and external developments and ensure that its monetary policy framework and policy agenda remain responsive to the very fluid economic environment.We likewise remain focused on our purpose and steadfast in pursuing continuity, preserving our credibility, and in staying committed to undertake bold reforms and continued improvements in carrying out our mandates of price stability, financial stability, and efficient payments and settlements system. This way, we can truly fulfill our role in navigating the country towards a charted path of sustainable and inclusive economic growth.Again, it is a pleasure to be here this morning. Salamat at mabuhay tayong lahat!About the authorBenjamin E DioknoMore from this authorRelated informationMore speeches from "Central Bank of the Philippines (Bangko Sentral ng Pilipinas)"Country page: Philippines
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[blurb] => The Eleventh Meeting of the Arab Regional Fintech WG will feature sessions on AI & GenAI in financial services, financial system resilience, crypto assets and AML/CFT, open banking/finance implementation, and the Arab Regional Fintech WG work programme, while the workshop will focus on the formulation of effective suptech frameworks.
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[description] => The Lab, in conjunction with the AMF, have organised a workshop on “Formulation of Effective Suptech Frameworks” on 7th May 2024 following the Eleventh Meeting for the Arab Regional Fintech WG taking place on 5th and 6th May 2024. Both events will take place within the Dubai FinTech Summit at Madinat Jumeirah, Dubai. The workshop targets staff from regulatory and supervisory authorities and aims to help them understand the opportunities and challenges of suptech adoption as well as how to develop an effective suptech strategy. The Cambridge Suptech Lab will be presenting an overview of the State of Suptech 2023 report and discussing “Technology application design and prototyping” during the workshop.
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[internal_notes] => Extra link: AMF Agenda for the first https://www.amf.org.ae/sites/default/files/2024-04/Agenda-11th%20Meeting-Regional%20Fintech%20WG-May-05-06-2024-2_1.pdf
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[description] => ess to technology is vital for alleviating poverty, inequality and improving the livelihood of the poor households. In this context, Technology Needs Assessment (TNA) project provides an ideal platform for participating countries to identify technologies through a participatory approach. The objective of this study is to identify such Renewable Energy Technologies (RETs) and assess its long-term sectoral transformation potential to achieve socio-economic and environmental goals. The findings of this study suggest that countries like Bhutan, Laos, Sri Lanka and Vietnam have prioritized bio-digester technology as a clean energy for cooking. In the present scenario, the technology is in the early stage of the development and private sector participation is vital for technology implementation through new business models. In order to achieve complete sectoral transformation, there is a need to address barriers such as lack of private sector engagement, capacity building for the local population, standardization of design, lack of various financial mechanisms and government intervention to reduce the cost of technology for large-scale technology penetration.
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[description] => The Financial Conduct Authority (FCA) has today published a Decision Notice issued to Andrew Barry Hart, director of Wage Payment and Payday Loans Limited (WPPL), and a Decision Notice issued to WPPL. The FCA has decided to prohibit Mr Hart from performing any role in regulated financial services and has decided to cancel WPPL’s interim permission.
WPPL is a consumer credit firm that provides payday loans (a form of high-cost short-term credit) under the trading names 'Payday Overdraft', ‘Wagepayday’ and ‘Doshloans’. Mr Hart is the sole director, controller and ultimate owner of WPPL.
Mr Hart and WPPL dispute the FCA’s decisions and have referred their cases to the Upper Tribunal (the Tribunal). Accordingly, the findings in these Decision Notices are provisional pending the Tribunal’s determination of Mr Hart and WPPL’s references. In relation to the FCA’s decisions to prohibit Mr Hart from any regulated role and cancel WPPL’s interim permission, the Tribunal will determine whether to dismiss the reference or remit it to the FCA with a direction to reconsider and reach a decision in accordance with the findings of the Tribunal. The Tribunal’s decisions will be published on its website.
The FCA has found that Mr Hart is not a fit and proper person because he lacks integrity and competence. In the FCA’s view, between 1 April 2014 and 28 August 2014, he took a reckless approach to managing WPPL and to complying with regulatory requirements. Mr Hart recklessly contributed to and failed to address unfair business practices carried on by WPPL.
Mr Hart failed to take reasonable steps to implement appropriate policies and procedures relating to creditworthiness, affordability and forbearance. He also failed to take reasonable steps to ensure that WPPL had appropriate systems in place to communicate with customers, to ensure that customer complaints were dealt with adequately, to provide proper oversight of WPPL’s staff and to ensure that WPPL’s loan agreements complied with regulatory requirements.
Mr Hart’s failings had a direct impact on WPPL’s customers, who were often treated unfairly and were frequently misled. Customer complaints were commonly disregarded, and excessive sums were taken out of some customers’ bank accounts. In some cases these practices caused financial loss to customers, many of whom were already in financial difficulties.
On 28 August 2014, WPPL submitted an application for the imposition of requirements on its interim permission. Since that date, WPPL has not been permitted to lend to new or existing customers or to engage in any outbound collection of any debts due to it under regulated credit agreements (except in the limited circumstances specified in the requirements on its interim permission).
The FCA has decided to cancel WPPL’s interim permission because it is failing to satisfy the threshold conditions regarding appropriate resources and suitability, for reasons including its connection with Mr Hart.
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[description] => Based on an extended STIRPAT framework, this paper investigates the effects of financial development on carbon emission intensity in OECD countries from linear and non-linear perspectives, where financial development is proxied by three dimensions: financial deepening, financial deepening, and financial size, and financial efficiency. Fortunately, three types of financial development significantly alleviate carbon emission intensity. An extended moderation effect model is built to estimate the effect of financial development via information and communication technology on carbon emission intensity. The results reveal that internet-based information and communication technology and service-based information and communication technology are positively correlated with carbon emission intensity. To effectively handle the endogeneity issue triggered by causal relationships between variables and allow potential non-linear nexus, an advanced dynamic panel threshold model incorporating the generalised method of moments is employed to investigate how financial development affects carbon emission intensity under different types of information and communication technology. Empirical evidence demonstrates the significance of the non-linear nexus between financial development and carbon emission intensity. Lastly, heterogeneity analysis demonstrates the existence of heterogeneity associated with institutional quality, degree of economic development, and resource endowment concerning the effect of financial development on carbon emission intensity among the OECD countries. Full paper available at https://doi.org/10.1016/j.jenvman.2023.117553
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[description] => Speaker: Ashley Alder, Financial Conduct Authority Chair
Event: UK Mission to the European Union
Delivered: 20 February 2024
Note: this is the speech as drafted and may differ from the delivered version
Deputy Ambassador, it’s great to be able to join you in what I gather has become a regular Embassy event the day before Eurofi.
I joined the FCA as Chair exactly a year ago today. And since then, I’ve come to understand the challenges to global cooperation amongst regulators in a world where market fragmentation and shifts towards protectionism are an undeniable trend.
Effective cooperation matters hugely to enable us to manage the considerable risks that accompany extremely large volumes of cross-border financial activity. And of course, this includes activity between the EU and UK, whose financial services sectors remain closely intertwined.
Whenever possible I have sought to emphasise our strong commitment to our relationship with the EU, especially with our counterpart financial market regulators.
In fact, only three weeks ago I attended ESMA’s Board of Supervisors to exchange views on some of the many topics we have in common. These ranged from AI and digital markets to sustainable finance and the risks that arise from the sizeable shift of financial activity into so-called “non-banks” and private markets.
These discussions demonstrated to all who were there that close cooperation is more essential than ever in a world facing what some have called a polycrisis.
It’s hard to overstate the turmoil we are all attempting to navigate. Conflicts in Europe and the Middle East. The climate crisis as the defining challenge for generations to come. And the lasting economic drag of COVID with higher living costs for many across the world.
The IMF has pointed out that these challenges have resulted in an increased threat of fragmentation and decoupling of trade, resulting in a significant impact on global GDP.
In 2021, Ipsos polled people across the world on their attitudes to trade.
Unsurprisingly most people, regardless of where they lived, thought that an expansion of trade was a good thing. At the same time, in most countries, more people agreed that there should be greater barriers on imported ‘foreign’ goods and services.
This illustrates vividly some fundamental tensions which can even impact our effectiveness as regulators of global financial activity.
The FCA’s primary statutory objectives are to enhance market integrity, promote competition and protect consumers. Each objective is fully aligned with an open markets philosophy where healthy competition lowers costs for consumers and high, consistent and proportionate standards reduce unnecessary, expensive frictions across the financial services landscape.
This approach enables centres of excellence to develop, which provide benefits well beyond national borders. And it’s true that the UK has been an historic beneficiary of open markets.
Despite some recent pessimism about the future of the UK’s equity capital markets (which I personally think is misplaced), we remain the largest market in the world for debt issuance, the largest centre for commercial insurance, number one in foreign exchanges, the second largest base for asset management and the second largest fintech hub.
Financial centres in Europe are, understandably, incentivised to compete for some of this business.
In the UK legislation was passed last July to give us a new, explicit secondary objective to pursue the UK’s international competitiveness and growth. This is reflective of a healthy ambition shared by many national regulators to pursue policies which are aligned with long term economic success.
But we also know from experience that there is often a strong temptation to intervene in ways that build barriers which ultimately result in costly fragmentation of global activity. Among other effects this increases the cost of capital in a world where financial flows have outsized significance – not least to finance the transition to net zero.
So, to be clear, our new competitiveness objective does not imply isolationism or a dialling back on our commitment to cooperation and open global markets. In fact, just the opposite.
In an interconnected global economy dependent on international investment, the FCA knows that it can’t achieve its consumer, market integrity and competition objectives alone.
We have made clear that cooperation around international standards and cross-border collaboration is closely tied to efficient capital formation and greater productivity. And we believe that this holds just as true for our EU counterparts as it does for the UK.
In short, the FCA is committed to finding consistent international responses to challenges that increasingly give rise to cross-border risks, collaborating with our EU and international partners to foster open and competitive global economies.
I’ll touch on just a couple of examples of how we are doing this.
First, last month the UK Government announced its decision that EU states are deemed equivalent to the UK under our Overseas Funds Regime.
This enables EU UCITS funds to be marketed to UK retail investors, supporting the existing global operating model of asset managers and facilitating greater consumer choice.
As with any properly implemented equivalence regime it also ensures that foreign funds sold to UK investors meet high standards of transparency, investor protection, and regulatory oversight. My hope is this initiative could be a pathfinder for additional findings of equivalence in years to come, to include principles of reciprocity.
In this spirit the recent financial services agreement between the UK and Switzerland signified an ambitious attempt to push the envelope in terms of what can be achieved in developing more formalised financial services cooperation agreements.
This deal delivers enhanced market access with closer regulatory and supervisory cooperation, with each jurisdiction recognising that the other’s system of regulation delivers equivalent outcomes across a suite of financial services’ activities. This approach is fully aligned with competitiveness and economic growth objectives for each side.
More broadly we see a cooperative approach as a necessary condition for the collective effort required to tackle the challenges and opportunities posed by the climate crisis, developments in Fintech and the growth of financial intermediation outside banks. I’ll take these in turn.
Financing the transition of our economies to a low-carbon future demands a global approach to a problem which, more than any other, transcends borders. Many countries have announced ambitions to be competitive centres of green finance, including the UK. But for any of us to realise the full extent of these ambitions it is crucial that we agree the rules of the game globally.
Without sufficient global consistency investors lack the ability to compare and make informed choices, resulting in sub-par capital allocation decisions which fail to align with the climate transition.
So here I’ll point to the impressive progress made by the International Sustainability Standards Board
Link is external
(ISSB), which was set up as recently as 2021. Its baseline disclosure standards are now being adopted across the world, and we were impressed to see how willing the EU authorities were to incorporate these standards into their own frameworks.
We are similarly committed to the work of the EU’s International Platform on Sustainable Finance
Link is external
(IPSF). This is where the FCA is participating in a transition finance working group with a view to leveraging the UK’s new Transition Plan disclosure framework
Link is external
to inform a globally coherent approach.
The FCA has also drawn on the EU’s experience to adapt our regulatory expectations to meet the needs of a sustainability-focused market for financial products.
Our recently published Sustainability Disclosure and investment labelling regime is fully aligned with the ISSB’s drive for global interoperability, enabling firms to rely on overseas standards when reporting to stakeholders, including the EU’s green taxonomy.
Fintech is another example of how international cooperation among regulators can support firms and consumers, whilst managing a set of novel risks. This sector is now a major disruptive force, challenging traditional financial institutions and driving innovation across the industry.
In each of the seven largest European economies there is now at least one fintech among the top 5 banks. The attitude of most regulators to these innovations is fairly binary. First, by fostering an environment that encourages fintech ideas to flourish we aim to promote competition, enhance consumer choice and protection as well as encourage economic growth.
Many of us have launched successful regulatory and digital sandboxes and have set up mechanisms to learn from each other as innovation develops.
But we must also be alert to new risks where the development of common international approaches to protect financial stability and competition is essential.
The failure of SVB and other problems with banks last year was a prime illustration of how technology has massively accelerated the speed at which bank runs can develop. This requires smart policy responses which don’t increase moral hazard.
Important questions are also being asked about the evolving role of Big Tech and social media across financial services.
For example, last November the FCA issued a call for input about the way in which Big Tech firms could gain advantages from their digital activities when they combine core business data with financial information sourced from different data sharing mechanisms.
When this combined data is leveraged through advanced analytics and AI, the result could be that these firms gain entrenched market power.
We recognise that there could be benefits arising from a concentration of customer data in Big Tech firms. But my overall point is that a handful of them have already achieved unprecedented global reach, meaning that incentives for regulators to learn from each other and pursue common approaches are hugely compelling.
Here I’ll just point to the UK’s recent proposals enabling financial regulators to directly regulate how Big Tech firms provide critical services to financial firms, such as cloud storage. This is a good indication of how our remit is likely to expand into sectors which have not traditionally been classed as financial services. And I know that our European partners are looking at similar issues.
I’ll finish with a word on so-called non-banks. These comprise a vast range of globally active public and private investment funds, money market funds, pension funds, insurers and the like, which have grown to intermediate around 50% of global financial assets.
Their activities have led to a wall of worry, with the Archegos episode, disfunction in global nickel markets, the LDI incident and concerns about hedge fund activity in treasury markets all seen as canaries in the coalmine for potential global financial stability risks.
In my view the priority for regulation of this vast and diverse non-bank sector should hinge on a global effort to improve the data needed to spot risks in private markets and supervise them credibly. This should include a good understanding of hidden leverage, a better assessment of liquidity risks, and better information on exposures between private markets and traditional banks.
To this end we are working with our international partners in the FSB’s Leverage Working Group, which we co-chair with the ECB
Link is external
. This aims to identify gaps in existing data and policy tools to address the build-up of systemic risk arising in opaque markets where interactions between leverage and poor liquidity can signal trouble.
The point, once again, is to recognise that none of us can hope to manage the cross-border risks implicit in the shift of activity into private markets without close international coordination.
To sum up, I believe that the UK and EU must lead by example.
As two of the world’s largest economies, our actions reverberate far beyond our borders. We should demonstrate an unwavering commitment to high standards, openness and cooperation, not only in our bilateral relationship but also in our interactions with other trading partners.
We may have left the EU, but the ties that bind the UK and Europe together - economic, cultural and relationships forged over decades - remain incredibly strong.
You should naturally expect that the FCA will take full advantage of its ability to pursue a major reform program to tailor financial services regulation to suit UK markets, using powers newly given to us in legislation passed last July.
But in doing so we recognise that in key areas the EU and UK are pursuing similar reforms which, although not identical, signal common causes. We are fully alive to the dangers of regulatory fragmentation, and while I believe that we should avoid talking about reforms in terms of ‘divergence’ between the UK and EU, I can also say that we won’t be pursuing change for change’s sake.
Last year’s UK – EU MOU on regulatory cooperation on financial services
Link is external
was an extremely welcome development, enabling us to deepen relationships with our EU counterparts which are already close and collegiate.
By strengthening our partnerships, enhancing our cooperation and upholding our shared values, we can build a more prosperous future for generations to come.
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[blurb] => Banco de España has transformed its data infrastructure, managing up to 850 TB of micro‑data on a new lakehouse platform to improve data quality, accessibility and analytics.
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[description] => As part of its 2020‑2024 strategic plan, Banco de España redesigned its information management processes, moving from siloed systems and ageing architecture to a modern data lakehouse built on Cloudera technology. The project, known as BigCIR, now handles 77 billion records and around 3,300 weekly queries, while enabling strong data‑governance practices, enhanced analytics and full access to granular micro‑data. Thanks to automated data‑quality tagging, users can now easily assess whether information is final or provisional, supporting more reliable analysis and faster insights for supervision and policy.
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[description] => Investment in productive finance refers to investment that expands productive capacity, furthers sustainable growth and can make an important contribution to the real economy. Examples of this include plant and equipment (which can help businesses achieve scale), research and development (which improves the knowledge economy), technologies (for example, green technology), infrastructure and unlisted equities related to these sectors.
Productive finance investment can generate desirable outcomes for investors. It also provides various challenges, including that it may necessitate long-term commitments from investors in some cases.
The economic uncertainty created by coronavirus (Covid-19) means that it is now more crucial than ever that a long-term investment culture is fostered that ensures good outcomes for consumers, while aiding economic recovery.
The working group will build upon work already undertaken to investigate the challenges and potential barriers to investment in productive finance assets in the UK, including the Treasury’s Patient Capital Review in 2016 and the Asset Management Taskforce’s UK Funds Regime Working Group’s Long-Term Asset Fund (LTAF) proposal in 2019.
The working group’s mandate will be to agree the necessary foundations that could be implemented by firms and investment platforms, to facilitate investment in long-term assets by a wide range of investors.
The working group will:
The working group will be co-sponsored by the Economic Secretary to the Treasury; Andrew Bailey, Governor of the Bank; and Nikhil Rathi, Chief Executive of the FCA. The membership will be drawn from a diverse set of market participants, including but not limited to banks, asset management firms, pension funds and insurance companies, corporates, infrastructure firms, wealth managers, investment platforms and trade associations representing relevant sectors and markets.
Membership will be by invitation from the Treasury, the Bank and the FCA who will determine the final membership against a set of transparent criteria, including market footprint in UK, relevance to the mandate of productive finance, contribution to overall representativeness to the group, and engagement with productive finance issues. Further details will be announced in coming weeks.
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[description] => Opening remarks by Mr Pablo Hernández de Cos, Governor of the Bank of Spain and Chairman of the Basel Committee on Banking Supervision, at the 1st "Observatorio de las Finanzas" Symposium, organized by El Español/Invertia, 22 March 2021.The views expressed in this speech are those of the speaker and not the view of the BIS.Central bank speech | 26 March 2021by Pablo Hernández de CosPDF full text (211kb) | 12 pagesGood evening ladies and gentlemen.I should like to thank the organisers of this 1st "Observatorio de las Finanzas" Symposium staged by El Español/Invertia for inviting me to deliver this opening address. This forum has proven timely; the challenges posed by the pandemic make it particularly important for the main financial institutions and the regulatory and supervisory authorities to pool their views on the situation of the Spanish financial system.To contribute to this debate, I shall analyse today what the banking sector's pre-crisis starting point was, the impact of the crisis over this first year, the current situation and the challenges ahead.The starting point: a more resilient banking sectorAs we know, the COVID-19 pandemic strongly impacted Spanish economic activity in 2020. GDP underwent a year-on-year decline of 11% last year, marking an unprecedented peacetime contraction. This decline has been appreciably steeper than that of other, comparable euro area economies. This relatively worse performance has been due, at least in part, to structural factors, such as the greater weight in our economy of the services sector. The adverse impact has been particularly severe in some sectors of the economy (hospitality, retail and wholesale trade, transport, etc.) and in specific population groups (in particular among the lesser skilled and young adults).About the authorPablo Hernández de CosMore from this authorRelated informationMore speeches from "Bank of Spain"Country page: Spain
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[description] => BIS Quarterly Review | June 2005 | 13 June 2005by Ingo Fender and Janet MitchellPDF full text (80kb) | 14 pagesThis article reviews the principal features of structured finance instruments. Key to understanding the risk properties of these products is the evaluation of the risks associated with their contractual structure, in addition to the modelling of the credit risk of the underlying asset pools. It is argued that structured finance ratings, though useful, have intrinsic limitations in fully gauging the risk of these products, even as their complexity creates incentives to rely more heavily on ratings than for other rated securities. Market participants and public authorities need to take account of this in their assessments of structured finance instruments and their markets.JEL classification: G100, G200.About the authorsIngo FenderMore from this authorJanet MitchellMore from this author
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[description] => The Asian Office conducts policy analysis and research on topics related to monetary and financial stability, including digital innovation. Research is done in close collaboration with staff across the BIS globally as well as central banks and other stakeholders in the region.Research at the Asian Office currently focuses on the following priority themes:macro-financial analysisinflation expectations and monetary transmissiontrade and financial integrationdigital finance and artificial intelligenceclimate change and green financeResearch
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[description] => Keynote address by Mr Johannes !Gawaxab, Governor of the Bank of Namibia, at the Global African Hydrogen Summit, Windhoek, 4 September 2024.The views expressed in this speech are those of the speaker and not the view of the BIS.Central bank speech | 06 September 2024by Johannes !GawaxabPDF full text (11kb) | 5 pagesDirector of CeremoniesDistinguished Speakers and Panellists,Captains of Industry,Esteemed guests,Ladies and Gentlemen,Good afternoon,We stand at a pivotal moment in history, facing challenges that demand both urgency and action. Climate change has evolved from a future concern into a present crisis, affecting economies, ecosystems, and communities around the world. As central banks, our role has traditionally focused on maintaining price stability and safeguarding financial systems. Yet, as the realities of climate change unfold, we must ask ourselves: what is our responsibility in this unprecedented situation? And how can we support the transition to a sustainable, low-carbon economy while protecting the financial systems we oversee?For Namibia, this challenge presents a unique opportunity. Our country has set bold ambitions to become a leader in green hydrogen production and is positioning itself at the forefront of the global energy transition. This is not just about responding to climate change; it is about leading in the emerging green economy. While this ambition is challenging, Namibia has a proven track record of rising to the occasion when it matters most, demonstrating our ability to lead and innovate in critical moments.Today, I invite you to explore these crucial questions with me as I outline the steps the Bank of Namibia plans to take to address the evolving economic and environmental landscape and align our financial sector with Namibia's green hydrogen agenda to foster a resilient, low-carbon economy.Ladies and gentlemen,Global temperatures are rising, and as the World Meteorological Organisation notes, are "likely to reach new highs over the next few years," making it clear that climate change is not a distant threat but a present and escalating crisis. The economic impact of these events is staggering, with annual global damages from weather-related events having more than doubled in the past twenty years to reach $275 billion USD in 2022. As the frequency and severity of climate related risks increases, Central banks, will need to assess and understand the economic impact of climate change and reflect on the scope of responsibilities we wish to carry in managing climate-related risks.Central banks typically have two core mandates: maintaining price stability and safeguarding financial stability. There is increasing empirical evidence that the physical impacts of climate change are already affecting inflation in many economies, particularly in the Global South. As extreme weather events become more frequent and severe, they could disrupt agricultural and industrial production, leading to supply shocks and cost-push inflation. For instance, Namibia has experienced several severe droughts in recent years, including 2013, 2016, 2019 and, most recently, 2024 with a national state of emergency having been declared on account of the persisting national drought. These drought episodes have severely impacted the country's water supply, energy generation, and industrial production capacity - contributing to inflationary pressures.In addition to maintaining price stability, safeguarding financial stability is a critical responsibility of central banks. Climate change and environmental degradation pose significant risks to the stability of individual financial institutions and the financial system as a whole. In light of this, there are at least three reasons why central banks need to be concerned about climate change, and the loss of nature.Firstly, we must respond to environmental externalities that impact our core mandates. The physical and transition impacts of climate change create financial risks that need to be mitigated. Mark Carney, the former Governor of the Bank of England, aptly stated, "Climate change is the tragedy on the horizon," emphasising the urgent need for action. These risks can threaten macroeconomic and price stability, making it crucial for regulators and supervisors to understand, assess, and address them within our prudential and monetary policy frameworks.Secondly, central banks occupy a unique position within the financial system that enables us to influence market behaviour. By aligning financial markets with sustainability goals in a phased approach, we can play a vital role in supporting the transition to a low-carbon, environmentally sustainable, and resilient economy. While central banks cannot replace government policies on climate change and nature, we can ensure that the financial system supports this critical transition.Finally, we must lead by example. As we ask supervised entities to disclose climate- and nature-related risks and consider these factors in their decision-making processes, we must apply the same standards to our own operations. This commitment to transparency and accountability will strengthen our credibility and effectiveness in managing climate-related risks.Consensus has started to emerge within the global central banking community that addressing climate and nature-related risks in the pursuit of price and financial stability falls squarely within our mandates and remit to a large extent. This has been affirmed by the 138 central banks that have joined the Network of Central Banks and Supervisors for Greening the Financial System (NGFS), including the Bank of Namibia, which gained membership to this pivotal network in December 2023. The NGFS has also emphasised the role of central banks in actively supporting the scaling up and expansion of sustainable finance.Ladies and gentlemen,Against this backdrop, we are of the view that the Bank of Namibia has a role to play in not only in managing climate and nature-related financial risks but also in supporting the scaling up of sustainable finance and investment in emerging renewable sectors. Several factors compel us to take a more active stance. Namibia's bold move into the Green Hydrogen sector illustrates the country's leadership in the transition agenda. Moreover, the Namibian banking industry has shown commendable initiative by adopting a sustainability agenda of its own accord, with a number of local banks having issued Green and Sustainable Bonds to support green and social projects.In the face of these developments, it is clear that addressing climate change and the associated macroeconomic risks requires a comprehensive and coordinated approach involving the Central Bank, other regulators, and the broader financial sector. To this end, the Bank of Namibia is committed to playing an instrumental role in facilitating engagement on sustainability within the financial sector. We are adopting a proactive and forward-looking approach to support the just transition to a green and blue economy, ensuring the stability, resilience, and sustainability of both the banking sector and the broader economy.This year, the Bank of Namibia took a significant first step by developing a Sustainability Framework which outlines the Banks' vision to institutionalise sustainable finance within the financial industry and establish a dedicated industry body to champion sustainability within the Namibian financial system. These initiatives, which are set to be officially launched in the coming weeks, align with Namibia's goal of becoming a net clean energy-based country by 2050.Ladies and gentlemen,The world is evolving rapidly as it accelerates towards achieving net-zero targets. New markets and new growth pathways are emerging as nations race towards this sustainable future, and those who embrace the green agenda will have a competitive advantage in the race for capital. As the central bank, we fully support the Green Industrialisation Blueprint, which outlines our nation's roadmap toward economic diversification and societal advancement. This green agenda is not just about reducing emissions; it is about fostering investment, especially in the manufacturing sector, and setting the stage for reforms that will eliminate barriers to productivity and encourage robust, export-led growth.With that said, why should institutional investors see Namibia as the destination of choice? At the forefront is our commitment to creating the right regulatory environment to unlock the country's hydrogen potential. To ensure this, Namibia will introduce a comprehensive national strategic and legislative framework through the Synthetic Fuels Act. This legislation will establish standards that conform to international guidelines, thereby reducing operational uncertainties for developers and ensuring compliance with international export market requirements.Distinguished guest, this is your invitation to join us.As we extend this invitation, we are keenly aware of the potential positive externalities that green hydrogen projects could generate for existing sectors of our economy and support the government's diversification agenda.To fully capitalise on these emerging opportunities, it is imperative to fast-track ongoing measures to improve the business environment. This includes ensuring a predictable regulatory framework, easing constraints for hiring skilled foreign workers, and strengthening governance through improved accountability and transparency.In this vein, to strengthen the governance and management of the country's prospective energy revenues Namibia launched the Sovereign Wealth Fund. The Welwitschia Fund, Namibia's first sovereign wealth fund, was established at a pivotal moment, given the nascent economic discoveries in the country. Launched with USD17.7 million (NAD 262 million) in seed capital, the Fund will play a critical role in safeguarding the interests of future generations by serving as a strategic investment vehicle for Namibia's long-term economic and environmental well-being.Another important objective of the Welwitschia Fund is to support fiscal and macroeconomic stabilisation and contribute to Namibia's official foreign reserves. The Sovereign Wealth Fund Bill, currently being finalised by the MOFPE and the Bank of Namibia, is a significant piece of legislation that aims to enshrine these objectives. This Bill, which will be tabled before parliament in the coming year, includes provisions for establishing the Welwitschia Fund as a separate legal entity, with clear governance structures, management responsibilities, investment guidelines, risk management principles, and rules for the distribution and withdrawal of funds. Notably, the Welwitschia Fund intends to adhere to the Santiago Principles, committing to transparency, good governance, accountability, and prudent investment practices.Revenue flows from emerging sectors like oil, gas, and green hydrogen will help Namibia reduce its reliance on traditional economic sectors, thereby mitigating risks and contributing to economic stability. The promulgation of the Sovereign Wealth Fund Bill will ensure that the Fund is well-managed, enhancing Namibia's financial independence and capacity to respond to challenges and opportunities. The Bank of Namibia has been entrusted with managing the Fund's assets, and as of August 20th, 2024, the Fund's asset base has grown to USD 24 million (NAD 428 million), representing a significant increase. However, we need to manage two key transitions: a just energy transition and managing expectations over the next 5-10 years before revenues from oil, gas, and renewables, including green hydrogen, begin to flow. Until these revenues materialise, current economic realities may warrant fiscal consolidation to ensure macroeconomic stability and a sustainable financial foundation leading up to 2030.Ladies and gentlemen,As we stand on the brink of a new energy dawn, our country, rich with promise yet burdened by the past, calls us to find a path that is both fair and just. In a world where clean energy shines bright, we dream of a future that is pure and light. Yet, in the soil beneath our feet lies a treasure we must leverage to uplift our people, breaking the chains of poverty, inequality, unemployment, and pain. In pursuing our Noble Energy dream, let us be wise and mindful of the reality that capital flow may take five to ten years. We must build tomorrow with hope, not haste, and avoid borrowing sorrow from a future that has yet to unfold. As we look ahead, the Bank of Namibia is committed to ensuring that our financial system is not only resilient to climate risks but also a driver of sustainable growth. As former United Nations Secretary-General Ban Ki-moon stated, "We are the first generation to feel the effect of climate change and the last generation who can do something about it." This powerful reminder urges us to seize this moment and lead by example, ensuring a stable, sustainable, and prosperous future for all.Namibia's journey toward a green economy is not just a policy decision; it is a call to action. We are building a future where economic growth and environmental sustainability go hand in hand. This is your invitation to join us on this journey. Together, we can harness the power of innovation and investment to create a greener, more prosperous Namibia. Let us embrace this opportunity and work collectively to drive the green agenda forward. The world is watching, and the time to act is now.I thank you.About the authorJohannes !GawaxabMore from this authorRelated informationMore speeches from "Bank of Namibia"Country page: Namibia
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[description] => What’s the latest thinking in fiscal and monetary policy? The Hutchins Roundup keeps you informed of the latest research, charts, and speeches. Want to receive the Hutchins Roundup as an email? Sign up here to get it in your inbox every Thursday.
Skilled workers leave areas dominated by few employers
Using county-level data over the 1980-2010 period, Matthew E. Kahn at the University of Southern California and Joseph Tracy of the Federal Reserve Bank of Dallas find that skilled workers tend to move away from areas with high levels of monopsony power (where a single or few employers dominate the local labor market), leading to a “brain drain” and a decrease in the average skill level of the remaining population. Specifically, counties with a one-standard deviation higher employment concentration experience population growth over the next 10 years that is 0.88 percentage point lower than other counties as workers migrate to more competitive areas. These counties experience a 4%-4.4% decline in the share of individuals aged 26 to 35 and a 16.7%-18.2% decline in the share of individuals holding a college degree or higher. The authors note that the rise of work-from-home arrangements due to the pandemic may allow younger and more-educated workers to reside in monopsony areas without facing lower wages, possibly making the areas less likely to “deskill.”
Older mortgage refinance applicants are rejected more often
As the U.S. population ages, senior citizens’ ability to access credit is an increasingly important policy concern. Examining millions of mortgage applications, Natee Amornsiripanitch of the Philadelphia Federal Reserve finds that older mortgage refinance applicants are more frequently rejected than their younger counterparts with similar credit characteristics. From the age of 25 onwards, “rejection probability increases smoothly with age and accelerates in old age.” The probability of rejection is higher for men than women, and the gap increases over time. Older borrowers’ mortgages also had slightly higher interest rates. The author finds that insufficient collateral—when the value of a property is low compared to the requested loan amount—was the most common reason for rejections for older borrowers. The author suggests that age may be as big a barrier to getting a mortgage as race or ethnicity.
COVID caution explains worse labor market outcomes for Asian Americans
While Asian Americans have typically fared well during previous economic recessions, they experienced disproportionately large increases in unemployment during the COVID-19 pandemic. Chris de Mena of the University of California, Davis, Suvy Qin of the University of California, Berkeley, and Jing Zhang of the Federal Reserve Bank of Chicago attribute this phenomenon to greater caution among Asian Americans about COVID-19 infections and, thus, more selectivity about job opportunities. Using cellphone data from SafeGraph, the authors find that mobility is reduced by 0.17 percentage points for each percentage point increase in the Asian share of an area’s population. Three-quarters of this decline comes from reduced non-work mobility, suggesting that this reflects increased COVID caution rather than worse labor market opportunities.
Chart of the week: Yield on US 2-year Treasury plunges amid banking woes
Source: Trading Economics
Quote of the week:
“Often, when innovation is discussed within the context of the banking system, the focus is not on traditional banks engaged in core banking activities, like taking retail deposits and making loans. I think this perception misses the mark. Innovation has always been a priority for banks of all sizes and business models…. Innovation has the potential to make the banking and payments systems faster and more efficient, to bring new products and services to customers, and even to enhance safety and soundness. Yet, some have criticized the banking regulators for being hostile to innovation, at least when that innovation occurs within the regulated financial system. Regulators are continually learning about and adapting to new technologies, just as banks are, and regulators can play an important, complementary role, making the regulatory rules of the road clear and transparent to foster bank innovation,” says Michelle Bowman, Governor, Federal Reserve Board.
“Along with presenting new opportunities, innovation can introduce new risks and create new vulnerabilities. Banks, and really, any business today that adopts new technologies must be prepared to make corresponding improvements to manage these risks and vulnerabilities, including improvements to risk management, cybersecurity, and consumer compliance. Regulators must continue to promote efforts that are consistent with safe and sound banking practices and in compliance with applicable laws, including consumer protection laws….[T]his is not always an easy task, and the regulatory response to innovation must reflect the changes in how banks engage in this process.”
“It is absolutely critical that innovation not distract banks and regulators from the traditional risks that are omnipresent in the business of banking, particularly credit, liquidity, concentration, and interest rate risk. These more traditional risks are present in all bank business models but can be especially acute for banks engaging in novel activities or exposed to new markets, including crypto-assets. Whatever the cause, many traditional risks can be mitigated with appropriate risk-management and liquidity planning practices, and effective supervision, and without stifling the ability of banks to innovate.”
The Brookings Institution is financed through the support of a diverse array of foundations, corporations, governments, individuals, as well as an endowment. A list of donors can be found in our annual reports published online here. The findings, interpretations, and conclusions in this report are solely those of its author(s) and are not influenced by any donation.
The Brookings Institution is committed to quality, independence, and impact.
We are supported by a diverse array of funders. In line with our values and policies, each Brookings publication represents the sole views of its author(s).
[keywords] => the Philadelphia Federal Reserve COVID the University of California, COVID-19 Davis Dallas Federal Reserve Board Berkeley SafeGraph the University of Southern California Brookings The Brookings Institution US Matthew E. Kahn Chris de Mena Joseph Tracy Treasury Suvy Qin the University of California the Federal Reserve Bank Michelle Bowman U.S. Jing Zhang Hutchins Roundup the Federal Reserve Bank of Chicago Natee Amornsiripanitch counties workers migrate mortgage access disparities concentration experience population monetary policy hutchins population quarters decline
[name] => Hutchins Roundup: Worker migration, mortgage access disparities, and more
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[description] => In the 1930s, former President Franklin Delano Roosevelt faced the monumental challenge of restoring Americans’ faith in the economy. Agriculture and heavy manufacturing were at the heart of innovation at that time. Roosevelt’s response was the New Deal, the numerous programs he initiated to stabilize the economy and safeguard workers. Some of the most notable workforce programs and labor laws were established then, including unemployment insurance, worker retraining, Social Security, and more.
Decades later, as we face a similar challenging moment today, it’s technology and telecommunications infrastructures that are the leading paths toward economic recovery as they expand into other industries like transportation, manufacturing, and emerging forms of commerce. President Biden has put forth an agenda to Build Back Better to address the pandemic, reopen schools, reform immigration, and get Americans back to work. In addition to these, Biden needs a “Tech New Deal” to accelerate the deployment and adoption of high-speed broadband access for economic recovery and greater social integration. Ubiquitous technology access can also help execute a complementary range of pandemic response programs.
Making high-speed broadband and the applications it enables are priorities of the Tech New Deal. These efforts should be followed by the reform of the existing federal universal service program, creation of twenty-first century jobs and relevant workforce training, more digital-ready businesses, investments in start-ups, and expanded digital access to schools, libraries, and surrounding communities to ensure that no child is left offline.
While the deployment of a national vaccination strategy will likely override immediate attention to a proposed Tech New Deal, the dire economic consequences of the pandemic should position technology as one of the spokes of the modern economy. Biden’s current challenges are different than those of President Roosevelt. The unforeseen global pandemic has starkly affected many U.S. industries, especially the hospitality, retail, and leisure sectors. More than 100,000 small businesses have permanently closed, and the nation’s unemployment rate remained unchanged at 6.7 percent in December 2020 with 10.7 million people unemployed. Rapid business closures and high unemployment rates have led to increased food insecurity for millions, and forthcoming housing evictions and foreclosures will be equally detrimental. The social distancing mandates to mitigate COVID-19 have also made online connectivity essential as more people are connecting to doctors, schools, and remote workplaces via the Internet.
Read the full article on Democracy: A Journal of Ideas.
The Brookings Institution is committed to quality, independence, and impact.
We are supported by a diverse array of funders. In line with our values and policies, each Brookings publication represents the sole views of its author(s).
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[description] => CPMI Papers | No 139 | 30 November 2015PDF full text (1,204kb) | 217 pagesThe Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO) continue to closely monitor the implementation of the Principles for financial market infrastructures (PFMI). The PFMI are international standards for payment, clearing and settlement systems, and trade repositories. They are designed to ensure that the infrastructure supporting global financial markets is robust and well placed to withstand financial shocks.This report presents the findings of the CPMI-IOSCO assessment of the completeness and consistency of frameworks and outcomes arising from jurisdictions' implementation of the Responsibilities for authorities in the PFMI. The assessments covered implementation of the Responsibilities across all financial market infrastructure (FMI) types in 28 participating jurisdictions. The work on the Responsibilities was carried out as a peer review during 2015 and the assessment ratings for each jurisdiction reflect the implementation measures in place as at 9 January 2015; other measures implemented after this date, or other material developments, are noted where relevant but were not considered when assigning ratings of observance.Overall, the assessment revealed that a majority of the jurisdictions had achieved a high level of observance of the Responsibilities. Of the 28 jurisdictions assessed, 16 fully observed the five Responsibilities for all FMI types; an additional two jurisdictions either fully or broadly observed each of the five Responsibilities for all FMI types.With respect to specific FMI types, jurisdictions most frequently fell short of a fully observed rating in the case of trade repositories (TRs). Five of the participating jurisdictions had TR regimes that were still in development and were therefore determined to be "not ready for assessment". In addition, several other jurisdictions lacked clear criteria and/or fully disclosed policies to support their regulation, supervision and oversight of TRs.With respect to specific Responsibilities, considerable variability was observed in implementation measures for the Responsibility on cooperation with other authorities. This was due partly to the fact that many cooperative arrangements are new, but may in some cases also reflect different interpretations among authorities of the expectations in this area.CPMI and IOSCO will review the Responsibilities in light of the findings of this assessment and consider the need for additional guidance. Further, as jurisdictions gain greater experience with cooperative arrangements, particularly cross-border arrangements for central counterparties (CCPs) and TRs, CPMI and IOSCO expect to consider new developments as part of a follow-up exercise to this report.Related informationPress release: 30 November 2015
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[description] => Financial time series forecasting is a challenging issue in the time-series field and has at- tracted many researcher’s attention. Nowadays, it is one of the financial markets managers’ concerns that individuals with different tastes selection and amounts of every kind of asset to be able to enter those markets, to recognize suitable opportunities and to gain good profit based on correct assessment. Today's world is that of change, and it is an essential factor in organizational success and survival to know what we expect in the future. This paper provides the detailed information about the regulatory compliance and supervision of artificial iintelligence, machine learning and also possible effects on financial institutions.
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[description] => Good morning.
When Martin Wheatley opened the 2014 credit summit, the FCA had been regulating consumer credit for a whole three days. While a lot has happened in the last year, the message he sent out then – that for the FCA credit regulation comes with a significant responsibility to both firms and consumers – remains true. Especially as we see continued growth in consumer credit borrowing.
As you may have seen from our business plan and risk outlook, published a couple of days ago – the responsibility for regulating consumer credit has fundamentally changed the FCA.
And – as you may have seen from our business plan and risk outlook, published a couple of days ago – the responsibility for regulating consumer credit has fundamentally changed the FCA.
We knew that it would – it almost trebled the number of firms we regulate and diversified the needs of consumers that we are responsible for protecting and the businesses we regulate.
By way of illustration, two weeks ago we held a firm event in Edinburgh, where the delegates included the usual high street banks and mortgage brokers, but also a holiday park, dentist and even a football club.
In the course of the first year I’ve experienced first-hand some horrendous examples of consumer treatment, such as a man with severe learning difficulties and no income offered multiple payday loans. But I’ve also met people for whom access to credit means the ability to buy their child a birthday present. And a car dealer who had been poorly advised by a compliance consultant to spend an enormous amount of time and money to put in place policies for our new regime, far in excess of what we require.
Building productive relationships with very different businesses is not a nice to have for us. It’s the only way that we can work together to enable the positive development of this vital sector.
The difference between the last credit summit and now, of course, is that these relationships are a year old.
And it has been a busy year. So today I’m going to reflect on the work we’ve done, where we find ourselves one year in, and look ahead to what’s next.
As I start by reflecting on our first year, the scale of the task deserves a pause. Nearly fifty thousand firms that had a consumer credit licence with the Office of Fair Trading registered with us for interim permission.
On a monthly basis we are inviting groups of those firms to decide what’s next for them – whether to apply for full authorisation, become an appointed representative, or exit the credit market.
Our experience elsewhere tells us that a change in regulatory regime is often a time when people stop and reflect on their business models, and some may choose to leave.
Inevitably through the natural life-cycle of a business, some sole traders will take the chance to retire, business models will change, and the government may make changes to exemptions – such as the extension of the instalment exemption announced last week.
In some areas where we have seen poor practice, we expect that some firms will not meet our requirements when we assess their applications.
So we are not expecting all 50,000 firms who have interim permission to either apply or become authorised.
However most will, and are, submitting their applications and will continue to thrive in this market. Seeing the opportunities that arise from change.
The important point to make is that are committed to delivering the right regulatory standards in a proportionate way. We are committed to providing helpful communications to every firm to help them prepare – from blogs on the Credit Today website, to webinars to jargon busters and checklists through the post.
We have already authorised over ten thousand firms, with thousands more applications being reviewed by our dedicated team of case workers.
So to those of you preparing, or advising others on preparing their applications, the message should be an encouraging one, as long as you can show that you meet our requirements and have a business model that treats customers fairly.
To those of you who have been authorised: Regulation tells your customers that you meet our standards and that you put them at the heart of your business.
If you have interim permission or are fully authorised, it’s important that you keep up with our standards – you are an integral part of the UK financial services industry, making a difference to the lives of millions of people every day.
Whether it’s about buying cars, solar panels or smart phones, credit has opened up new technologies and opportunities to all of us. For many, it also provides a lifeline when unexpected situations arise.
The inherent risk, of course, is the potential for people to get into debts they find hard to repay. It’s the responsibility of both firms and consumers to manage this risk.
It’s the responsibility of the regulator to make sure the right standards are in place and are upheld. And of course, one of the reasons for the transfer of credit regulation to the FCA, was significant concern that, under the previous light touch regime, standards needed to be raised in some areas of the market.
Much of our first year has been marked by our work to raise standards – particularly in high-cost short-term credit and debt management.
I think it’s fair to say that much of our first year has been marked by our work to raise standards – particularly in high-cost short-term credit and debt management.
These are small markets in terms of numbers of consumers, but significant in terms of potential detriment. In our business plan last year, we said we would prioritise these sectors, and we have.
There were issues here that the OFT had not been able to resolve, and so we needed to act quickly with our greater resources and power to turn things around.
Our work on payday has, inevitably, attracted the most public attention. Our new rules restricting the use of continuous payment authorities and limiting rollovers, the cap on the total cost of credit and the work that we have done to secure redress for thousands of consumers have been well documented.
But as our review into forbearance and arrears in the high-cost short-term credit market showed, this was an industry that was simply not ready for FCA regulation.
Firms have been working to address regulatory failures over the last twelve months, but the steps that they have had to take to raise the bar have had to be significant. They’re not superficial tweaks – they are systemic and cultural changes. Firms have had to change senior management, re-train staff to deal with struggling customers and put better systems in place to improve monitoring, compliance and risk.
While it’s encouraging to hear from Mike O’Connor of Stepchange that they are seeing ‘signs of improvement’ in the payday loan sector, there’s no doubt that there is still some way to go.
This is also true of debt management. Our thematic review of the quality of advice in the debt management sector is coming to the final stages. Alongside that focused piece of work, our ongoing firm visits have been – frankly – disappointing. Some of the examples of consumer treatment we’ve seen are incredibly poor. And in September, we said so quite publically to send a clear message to the rest of the industry as they prepared for authorisation. We’ve agreed requirements with 13 firms and frozen the bank accounts of seven firms where client monies are at risk.
While our approach has been to set priorities and focus efforts on those, that doesn’t mean that we are inflexible, and it doesn’t mean that we are blind to emerging issues. We’ve had nearly 30,000 calls to our contact centre from consumers, and receive regular intelligence and alerts from firms, trade bodies and consumer organisations about harmful practices that threaten the integrity of the market.
That’s invaluable information for us.
One of the main flags raised this year was in relation to credit broking – particularly in relation to payday lending. Consumers were seeing payments being taken from their account with little understanding of what for or why. They were being misled about the purpose of giving payment details. Consumers around the UK complained to their banks, to us, to consumer bodies in large volumes.
In December, we took the rare step of exercising our powers to make new rules without consultation. Alongside that, we put dedicated supervision resource into systematically targeting the firms that caused the highest volume of complaints – to date 18 firms have voluntarily decided to stop taking on new business.
However, it is important that we don’t fall into the trap of thinking that our findings from our work on these areas are reflective of the market as a whole. This is a diverse sector with thousands of firms running useful businesses vital to people’s everyday lives.
All firms should understand that paying lip service to compliance is simply not acceptable. Firm conduct and culture goes to the heart of our work as a regulator.
We will tirelessly continue to dedicate resources and use our powers to respond to complaints about the practices and financial promotions of individual firms. We will take it very seriously when firms do not disclose important information when they apply for authorisation. But that is of course not the end game.
As a regulator, we want to enable change, not to force it.
Our experience from our first year is that firms are getting used to the way we work – through dialogue, negotiation, holding senior managers to account to drive conduct standards from the top and constructive engagement when it has come to consultation.
At the FCA, we place a lot of emphasis on making sure we work together to be the sum of our parts. Alongside our supervisors and authorisations case workers, we have economists, statisticians, researchers, policy makers and communications specialists working together to build our collective knowledge of how the credit industry is working in the UK, and to connect us with you.
This is so that we are in the best place to work with the industry on strengthening the health and evolution of the credit market for the longer term.
As the regulator we are uniquely placed to bring together consumer research and industry data and analyse it on a large scale.
Not only to understand the impact of our regulation but to identify sector-wide issues and best practice. To understand how the role of behavioural economics can work to make our rules more effective. For example, earlier this month we published a paper showing that signing up to text alerts or mobile banking apps reduces the amount of unarranged overdraft charges incurred by 5% to 8%. And signing up to both services has an additional effect, resulting in a total reduction of 24%.
Our credit card market study will bring together the largest consumer survey the FCA has ever undertaken with the analysis of several gigabytes of customer data and analysis of financial promotions. A study of substantial scale which is fit for one of the largest markets that we regulate.
For the majority of firms, doing the right thing, we recognise that it’s been a year of hard work for you. Preparing a detailed authorisation application, making changes to systems and getting familiar with a new rule book and principles based regulation. For many of you, wider legislative changes are also coming into play – such as the Mortgage Credit Directive. As the industry is adapting to our approach, and we are learning more about how the market operates, in some areas, we’ve had to take more regulatory action than we anticipated.
And we will keep learning too
Consumer credit remains a priority for the FCA in the coming year.
Consumer credit remains a priority for the FCA in the coming year. We have to complete the transition from the OFT regime. The authorisation process will move forward, and the day to day business of regulation will continue. We will be keeping a close watch on the impact of this year’s changes – on the market and on consumers, and our work on debt management and credit card market will come to fruition.
We need to keep making sure that our rules are really working in the best way for the market and for consumers, and adjust them where needed.
As you may be aware, we are currently consulting on the credit broking rules that came into effect in January. We are also asking for suggestions on what our future policy approach should be to broker remuneration. Alongside that, we are proposing to require firms to provide adequate explanations to guarantors, assess their creditworthiness and treat them with forbearance. We also want to allow firms to introduce continuous payment authority to collect repayments where a customer is in arrears or default and the lender is exercising forbearance.
I do urge you to have your say on these rules. We are running events around the UK to get direct input from firms. Demand for these has been encouraging and they are all booked up – so if you couldn’t get a place, I’m pleased to say you can now watch the London event, which is on 17th April as a webinar.
But there is new work to do.
If our first year was focused on particular ‘products’, if you like, in the year ahead we are going to be looking more towards addressing sector wide issues.
We will look at whether we should ban or restrict cold-calling, and also whether we can do more to facilitate the use of quotation searches across the sector as a whole.
Although we are still in the early stages of scoping, in our business plan we also announced our intention to carry out two new reviews.
One on the collection of unsecured debts will look at the ways in which consumer credit debts are collected and the extent to which firms involved in the recovery and collection of debts are following our rules.
The other will take a look at staff remuneration and incentives in consumer credit firms, to assess how firms are managing the risk that their reward arrangements could encourage potentially undesirable behaviours that might lead to poor outcomes for consumers.
But the main risk that has come into focus for us this year is a market-wide one – that of affordability. As consumer debt is growing, particularly among younger people, we are concerned that poor culture and practice in relation to consumer credit affordability assessments may be one of the key factors driving unaffordable debt. Unaffordable debt that can be the cause of harm for consumers.
If we are going to build a sustainable and healthy credit market for the future, that works in the interest of consumers and firms with sustainable business models, getting affordability assessments right could be the most important factor in helping people avoid unmanageable debt.
So far, we have been applying our knowledge and experience to the question. But there is more to do.
We know that the answer isn’t necessarily a simple one – and firms have been seeking clarity on our approach as they weigh up whether their checks are proportionate – going too far or not far enough.
We’ve looked at this in terms of our work on payday, and are looking at it in the credit card market study. But as we move to looking at the market as a whole, we will also be conducting more research work so we can learn more about the size and scope of any risks.
We will be looking at several issues, including how a wide range of firms assess affordability, to build a deeper understanding. This will lead to proposals to mitigate the risks we find, which we will, of course, consult with you on. It is really important to us that this is a thoughtful and careful piece of work.
We are all on a journey with consumer credit. But I want to be clear that our objective isn’t to achieve a smaller market. It is towards a sustainable one.
We are all on a journey with consumer credit. But I want to be clear that our objective isn’t to achieve a smaller market. It is towards a sustainable one.
Yes, in the short term, as we find we cannot reconcile bad practices in some markets with our standards, we expect to see a reduction in the number of firms.
But our journey is towards a credit market where consumers continue to have access to the products and services they need, while protecting them from practices that could lead to harm. That sustainable market is one that needs to work well across the whole consumer journey – from transparent financial promotions, through to responsible lending, the fair treatment of customers when they get into difficulty and suitable debt solutions. All of those things must be underpinned by a culture of ‘doing the right thing’ for your customers. That’s a challenge for every firm in this sector as you look at your own business models.
And finally, I want to leave you with a commitment and a request. A year in we are still learning. We are still listening. We will continue to keep up an open and honest dialogue with you as we learn more, and please do the same with us through the authorisation and supervision process.
Between us we can get to a sustainable sector in the interest of consumers.
Thank you.
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[description] => During her speech before the World Economic Forum’s virtual meeting in Davos in January, European Commission President Ursula von der Leyen invited the United States to join Europe in writing a new set of rules for the internet: “Together, we could create a digital economy rulebook that is valid worldwide. It goes from data protection and privacy to the security of critical infrastructure. A body of rules based on our values: human rights and pluralism, inclusion, and protection of privacy.”
This invitation to collaboration comes at a time of remarkable diversity in how states are approaching internet governance. Beijing is advancing new internet standards to replace the global, open, interoperable ones. Moscow is continuing to clamp down on the web through a combination of online and offline coercive measures. India is advancing a data-protection framework with large carve-outs for state data collection against the backdrop of the Modi government’s repressive internet shutdowns. A Brazilian official who authored the country’s data localization proposal recently called data flows abroad a violation of the country’s sovereignty. In Europe, the previous watchword of “digital sovereignty” may be giving way to talk of “strategic sovereignty” in the digital sphere, but the underlying premise remains the same: creating an internet environment where European values proliferate. In the United States, the Biden administration is grappling with how to reinvigorate U.S. global engagement on technology while simultaneously managing new regulatory proposals for American tech giants.
This fractured policy landscape has prompted hope that Europe and a United States led by President Joe Biden might collaborate to facilitate a more consistent and predictable approach in internet governance, one that seeks to uphold the fundamental values of the internet. But the United States and the European Union are not as aligned on this question as some might claim. American internet governance has been described as everything from a privatized model to a hands-off-the-internet approach. In the EU, however, varying understandings of “sovereignty” online both reflect and shape the different political contexts in which member states are designing their internet governance models, which have historically been far more willing to embrace regulation than in the United States.
This divide matters for EU-U.S. technology cooperation, as recent shifts in the EU toward digital self-determination heighten the potential divergence between the Washington and Brussels in internet policymaking. How the visions of the internet in the United States and the EU bloc play out in the coming years, particularly under the Biden administration, will matter greatly for shaping the future of the internet, its freedom, and openness.
Europe’s internet shift
Between 2016 and 2020, the Trump administration stepped back from the United States’ historic leadership role on questions of internet governance. Domestically, the administration failed to devise a national plan that would address issues of competition, connectivity, and new technologies, including 5G. While the Trump administration took some action, it was sporadic and mainly driven by larger national and international political forces rather than any serious high-level commitment to ideas like internet openness or security. Internationally, the Trump administration not only abandoned but worked against years of effort by dedicated cyber diplomats to promote and protect the idea of an open, globally connected and interoperable Internet. This abdication of leadership left a significant gap that was felt across the global internet governance ecosystem. It enabled China to introduce a “New IP” proposal at the International Telecommunications Union (ITU) to make internet traffic more easily state-controlled and gave Russia the opportunity to spearhead a United Nations General Assembly resolution on cybercrime that called for “countering the use of information and communications technologies for criminal purposes.” It was adopted by 79 votes to 60 with 33 abstentions, despite opposition from several major Western powers.
In Europe, this leadership vacuum was filled by legislative proposals for internet governance driven by two different fears. The first was a philosophical one regarding Europe’s ability to exert more political control over information and the internet. The other was a pragmatic desire to avoid being stuck in the middle of a toxic rivalry between the United States and China. Both fears were articulated as part of what von der Leyen last year called “tech sovereignty”: the “capability that Europe must have to make its own choices, based on its values, respecting its own rules.”
But Europe’s people-centric idea of sovereignty, albeit relevant to a world recognized by territorial borders, is difficult to reconcile with an internet that has little respect for these physical boundaries. The EU’s signature internet regulation, the General Data Protection Regulation, has centered its rules around citizens and users, the political community formed by Europe’s “people,” and granted the European Union a measure of internet sovereignty via regulation. This last point is especially important: The European Union may have a seat at the table in international fora, but its individual member states are ultimately the sovereigns, not Europe as a whole.
Europe’s move toward digital sovereignty and self-determination
The geopolitical shifts of the past four years have caused many in Europe to value strategic self-determination and limiting dependence on foreign powers. In a March letter to von der Leyen, four European leaders, including Germany’s Angela Merkel, articulated this desire: “We believe that Europe needs to recharge and complement its current digitisation efforts with a self-determined and open digital policy which includes digital sovereignty as leitmotif.” The statement is notable for several reasons: It abandons the phrase “cyber sovereignty” and its evocations of Chinese and Russian internet control; positions Europe as the exporter and not consumer of policy; and expresses a willingness for a European leadership role regarding internet governance questions.
Europe might be the first to set the rules of the online game, but this alone cannot win the game. Because the internet is founded on and continues to create interdependencies between nations, eliminating dependence on other countries is not just challenging but to some extent contradictory. For instance, European Union privacy rules and limits on cross-border data flows have necessitated the establishment of adequacy decisions and other agreements to enable data to continue flowing across borders. Interconnections and interdependencies between countries have become pervasive and will relatively remain so in a globally interoperable system.
Given this limitation, Europe has focused on regulation and, over the past few years, has managed to establish itself as the de facto global regulator for the internet on a number of issues. When it came into force in 2018, the GDPR represented the world’s most ambitious privacy regulation. Its impact was felt globally, so much so that some 80 countries around the world have implemented GDPR-like statutes. The recently released Digital Services Act package, which addresses rules and responsibilities for online platforms and rules on competition policy, continues the trend of European rule-making leading the way internationally. Meanwhile in Brussels, the digital policy agenda is crowded with issues that range from online terrorism to cybersecurity, data governance, and encryption. All this policy activity has placed Europe at the heart of internet governance discussions, but not necessarily in a way that fully satisfies either Europe or its allies.
Regulation alone is not enough. Many European observers have adopted the view that in order to be competitive in the tech sector, Europe needs to invest in infrastructure. In the past year alone, Europe has embarked on a series of activities that hint at its wish to become an infrastructure pioneer, while also building the legal framework to support it. GAIA-X, the federated Franco-German cloud initiative is an example; proposals for a European DNS—no matter how poorly thought out they are—are another. In and of itself, building infrastructure is not bad: It could contribute to increased innovation. But many key questions remain, especially the feasibility of such grand ideas in practice.
Europe’s main challenge is that it continues to be technologically dependent on both the United States and China, placing it in the middle of a technology conflict that will most likely continue and may escalate. Europe faces two different dependency hurdles. The first is its dependence on China. The EU’s economic links with China’s tech sector are pervasive, and Chinese software and hardware are used throughout the EU internet ecosystem. Europe knows that China’s cheap equipment and financial promises come with attachments and tradeoffs that Europe is struggling to make in a coordinated fashion. For example, Europe’s indecisiveness and lack of a harmonized strategy among its member states with regards to the deployment of 5G equipment from Huawei, is a case in point. Germany and other countries seem keen to continue some sort of collaboration with China, albeit within limitations, whereas countries like Italy have prevented national operators from making deals with Huawei.
The second dependency hurdle is with the United States. European policymakers understand it is impossible to cut ties with America’s digital companies altogether. Instead, they are focused on how these companies should behave within its borders. By taking advantage of its economic standing, Europe drafts regulation that aims to shape the business models of big technology companies. The impact of this can be quite profound if one considers the opportunities it creates for Europe as a global regulator. However, this also raises a number of questions for cooperation with the United States. When member states are focused on regulation in ways that are still notably different from counterparts in the United States, it begs the question of just what kinds and degrees of internet strategy cooperation are most realistic for the U.S.-EU relationship.
This approach seems to be paying off, but not without hiccups. Europe’s experimentation with regulation allows it to set the agenda on complex internet governance questions. Despite its unintended consequences, the GDPR continues to be the most influential privacy regulation in the world. In contrast to the chaotic debate in the United States over Section 230 of the Communications Decency Act, the DSA at least provides some clarity on how regulators envision the roles and responsibilities of online platforms. With both the DSA and the GDPR, European policymakers have resisted regulation that aims to make sweeping changes to the internet’s core properties. But this is not a guarantee for the future. As Europe becomes more inward looking, it may push further in its approach to asserting a measure of online sovereignty.
Similar to other countries around the world, Europe is facing some hard facts. The internet is becoming less—less global, less interoperable, less open. The internet remains unable to resist the centralization of economic power to a few big players and has become increasingly weaponized through such activities as disinformation campaigns. This type of behavior will most certainly intensify and, as it does, Europe will need to make some crucial choices. What kind of an Internet does it want?
Sooner or later, the United States will face inevitably the same dilemma. This is a point where both allies will converge: recognizing that historically hands-off approaches to the internet no longer suffice in an age of harmful company behavior, internet insecurity, and authoritarian affronts on the open internet. But, ultimately, the biggest obstacle for collaboration will be their divergent views on how regulation should shape the internet: the United States will most likely continue to insist on a market-based approach, perhaps with some minimal interventions, while Europe will persist in a more institutional-oriented process. This schism will be difficult to bridge because it is part of the countries’ historical and cultural background.
Yet, it can also act as an opportunity. Realizing this difference should encourage both actors to turn their attention to the internet itself. Their common, shared goal can be to rally behind the values that have defined the internet since its early days: its architectural design. The critical properties of the internet can become the starting point and the shared understanding in moving forward, regardless of which approach each decides to follow. This would place both allies in stark contrast to countries like China and Russia.
Much policy discussion has focused on strong cooperation prospects between the European Union and the United States on internet strategy. While an objective worth pursuing, it does not mean the shifts towards digital self-determination in the EU can be ignored. Focusing on these trends, rather than treating all internet “democracies” as the same, is critical to forging multilateral cooperation on protecting an open, global, and interoperable internet.
Konstantinos Komaitis (@kkomaitis) is a senior director for policy strategy and development at the Internet Society.
Justin Sherman (@jshermcyber) is a fellow at the Atlantic Council’s Cyber Statecraft Initiative.
The Brookings Institution is committed to quality, independence, and impact.
We are supported by a diverse array of funders. In line with our values and policies, each Brookings publication represents the sole views of its author(s).
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[description] => The financial crisis has dramatically demonstrated that the increasing role of cross-border financial intermediaries in the EU has not been supported by adequate pan European supervision.
The aim of the paper is first of all to focus on the shortcomings of supervision in the EU especially with regard to cross-border financial intermediaries, highlighted by the impact of the financial crisis. Thereafter we intend to critically review the recent proposals for a new supervisory architecture in the EU. To this end we first analyse the main aspects of the crisis in terms of its impact on EU cross-border financial groups (Dexia, Fortis) and the actions taken by the national authorities to deal with the crisis. Thereafter we analyse the current supervisory framework and the shortcomings aggravated by the crisis.
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[description] => The blockchain technology acts as a record-keeping decentralised digital ledger that stores, transmits and transfers data from one user to the other without intermediary. Through cryptocurrency, it gained its popularity and it remains the fundamental database of the Bitcoin cryptocurrency. But this technology is wider in potentiality than the creation or use of Bitcoin alone. As a concept, the blockchain technology appears obscured, reason being that it is hard to believe that the same technology can empower applications that have extremely different requirements and as well exhibit dissimilar performance and security. With the application of blockchain in Islamic finance, high level of efficiency and transparency will be realistically feasible in the Islamic financial sector. However, there are some scholarly arguments that its application will not only open the door for tax evasion and money laundering but also devaluation of fiat currency. Therefore, the regulatory challenges combating the adoption of blockchain under the Islamic finance require profound attention in order to foster Shariah-compliant usage of this reliable and fast-growing technology.
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[updated_at] => 2025-11-05T18:43:43.000Z
[description] => Speech by Mr Nestor A Espenilla, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the Freshmen Orientation Program and Launching of the University of Phlippines BGC Graduate Business Program, Bonifacio Global City, 4 September 2017.The views expressed in this speech are those of the speaker and not the view of the BIS.Central bank speech | 04 October 2017by Nestor A Espenilla, JrPDF version (39kb) | 4 pagesDr. Ben Paul B. Gutierrez, Dean, Cesar E. A. Virata School of Business, University of the Philippines, faculty, staff, and incoming freshmen of the Master of Business Administration and Master of Science in Finance programs, ladies and gentlemen, good evening. I understand that eighty (80) new MBA and MS Finance students were admitted to UP-BGC. I am delighted to address this audience. It is one full of promise and potential. Yours is the first batch to learn in these new, world-class halls! What an honor for you!NostalgiaAddressing you today, I am reminded of the thirty-seven (37) years that separate the time when I myself was a freshman of the UP-MBA program. It made me think of my student number (I think, I will keep this a secret). It made me nostalgic for UP Diliman (for fishballs in front of Vinzon's Hall) and mainly, for how the College of Business Administration building stood proudly (well, still stands) in the center of campus, opposite Quezon Hall.It was the most modern building in the academic oval (at least in my time) with an architecture markedly different from that of Palma, Melchor, and Malcolm Halls.Compare that to where we are now in a state-of-the art building in the heart of the Bonifacio Global City. The imagery of the two structures juxtaposed in my mind is enough symbolism for how fast things have changed (and improved!) in that span of time.ChangeIn the last two to three decades, the world has become a very different place transformed by digital revolution and technological advances in almost every field and industry. Students like you have the advantage of data retrieval in real time! Your connections are wireless, with access points in classrooms, hallways, in the library almost everywhere. You read, communicate, research and are entertained on iPads, iPhones, Androids and laptops these are developments we never would have imagined as we strolled by the sunken garden decades ago! Simple lang kami noon. To run regressions, we punched cards and dashed to the UP Computer Center. We had to come back later for the results print-out which were in outsize continuous forms at least an inch thick.Yes, change is inevitable. But as you begin your journey as graduate students (especially as many of you here are also working students) let me share with you a timeless value that ensures success. Grit. Sticktoitiveness. - yes, this is a real word.Secret formula for successGrit, discipline and diligence are requirements for each of you to successfully hurdle every exam, presentation, case discussion, thesis defense and requirement that you need to earn your MBAs and Masters of Science in Finance. Grit is needed to face life's challenges. Grit - mental toughness -will set you apart. While the truth of this is borne out of my personal experience, the expression of this idea is not new. Many studies (and I understand, facebook posts) convey that neither intelligence nor talent ensures success. Rather, it is perseverance that allows one to fulfill goals and make dreams come true. In my long career at the Bangko Sentral ng Pilipinas (thirty-six years and counting!) as a young bank officer and working student shuttling between the CB Campus in Malate to Diliman, Quezon City as Deputy Governor of the Supervision and Examination Sector for the last twelve (12) years to this day as Governor of the BSP, sticktoitiveness has made all the difference in my career.Why? The reason is simple. There are good days and there are bad days. While we are presumably talented and intelligent uniformly each day (at least we hope to be!) - the feeling of wanting to persevere and stay-on, changes. It changes with our moods, and is affected by situations and circumstances. This is why sticktoitiveness commitment is the true formula for success.When I first joined the Central Bank in 1981, I was idealistic. My grit was tested all at once! During the turbulent 80's, there was political unrest. A debt crisis was unfolding and it forced the country to declare a moratorium on the payment of its foreign debt by 1983. Dollars had to be rationed. Central Bank interest rates shot up to around 40% per annum. Compare that to 3% today. The economy was in recession. In 1986, Senator Benigno Aquino, Jr. was assassinated. What a challenging time for the central bank and a young central banker like me! I certainly had days when I wondered if I should continue. I am glad I did.Grit in central bankingIn the central bank, grit is always required. Grit is what brings about constancy, continuity, credibility and stability to the financial system.Perseverance is needed to face macroeconomic challenges on both global and domestic fronts. Right now, it is necessary as we face the growing uncertainty of economic policies as more central banks in major advanced economies prepare to enter a tightening cycle. The US Federal Reserve (US Fed) hiked the federal funds rate in June (the second time this year) and there is an expected further rise in US interest rates. The European Central Bank (ECB) is also talking about tapering in Quantitative Easing (QE) Policy in 2018.Vigilance is needed as we remain resolute in our mandates of price stability, and banking and financial stability in the face of global political and economic uncertainties and given domestic challenges such as the ongoing Marawi conflict.Grit translates to us preparing well, committing to the implementation of difficult but necessary and bold reforms. Grit is synonymous to the perseverance needed to cushion the economy from any volatility. Even as we enjoy our current economic sweet spot, we still need to be tenacious, dedicated to the fundamentals of hard work and proactive reform. The same should hold true for each of you here as you begin your graduate studies and face your future.Economic sweet spotAnd may I say, even as I began with earnest advice of vigilance, that the future looks good. Present numbers indicate it to be so. As Governor of the BSP, I am committed to ensuring continuity in the policies that resulted in this favorable economic environment (with room for improvements through strategic financial sector reforms).I am glad to share that real GDP rose by 6.4 percent in the first half of this year with stronger economic activity expected in the second half. This has been the trend for the last 74 quarters. This shows overall economic vitality and resilience. Inflation also remains manageable. While headline inflation rose to 2.8 percent in July (from 2.7 percent in June), the year-to-date average inflation rate of 3.1 percent is well within Government's target range of 2-4 percent for 2017, and should remain solidly on-target over the 2018-19 policy horizon. There is ample domestic liquidity. Bank lending is strong but prudent, and funds continue to flow into productive sectors. The banking sector is in sound condition as reforms put in place by the BSP over the last decade, along with banks' implementation of better corporate governance and risk management have brought about big improvements in bank asset quality, business operations, and strong capitalization.Time of great advancementWe are in time of great advancement. Innovation is at the forefront of economic development. And you are the very generation that knows how to leverage on this! In one click, you obtain information that we used to find slowly and tediously in volumes of dusty encyclopedias. Almost in an instant, you send and receive messages that, in the past, took us weeks to give and get. These innovations have produced great strides in communication, finance and commerce. We are in tune with the times. I am also eager to share that the BSP is creating a regulatory environment to encourage innovation and maximize prudent technology use. An ecosystem is being created so that the unreached are granted financial services through alternative providers. BSP is piloting its own "regtech" solutions to address its operational pain points. Our goal is that through technological solutions - financial consumers and investors would be able to make more informed business decisions and choose from a longer, fresher and more innovative menu of available financial products and services. We see the digitalization of finance as essential to achieve significant inroads against financial exclusion and payments inefficiency. We adopted the National Retail Payments System (NRPS) project, a flagship program for digital finance. Its purpose is to establish a safe, efficient and reliable means to transfer money value digitally. Envisioned is an effective and interoperable interface of various electronic payment channels. The NRPS will expand the reach of financial services and will promote efficiency, transparency and development of business models improving economic competitiveness. With the NRPS, we hope to transition from a cash-heavy economy, where 99 percent of retail transactions by volume are done in cash, to a cash-lite economy, with transactions becoming mostly electronic. Collaboration and cooperationIn making all these happen, the BSP counts on its partners and stakeholders in the private sector, in the government, and in the academe. We understand that we cannot achieve our goals alone.Especially as we create an enabling environment for Fintech, we have awareness there are several industry regulators with oversight over multiple players. There are multi-layered relationships. We are mindful to guard against policy inconsistency, conflicts and gaps. Otherwise, there is a danger of regulatory arbitrage or a failure of oversight.We know that the best way to prevent this is through constant engagement with Fintech innovators, financial sector players, regulatory agencies and experts. Collaboration and cooperation are required for us to have a deeper understanding of risks inculcate appreciation for financial inclusion goals and to communicate market conduct expectations.Indeed, collaboration and cooperation is very important. These are values you too - dear grad students - can apply. You will find that your professors and your classmates will contribute to your success and will multiply the possibilities of your hard work. These connections are very important not just as you pursue your studies. You will find these indispensable in your personal lives as well. Relationships, discussion, the expertise and guidance of others will matter and add value. Even Harvard studies confirm that true success and happiness is not determined by material possessions, but by friendships, good communication and camaraderie. Even in this, sticktoitiveness is also needed. In closingAs I end, allow me to remind you to consider yourselves blessed to be part of this elite group of graduate students. Congratulations to all of you. Embrace this challenge, persevere in it!I realize that I shared a lot of thoughts and information with you. But I hope, if anything that you remember the main idea I shared this evening. Take the word to heart sticktoitiveness. I promise, it will help you.I wish you all the best and godspeed.About the authorNestor A Espenilla, JrMore from this authorRelated informationMore speeches from "Central Bank of the Philippines (Bangko Sentral ng Pilipinas)"Country page: Philippines
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[description] => This article gives a very general introduction to the technology, promises and limitations of blockchain technology --- popularized by the digital currency Bitcoin and a key force behind the surge of cryptocurrencies. Blockchain acts as a distributed database or joint global register of all transactions --- a decentralized digital ledger --- and has the potential to become a disruptive force in the financial industry and elsewhere, bypassing traditional, centralized channels such as banks.
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[description] => Innovation tour by the BIS Innovation Hub, Zurich, Switzerland, 28 June 2023. This tour uncovers how the BIS Innovation Hub is pushing the boundaries of central bank digital currencies (CBDCs) and shaping the future of the financial system together with partners around the globe. Attendees have the opportunity to gain first-hand insight into BIS projects and learn more about central bank innovation in interactive ways.This event is part of the Point Zero Forum (PZF), a Policy-Technology dialogue taking place from 26-28 June 2023 in Zurich, Switzerland. Interested participants may register for the event in the PZF website.Agenda08:45 - 09:30 Innovation breakfast09:30 - 09:40 Opening 09:40 - 10:20 Panel discussion: CBDCs, tokenisation and DeFi – exploring opportunities with Project MarianaModerated by Morten Bech (Head, BISIH Swiss Centre) Panellists:Benjamin Anderegg (Head of Money Markets and Foreign Exchange, Swiss National Bank)Rod Garratt (Senior Adviser, Bank for International Settlements)Claudine Hurman (Director of Innovation and Financial Market Infrastructures, Banque de France)Alan Lim (Head, FinTech Infrastructure Office, Monetary Authority of Singapore)10:20 - 11:45 Project showcases and demosCBDCs across bordersDynamo: catalysing innovation for SME growthIcebreaker: breaking new paths in cross-border retail CBDC paymentsMariana: CBDCs in automated market-makersMeridian: development of a prototype synchronisation operatorPolaris: secure and resilient CBDC systems, offline and onlineRio: monitoring of fast-paced electronic marketsRosalind: developing prototypes for an application programming interface to distribute retail CBDCSela: exploring technological solutions towards a two-tier retail CBDC modelTourbillon: exploring cyber resiliency, scalability and privacy in a prototype CBDC11:45 - 12:30 Networking and drinks
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[description] => After years of drift and inattention to the problems of global development, during the past half decade the international community has dramatically increased its focus on strategies to help the people of the world’s poorest countries share in the benefits of globalization and escape the traps of poverty, disease, and lack of education. The decision of the world’s leaders at the United Nations Millennium Summit in September 2000 to adopt eight specific development goals provided an agreed political benchmark for measuring progress. Left open, however, were crucial issues about how best to achieve those goals.
A key unanswered question is the potential contribution that information and communication technology (ICT) can make to this effort. The question is not new. In 1984 the Commission for Worldwide Telecommunication Development (the Maitland Commission) issued an influential report, The Missing Link, citing the lack of telephone infrastructure in developing countries as a barrier to economic growth. The advent of the global information technology revolution in the 1990s set off a heated, sometimes acrimonious debate among development specialists and policymakers about the place of ICT in development.
On the one hand are those who see wiring the global South as a way to transcend decades of painful economic development and catapult even the poorest countries into the information age. As United Nations Secretary-General Kofi Annan observed in his Millennium Report, “New technology offers an unprecedented chance for developing countries to ‘leapfrog’ earlier stages of development. Everything must be done to maximize their peoples’ access to new information networks.” Proponents of this view not only stress the potential benefits of ICT but also argue that in an increasingly globalized economy, countries that fail to “get connected” will fall further and further behind.
At the opposite end are those who assert that “you can’t eat computers.” In the words of Microsoft’s Bill Gates, “Let’s be serious. Do people have a clear view of what it means to live on $1 a day? . . . There are things those people need at that level other than technology. . . . About 99 percent of the benefits of having [a PC] come when you’ve provided reasonable health and literacy to the person who’s going to sit down and use it.” Investing in ICT for poor countries, they argue, draws precious resources away from more urgent development needs. The lack of critical infrastructure, such as adequate energy grids, and of education keeps citizens of poorer countries from tapping ICT’s potential.
Modern ICT began to have an impact in some developing countries even before widespread adoption of the Internet. In Brazil, for example, the computer industry accounted for more than 74,000 jobs and $4 billion in revenue by 1990. In 1988 India launched a set of policies that fostered a software-development industry whose exports grew to $5.7 billion by 1999-2000.
But the explosive growth of the Internet in the mid- to late 1990s drew increasing attention to the so-called digital divide. Just how serious is the gap? For telephones, the picture is mixed. In 1991, total telephone penetration (fixed plus mobile) per 100 inhabitants stood at 49.1 for the developed world, 3.3 for emerging economies such as Eastern Europe and China, and only 0.3 in the least developed countries (LDCs). By 2001, the gap between developed (121 per 100) and emerging (18.7) had narrowed considerably (from a ratio of 15:1 to 6:1), but that between emerging countries and LDCs had grown (from 12:1 to 17:1). For the Internet, the gap remains significant, although bright spots exist. China, for example, saw a 75 percent increase in Internet users, to 59 million, from 2001 to 2002, making it the second-largest Internet-using country in the world (in addition to being the largest mobile telephone market). Africa now has 5 million Internet subscribers. Moreover, according to the IMF World Outlook, 2001, “The rate of diffusion of IT to developing countries has been rapid compared to earlier all-purpose technologies” such as railroads. But today, says the International Telecommunications Union’s World Telecommunications Report 2002, “[T]he 400,000 citizens of Luxembourg between them share more international bandwidth than Africa’s 760 million citizens.” In October 2000, 95.6 percent of all Internet hosts were in the industrialized countries; Africa had only 0.25 percent and its share was falling.
Taking Action
Growing awareness of the digital divide spurred several initiatives by the developed world and the international organizations responsible for development, including the United Nations Development Program (UNDP) and the World Bank. At its July 2000 summit the Group of Eight (G-8) industrial countries created the Digital Opportunity Task (DOT) Force. The DOT Force, composed of representatives of G-8 and developing countries, as well as members of industry and nongovernmental organizations, was asked to make concrete recommendations for fostering policy, regulatory, and network readiness; improving connectivity; increasing access and lowering cost; building human capacity; and encouraging participation in global e-commerce networks. Its report, Digital Opportunities for All: Meeting the Challenge, became the basis of the Genoa Action Plan, adopted at the G-8 2001 summit. The focus of the plan was on “mainstreaming” ICT as an essential component of overall development strategies “as a fundamental tool for reducing poverty and for spurring sustainable development.”
The private sector also stepped up. In January 2000 the World Economic Forum launched its Global Digital Divide Initiative involving leading ICT, communications, and media executives. Hewlett Packard announced a $1 billion “World e-inclusion” program to sell, lease, and donate products and services to developing countries. Cisco Systems (in partnership with the ITU) set up Internet training centers for students and ICT and telecommunication professionals in the developing world.
The increasing international attention to the digital divide has moved to the forefront a key policy question—just how significant is the divide for the overall prospects for developing countries, and what role should closing that gap play in overall development strategies?
Four characteristics of ICT make it an attractive element of any strategy to meet development challenges. First, ICT is highly versatile. It can be tailored to meet a variety of diverse challenges and need not be “purpose built.” The same network, server, and peripheral devices (such as PCs or cell phones) can help support distance education and remote health delivery and connect rural communities to global markets. Second, ICT can help transcend barriers of geography. It allows individuals and entities anywhere in the world access to the same information without the time and cost associated with physical transportation, an advantage substantially enhanced by the advent of wireless and satellite communications, and voice-over-Internet protocol long-distance service. Third, it allows users, even in poor and small communities, to harness the benefits of scale and “network effects” (the exponential increase in value that comes with each additional user). Finally, it facilitates the transfer of know-how across the full spectrum of knowledge, allowing developing countries to reap productivity gains and harness state-of-the-art technology.
Several problems have nevertheless impeded the widespread adoption of ICT in the developing world and led to some deep disillusionment. Images of unused computer screens in rural schools and telecenters attest to good intentions gone awry. Among the reasons for ICT’s failure to deliver on some of its more overheated hype are lack of skilled workers to maintain equipment and train potential users, inadequate infrastructure (such as electricity), poor government telecommunication policies that have put costs for interconnection out of reach, and lack of applications tailored to meet the unique needs of developing countries (including language barriers).
ICT’s Development Potential
Assessing the potential value of ICT in supporting development requires addressing the three different channels through which it could work: its inherent worth in bringing new ideas to those outside the global mainstream; its part in helping to achieve specific development objectives; and its role in fostering broader economic development.
First, ICT has enormous potential to enrich the lives of people everywhere—regardless of any instrumental role it may play in meeting broader development needs. These technologies can help bring ideas and experience to even the most isolated, opening to them the world outside their village, town, and country—including family members and friends who have moved away. It also allows their experience to be shared with the world at large, at the tap of a keystroke or the touch of a cell phone keypad. The case for including information technology in development strategies would be strong even if it contributed little to explicit development goals. ICT can also empower individuals to participate in the social and political institutions of their community, giving voice to those who have traditionally been excluded.
Second, ICT-based solutions have already proved their value in addressing several specific challenges identified in the UN’s Millennium Development Goals (MDG). Health care workers in more than 150 countries, for example, are using Health Net to bring needed expertise and help deliver health services in underserved, often remote communities. Distance learning initiatives, such as those at the University of South Africa, are training a new generation of teachers, who are critical to meeting the MDG’s objective of universal primary education by 2015. The contribution of ICT is not confined to Internet-related projects: radio- and telephone-based services, for example, are making real contributions in areas such as training for health workers in Uganda and Kenya.
Third, in the end the key to self-sustaining development is economic growth. Although supporters have a strong intuitive sense that ICT can make a significant contribution to economic growth by increasing productivity, the empirical evidence remains somewhat uncertain. Anecdotal evidence suggests that effective use of ICT does, at least under some circumstances, make a difference. In the first place, it can provide an important source of income. India’s software sector attests to as much. And Costa Rica has attracted some 32 foreign electronic firms since 1995, including Intel and its investment of more than $1 billion. Even more important in the long run, however, ICT can strengthen overall productivity in developing countries by increasing efficiencies and technological competitiveness and by linking local producers to global markets. The experience of Estonia, which sought to overcome its lack of natural resources and outdated manufacturing sector by embracing an all-encompassing strategy of promoting ICT throughout its society and economy is an example of ICT’s potential. A recent study analyzing the positive impact of access to telephones on income in rural China has helped further our understanding of the ways in which ICT can contribute to overall development.
Other studies seem to confirm that with the proper “enabling environment,” developing countries can increase their rate of adoption of ICTs, a valuable, though not sufficient, condition for accelerating economic growth.
In 2001 a report by the Digital Opportunity Initiative, a collaboration between the Markle Foundation, the UNDP, and Accenture, identified five core elements to a comprehensive approach to create such an enabling environment—infrastructure (the hardware and “pipes,” physical and wireless); human capacity (skilled individuals who can maintain, adapt, train, and use the technology); government policies (telecommunication policies that facilitate the adoption of ICT, along with sound governance and trained regulators more generally); content (applications geared to the specific need of developing communities, such as local language and tools for rural agricultural development); and support for enterprise (much of the ultimate gains from employing ICT largely stem from a vibrant private sector, but the public sector too can improve productivity and performance through ICT).
Although getting each element right can make a significant contribution, an integrated strategy offers the best promise for greatest gain. As a result, many developing countries—from Tanzania to Kyrgyzstan—are beginning to adopt “national strategies” to address in a comprehensive way these various elements. A key to success is to bring together all the stakeholders—government, the local private sector, and civil society, as well as the donor community—both to develop the plans and to oversee their implementation. Studies suggest that local “ownership” and the involvement of stakeholders is especially critical to successfully harnessing ICTs.
How can the developed world help developing countries make effective use of ICTs? The lesson of the 1990s was that simply providing technology will have marginal impact. This supply-side approach has led to inflated expectations and mistrust that the purveyors of the technology care more about opening markets than helping the poor. Rather, the idea behind mainstreaming ICT into a broader development context is to seek ways to leverage ICTs to achieve core objectives. Sharing expertise (such as training programs for policymakers and regulators in the developing world) and best practices is often more valuable than the hardware itself. Recognizing the limits on the role of official assistance is also critical. Ultimately the broad-scale adoption of ICTs in the developing world will depend on the private sector. But government assistance can play an essential role, both in providing public goods and in helping to create the enabling environment that will encourage private investment.
For developing countries to benefit fully from the ICT revolution, they must have a voice in setting the policies that will affect them—and that voice must be heard not simply in organizations involved in development policy, such as the World Bank and UNDP. On issues ranging from international telephone tariffs to spectrum allocation to property rights, in institutions ranging from ICT-specific groups like the ITU and ICANN (the Internet Corporation for Assigned Names and Numbers), to the multisector World Trade Organization, key decisions are often made with little or no input from the poorest countries. All these institutions will need to take concrete actions ranging from increased transparency, to technical assistance, to training and financial support if these nations are to overcome structural barriers to participation.
Debate on the place of ICT in development has moved beyond the black-and-white arguments of proponents and skeptics in the 1990s. These new technologies, it is now clear, are not an end in themselves. Nor will a one-size-fits-all approach work—the challenges faced by developing countries vary too greatly by history, geography, and level of economic attainment. In particular, the challenges facing larger countries and economies (even where the overall level of poverty is high) differ considerably from those facing smaller nations whose internal markets are small and who are thus critically dependent on linkage to markets and knowledge beyond their borders. But evidence is growing that ICT is a potentially powerful tool when used judiciously as a part of an overall development strategy. The challenge, both for developing countries and for the broader international community, is to build on the experience to date to make these tools available to the stakeholders who are best positioned to adapt and apply them to their most pressing needs.
The Brookings Institution is committed to quality, independence, and impact.
We are supported by a diverse array of funders. In line with our values and policies, each Brookings publication represents the sole views of its author(s).
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[description] => The Investment Firms Prudential Regime (IFPR) is our new prudential regime for MiFID investment firms. The regime came into force on 1 January 2022.
Why we have introduced the IFPR
The IFPR aims to streamline and simplify the prudential requirements for MiFID investment firms that we prudentially regulate in the UK (FCA investment firms).
In line with our objectives and Mission, it refocuses prudential requirements and expectations away from the risks firms face, to also consider and look to manage the potential harm firms can pose to consumers and markets.
Why we have introduced the IFPR
The IFPR aims to streamline and simplify the prudential requirements for MiFID investment firms that we prudentially regulate in the UK (FCA investment firms).
In line with our objectives and Mission, it refocuses prudential requirements and expectations away from the risks firms face, to also consider and look to manage the potential harm firms can pose to consumers and markets.
Who is subject to the IFPR
The IFPR applies to:
MiFID investment firms authorised and regulated by us
Collective Portfolio Management Investment Firms (CPMIs)
regulated and unregulated holding companies of groups that contain either of the above
The IFPR will not apply to PRA-designated investment firms. They will remain subject to prudential supervision by the PRA.
Who is subject to the IFPR
The IFPR applies to:
MiFID investment firms authorised and regulated by us
Collective Portfolio Management Investment Firms (CPMIs)
regulated and unregulated holding companies of groups that contain either of the above
The IFPR will not apply to PRA-designated investment firms. They will remain subject to prudential supervision by the PRA.
Final rules and guidance
The final rules from our first and second policy statements are in the legal instruments FCA 2021/38 and FCA 2021/39. You can read a summary of minor updates made since we published the near-final versions of the instruments in PS21/9. The final rules from our third policy statement are in the legal instruments FCA 2021/49 and FCA 2021/50.
Firms that may be part of a financial conglomerate should also refer to our related amendments in FCA 2021/51 to certain technical standards under the onshored Financial Conglomerates Directive regime.
The IFPR rules are in our Handbook:
The new MIFIDPRU sourcebook is in the Prudential Standards block
The MIFIDPRU Remuneration Code (SYSC 19G) is in the SYSC sourcebook, within in the High Level Standards block
In 2021, we published general guidance on the application of ex-post risk adjustment to variable remuneration. This guidance explains our expectations on malus and clawback, including on how they should be invoked in an effective, timely, consistent and transparent way. We consulted on whether to extend the existing guidance to FCA investment firms.
Final rules and guidance
The final rules from our first and second policy statements are in the legal instruments FCA 2021/38 and FCA 2021/39. You can read a summary of minor updates made since we published the near-final versions of the instruments in PS21/9. The final rules from our third policy statement are in the legal instruments FCA 2021/49 and FCA 2021/50.
Firms that may be part of a financial conglomerate should also refer to our related amendments in FCA 2021/51 to certain technical standards under the onshored Financial Conglomerates Directive regime.
The IFPR rules are in our Handbook:
The new MIFIDPRU sourcebook is in the Prudential Standards block
The MIFIDPRU Remuneration Code (SYSC 19G) is in the SYSC sourcebook, within in the High Level Standards block
In 2021, we published general guidance on the application of ex-post risk adjustment to variable remuneration. This guidance explains our expectations on malus and clawback, including on how they should be invoked in an effective, timely, consistent and transparent way. We consulted on whether to extend the existing guidance to FCA investment firms.
Remuneration Policy Statement templates
We have published templates for Remuneration Policy Statements (RPS) which FCA investment firms may (but do not have to) use to record how their remuneration policies and practices comply with the MIFIDPRU Remuneration Code:
RPS template
Table of material risk takers (MRTs)
Remuneration Policy Statement templates
We have published templates for Remuneration Policy Statements (RPS) which FCA investment firms may (but do not have to) use to record how their remuneration policies and practices comply with the MIFIDPRU Remuneration Code:
RPS template
Table of material risk takers (MRTs)
IFPR newsletter
You can sign up to our IFPR newsletter by emailing IFPR-newsletter@fca.org.uk with ‘sign up’ in the subject line. The IFPR newsletter provides updates on the IFPR, IFPR resources and on any upcoming regulatory deadlines.
IFPR newsletter
You can sign up to our IFPR newsletter by emailing IFPR-newsletter@fca.org.uk with ‘sign up’ in the subject line. The IFPR newsletter provides updates on the IFPR, IFPR resources and on any upcoming regulatory deadlines.
Previous newsletters
IFPR webinars
We hosted two IFPR webinars on 30 November 2021. The first webinar covered more technical aspects of the IFPR, such as groups and own funds requirements. The second webinar focused on some more practical aspects of the regime such as the ICARA process, reporting, and the applications and notifications process.
Both webinars are available to re-watch here. You will need to register to access the recording. The slides will be available to view once you have registered.
IFPR webinars
We hosted two IFPR webinars on 30 November 2021. The first webinar covered more technical aspects of the IFPR, such as groups and own funds requirements. The second webinar focused on some more practical aspects of the regime such as the ICARA process, reporting, and the applications and notifications process.
Both webinars are available to re-watch here. You will need to register to access the recording. The slides will be available to view once you have registered.
IFPR queries
If you have any questions in relation to the IFPR or if you have not received the IFPR setup questionnaire but believe you should have, please email IFPRquery@fca.org.uk.
IFPR queries
If you have any questions in relation to the IFPR or if you have not received the IFPR setup questionnaire but believe you should have, please email IFPRquery@fca.org.uk.
IFPR resources
Publication Date
Handbook Notice 112 (Investment Firms Prudential Regime (Amendment) Instrument 2023) September 2023
Handbook Notice 108 (Investment Firms Prudential Regime and Interim Prudential sourcebook for Investment Businesses (IPRU-INV) (Amendment) Instrument 2023) March 2023
Handbook Notice 102 (Investment Firms Prudential Regime (Amendment) (No. 2) Instrument 2022) September 2022
Handbook Notice 99 (Investment Firms Prudential Regime(Amendment) Instrument 2022) May 2022
PS21/17: A new UK prudential regime for MiFID investment firms November 2021
CP21/26: A new UK prudential regime for MiFID investment firms August 2021
PS21/9: Implementation of Investment Firms Prudential Regime July 2021
PS21/6: Implementation of Investment Firms Prudential Regime June 2021
CP21/7: A new UK prudential regime for MiFID investment firms April 2021
CP20/24: A new UK prudential regime for MiFID investment firms December 2020
DP20/2: Prudential requirements for MiFID investment firms December 2020
IFPR resources
Publication Date
Handbook Notice 112 (Investment Firms Prudential Regime (Amendment) Instrument 2023) September 2023
Handbook Notice 108 (Investment Firms Prudential Regime and Interim Prudential sourcebook for Investment Businesses (IPRU-INV) (Amendment) Instrument 2023) March 2023
Handbook Notice 102 (Investment Firms Prudential Regime (Amendment) (No. 2) Instrument 2022) September 2022
Handbook Notice 99 (Investment Firms Prudential Regime(Amendment) Instrument 2022) May 2022
PS21/17: A new UK prudential regime for MiFID investment firms November 2021
CP21/26: A new UK prudential regime for MiFID investment firms August 2021
PS21/9: Implementation of Investment Firms Prudential Regime July 2021
PS21/6: Implementation of Investment Firms Prudential Regime June 2021
CP21/7: A new UK prudential regime for MiFID investment firms April 2021
CP20/24: A new UK prudential regime for MiFID investment firms December 2020
DP20/2: Prudential requirements for MiFID investment firms December 2020
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[description] => Find out about the Temporary Transitional Power (TTP), considerations for UK and EEA firms, and how the end of passporting may affect you.
The UK left the EU on 31 January 2020 with a Withdrawal Agreement and entered a transition period that ended on 31 December 2020. On 24 December 2020, the UK and the EU agreed on the terms of the UK-EU Trade and Cooperation Agreement. The agreement came into effect provisionally at 11pm on 31 December 2020. It entered fully into force on 1 May 2021 after the EU and UK ratification processes were concluded.
How this affects you will depend on several factors, including the nature of your business and where your customers are located. You should make sure you have considered the following points and understand the impact they could have on your firm:
The UK left the EU on 31 January 2020 with a Withdrawal Agreement and entered a transition period that ended on 31 December 2020. On 24 December 2020, the UK and the EU agreed on the terms of the UK-EU Trade and Cooperation Agreement. The agreement came into effect provisionally at 11pm on 31 December 2020. It entered fully into force on 1 May 2021 after the EU and UK ratification processes were concluded.
How this affects you will depend on several factors, including the nature of your business and where your customers are located. You should make sure you have considered the following points and understand the impact they could have on your firm:
Considerations for UK firms
If you’re a UK-based firm and only do business in the UK, you’re less likely to have been affected by the end of the transition period. You may not have been affected at all.
However, if you carried out business between the UK and the European Economic Area (EEA) – whether through a passport or directly under EU legislation – you should have implemented plans to address any risks for your firm.
These questions will help you to decide whether you conducted business in the EEA and whether your business may have been affected by the end of the transition period.
Did you provide any regulated products or services to customers resident in the EEA? For example, you might have provided financial advice to EEA-based customers. Or you might have had insurance contracts either with EEA-based customers or which covered risks located in the EEA that required regulatory permission in that country in order to be serviced.
Did you have customers or counterparties based in the EEA, including UK expatriates now based in an EEA country?
Did you market financial products in the EEA? This includes products marketed on a website aimed at consumers in the EEA.
Did you have agents in the EEA or interact with any intermediary service providers in the EEA? For example, you may have used an insurance intermediary to distribute products into the EEA.
Did your firm transfer personal data between the UK and the EEA or vice versa?
Did your firm have membership of any market infrastructure (trading venues, clearing house, settlement facility) based in the EEA?
Were you part of a wider corporate group based in the EEA, or did your firm receive any funding from an entity in the EEA?
Did you outsource or delegate to an EEA firm or did an EEA firm outsource or delegate to you?
Were you party to legal contracts which referred to EU law?
Did you deposit client money and/or custody assets in any institution in the EEA, or was your safeguarding institution in the EEA?
If any of these questions apply to you – or you conducted (or currently conduct) business in the EEA in any other way – then you should think about the legal basis on which that business occurred, and how that might have been affected by the end of the transition period. This includes thinking about whether your firm needed additional regulatory permissions in the UK and/or in another country.
Not all these factors will automatically mean your business or your customers are impacted. There are other ways firms can access the EEA that may not be affected by the UK leaving the EU. However, these will depend on the specific firm, type of activity and the exemption or local permission in question.
These include:
permission under local law or based on rules of a local financial market infrastructure
local exemptions in an individual EEA country
whether reverse solicitation is permitted without local authorisation – this is where the client initiates the provision of the service on their own initiative, and you do not promote or advertise services
whether your activity would potentially be covered by any prospective EU equivalence decision on a specific aspect of the UK’s regulatory framework
Considerations for UK firms
If you’re a UK-based firm and only do business in the UK, you’re less likely to have been affected by the end of the transition period. You may not have been affected at all.
However, if you carried out business between the UK and the European Economic Area (EEA) – whether through a passport or directly under EU legislation – you should have implemented plans to address any risks for your firm.
These questions will help you to decide whether you conducted business in the EEA and whether your business may have been affected by the end of the transition period.
Did you provide any regulated products or services to customers resident in the EEA? For example, you might have provided financial advice to EEA-based customers. Or you might have had insurance contracts either with EEA-based customers or which covered risks located in the EEA that required regulatory permission in that country in order to be serviced.
Did you have customers or counterparties based in the EEA, including UK expatriates now based in an EEA country?
Did you market financial products in the EEA? This includes products marketed on a website aimed at consumers in the EEA.
Did you have agents in the EEA or interact with any intermediary service providers in the EEA? For example, you may have used an insurance intermediary to distribute products into the EEA.
Did your firm transfer personal data between the UK and the EEA or vice versa?
Did your firm have membership of any market infrastructure (trading venues, clearing house, settlement facility) based in the EEA?
Were you part of a wider corporate group based in the EEA, or did your firm receive any funding from an entity in the EEA?
Did you outsource or delegate to an EEA firm or did an EEA firm outsource or delegate to you?
Were you party to legal contracts which referred to EU law?
Did you deposit client money and/or custody assets in any institution in the EEA, or was your safeguarding institution in the EEA?
If any of these questions apply to you – or you conducted (or currently conduct) business in the EEA in any other way – then you should think about the legal basis on which that business occurred, and how that might have been affected by the end of the transition period. This includes thinking about whether your firm needed additional regulatory permissions in the UK and/or in another country.
Not all these factors will automatically mean your business or your customers are impacted. There are other ways firms can access the EEA that may not be affected by the UK leaving the EU. However, these will depend on the specific firm, type of activity and the exemption or local permission in question.
These include:
permission under local law or based on rules of a local financial market infrastructure
local exemptions in an individual EEA country
whether reverse solicitation is permitted without local authorisation – this is where the client initiates the provision of the service on their own initiative, and you do not promote or advertise services
whether your activity would potentially be covered by any prospective EU equivalence decision on a specific aspect of the UK’s regulatory framework
Servicing your EEA customers
Outsourcing
Engaging with non-UK regulators
Client money and custody assets
Sector-specific information
Considerations for EEA firms conducting business in the UK
UK authorities have taken a number of steps to limit the impact of the end of passporting on financial products and services provided to UK-based customers from EEA firms. This includes introducing the temporary permissions regime (TPR) and the financial services contracts regime (FSCR).
If you’re an EEA firm and you don’t plan to take advantage of these regimes to continue to provide services to customers, and are planning to stop servicing customers in the UK, you should tell us about your plans if you have not already done so by contacting us directly as detailed on our website, or via your usual supervisory contacts.
We expect you to treat customers fairly, including when considering what notice to provide and what support customers need to make alternative arrangements.
Considerations for EEA firms conducting business in the UK
UK authorities have taken a number of steps to limit the impact of the end of passporting on financial products and services provided to UK-based customers from EEA firms. This includes introducing the temporary permissions regime (TPR) and the financial services contracts regime (FSCR).
If you’re an EEA firm and you don’t plan to take advantage of these regimes to continue to provide services to customers, and are planning to stop servicing customers in the UK, you should tell us about your plans if you have not already done so by contacting us directly as detailed on our website, or via your usual supervisory contacts.
We expect you to treat customers fairly, including when considering what notice to provide and what support customers need to make alternative arrangements.
Temporary permissions regime (TPR)
Financial services contracts regime (FSCR)
Next steps
If you or your customers have been affected by the end of the transition period, you should:
implement any remaining changes you might need to make to your business
continue to provide information to customers who might be affected by your plans in a way which is clear, fair and not misleading
continue to consider the implications of any further developments, checking our website regularly for new information
You may want to discuss the implications with the relevant EEA regulator in the countries where you do business, or your trade association. You may also want to get independent legal advice for any additional clarification you need.
More information
We have agreed Memoranda of Understanding (MoUs) with ESMA and EU regulators, covering cooperation and exchange of information. These MoUs are now in effect following the end of the transition period on 31 December 2020.
Keep up to date with our latest information by signing up to our monthly Regulation Round Up and reading the latest issues, or signing up to our weekly news and publications alerts.
Next steps
If you or your customers have been affected by the end of the transition period, you should:
implement any remaining changes you might need to make to your business
continue to provide information to customers who might be affected by your plans in a way which is clear, fair and not misleading
continue to consider the implications of any further developments, checking our website regularly for new information
You may want to discuss the implications with the relevant EEA regulator in the countries where you do business, or your trade association. You may also want to get independent legal advice for any additional clarification you need.
More information
We have agreed Memoranda of Understanding (MoUs) with ESMA and EU regulators, covering cooperation and exchange of information. These MoUs are now in effect following the end of the transition period on 31 December 2020.
Keep up to date with our latest information by signing up to our monthly Regulation Round Up and reading the latest issues, or signing up to our weekly news and publications alerts.
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[url] => https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3516096
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[updated_at] => 2025-11-19T00:31:14.000Z
[description] => Digital technology can open new frontiers in the formation, registration, and enforcement of property rights in land. This chapter explores the prospects - but also the limits - of digital technology in streamlining efficient land use and land markets. In particular, it asks whether the digital production and dissemination of information can enhance a more optimal use of land, such as by the three-dimensional (3D) delineation of real estate into distinct segments and specific rights thereto, including for subsurface infrastructure, or by the digital pooling of non-adjacent assets for purposes such as creating collective security interests in them. This chapter shows that while aligning the digital production of information with a corresponding system of “legal volumes” and 3D zoning regulation can innovate land markets, the growing multiplicity of property rights in multi-layered tracts faces a genuine collective action problem, having both commons and anticommons features. Digital technology should thus be matched with a legal reform on the institutional governance of multiple uses and interests in and across tracts, somewhat like in the case of condominiums and other current forms of strata title.
[date] => 2020-01-30
[name] => The Future of Property Rights: Digital Technology in the Real World
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[source] => Bank of International Settlements
[source_sync] => Bank of International Settlements
[url] => https://www.bis.org/review/r190618a.htm
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[description] => Keynote by Prof Claudia Buch, Vice-President of the Deutsche Bundesbank, prepared for the workshop "Women in Macro, Finance, and Economic History", DIW Berlin, Berlin, 17 June 2019.The views expressed in this speech are those of the speaker and not the view of the BIS.Central bank speech | 18 June 2019by Claudia BuchPDF full text (277kb) | 13 pagesThe global financial crisis has been a watershed for the global economy. Its implications for growth, distribution, and public finances have been severe. Structural changes have affected both the real economy and the financial sector. Reforms of the financial regulatory system have not only been a consequence, but also a driver of these trends. The G20 countries undertook an internationally coordinated overhaul of the financial regulatory landscape. It has been the broad objective of these reforms to reduce the probability and impact of future financial crises.The crisis has particularly challenged the perception that the stability of individual institutions automatically guarantees the stability of the entire financial system. Macroprudential now complements microprudential supervision. The purpose of macroprudential policy is to ensure that the financial system can perform its role for the real economy, even in times of crises or distress.About the authorClaudia BuchMore from this authorRelated informationMore speeches from "Deutsche Bundesbank"Country page: Germany
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[url] => https://www.bis.org/review/r190130a.htm
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[updated_at] => 2025-12-02T22:47:29.000Z
[description] => Speech by Mr Denis Beau, First Deputy Governor of the Bank of France, at the ESSEC - Centre d'excellence, Paris, 30 January 2019.The views expressed in this speech are those of the speaker and not the view of the BIS.Central bank speech | 30 January 2019by Denis BeauPDF full text (58kb) | 6 pagesLadies and Gentlemen,Dear students, It is a pleasure to be at the ESSEC Centre d'excellence today to discuss the financial regulation and supervision issues raised by the impact of Tech firms on financial services.To date, in Europe, we have been accustomed to a bank-centric intermediation model. However over the last decade we have witnessed the rise of Fintech start-ups and the entry of Bigtechs in the financial sphere. Do they bring anything new to the way financial systems operate? According to some commentators they should bring a structural shift and see the replacement of the "old world" of bank-centric financial intermediation with disintermediated peer-to-peer systems. Others consider that rather than eliminating intermediation, if left on their own these new comers will more likely bring new intermediation models, in which Fintechs and Bigtechs intermediate banks.Hence I would like to focus the first part of my remarks on the possible impact of these new competitors on the traditional bank-centric financial intermediation model (1). I will then highlight some of the risks that go hand-in-hand with the changes underway and the regulatory and supervisory challenges they raise (2). Finally, I would like to explain how at the Banque de France we address them in order to strike an appropriate balance between, on the one hand, the objective of fostering innovation and the overall efficiency of financial services and, on the other hand, the objective of ensuring a secure and level playing field for all suppliers and their customers (3).1. From Fintechs to Bigtechs: a decade of digitalisation of the financial intermediation's value chainUnderstanding how the Fintech sector emerged and has been structured (A) is critical to assessing its impact on the future of intermerdiation (B).(A) The concept of Fintech, contraction of Financial Technology, designates both a structural shift - the digitalisation of finance - and the main actors of this shift: the Tech firms.The digitalisation of finance is prospering on the grounds of cutting-edge technologies. The combination of big data analytics, cloud computing, artificial intelligence and blockchain is transforming the way financial products are designed, processed and distributed. For its advocates, this transformation promises:better consumer experiences;more diversified financing of the economy; andgreater efficiency of the financial system.In addition to these promises, cutting-edge technologies also lower the entry barriers to the financial sector for early adopters: the Tech firms. This should not come as a surprise: internet and smartphones have lowered the distribution costs, big data technologies have lowered production costs and the shrinkage of banks' balance sheet in the wake of the Great Financial Crisis has given space for new players to conquer market shares.Balance-sheet-light payment services have so far been the main gateway to the financial sector for Tech firms. From there, Tech firms have an avenue to expand their business further along the value chain, from payment to retail and commercial banking, wealth management and insurance.The Tech firms' model is based on the unbundling of traditional universal banking into an array of distinct core functions (such as channelling payments, providing financing, sharing risk and allocating capital), which are reassembled in an online platform. In this model, the control of the platform is more strategic than the provision of financial services itself.(B) Among these Tech firms, the Fintech start-ups (also known as simply "Fintechs" with an "s") and the Bigtechs are likely to have a different impact on financial intermediation.Fintech start-ups have already been a game changer in the financial sector. They have imported a customer-centric culture from the internet industry into the financial sector and they have targeted and called into question many of the long-standing financial rents. However, Fintech start-ups do not have the capital resources to disrupt incumbent banks and their future role is likely to be shaped by two main alternatives: to be acquired by an incumbent bank or to compete on niche segments such as equity crowdfunding or market place lending.It could be different with Bigtechs. The market capitalisation of the GAFA companies - Google, Amazon, Facebook and Apple - is 25 times higher than that of the whole Fintech universe. Bigtechs already have a material footprint in financial services, and not least in payment services: Amazon Pay operates in 10 countries, Google Pay in 22 countries and Apple Pay in 25 countries. Facebook Messenger allows peer-to-peer payments in 3 countries and a Facebook wallet is reportedly in preparation.Moreover, Bigtechs like the GAFA companies have competitive advantages in terms of expanding their activities further in this area, including massive financial resources, strong brand recognition, a worldwide customer base and privileged access to cutting edge technologies.Therefore, Bigtechs, more than Fintechs, have the potential to fundamentally redefine financial intermediation by integrating the entire landscape of financial services into their own digital ecosystems. This does not mean that banks will be disintermediated; but rather that banks may be interfaced with Bigtechs' platforms. Such a move is already gaining considerable traction in China.So, digital finance driven by Tech firms may not lead to a more decentralised system as the centripetal forces of network effects may benefit large conglomerates the most. Rather than eliminating intermediation, if left on its own, digital finance will more likely lead to reshuffling the cards, with the most digitally-agile incumbents and the most financially-able challengers becoming the new dominant (and potentially systemic) intermediaries in a landscape where there would be four coexisting intermediation models:The traditional banking intermediation model for certain financial services, like mortgages;A non-bank financial intermediation model (formerly known as "shadow banking") performed by the asset management industry, in particular financing the corporate sector;A re-intermediated model, in which Fintechs and Bigtechs intermediate the banks, on the retail segment in particular;And a fully disintermediated model supported by blockchain and peer-to-peer economies.2. The digital revolution forces public authorities with an interest in financial stability to revisit a wide array of policy issuesThis move from a bank-centric intermediation model toward new unbundled financial intermediation models performed by multiple players does not eliminate the need for central banks, regulators and supervisors. But it does force us to revisit old questions (A) and to address new ones (B).(A) I would like to highlight two old questions that we must revisit.First, the activities to be covered by financial regulation. Just as an example, the use of the public cloud to perform core banking operations is becoming mainstream. Fintechs and Bigtechs have adopted an "all-in" strategy. Incumbents are also migrating, although more cautiously, to the public cloud. However, the cloud computing market is highly concentrated and Amazon Web Services has built a dominant position. As the core financial functions lift and shift to the cloud, the risk of a single point of failure will emerge, and yet cloud providers are unregulated and out of the direct reach of financial supervisors. This raises questions about the effectiveness of the strategy followed so far by regulators vis-a-vis financial institutions' third party service providers, which in essence consists in setting requirements on financial intermediaries regarding their contractual relationships with their service providers. The evolving balance of power to the benefit of dominant Bigtechs service providers may challenge the effectiveness of such a strategy going forward.Second, the question of conduct. Our regulation deems certain practices acceptable and others not. Technological developments are making it possible to use information that was previously out of reach of a financial intermediary. This could potentially allow a more accurate assessment of risk or a more "responsive" pricing of service. But what is possible may not be (socially) acceptable - to take one example, the current development of "social network informed credit scores" raises questions about financial intermediaries' governance and risk control frameworks, when privacy concerns or discriminatory bias are at stake.(B) Let me now turn to new risks, which are non-financial in nature but closely intertwined with the digitalisation of finance. In my view, two in particular merit financial supervisory scrutiny.First, the strategic independence of incumbent banks. If incumbents depend on Bigtechs for key infrastructure such as cloud computing, if they rely on the same Bigtech to distribute their products through their platforms and then compete with Bigtechs on certain segments, they will see their strategic independence challenged in the same way as hotels and retailers did. This process of commoditisation of incumbents may lower credit standards to compensate for higher pressure on margins and exacerbate their funding gap because of lower customer stickiness.Second, the development of cyber-risk. With greater interconnections between technologies and the financial system and the opening up of information systems, the Banque de France observed in its Financial Stability Report of December 2017 that cyber-risk is moving from an idiosyncratic risk to a potential source of systemic risk which needs to be addressed. This perspective is widely shared among public and private decision makers and it should not come as a surprise that cyber-security will be one of the priorities of the French presidency of the G7 this year.So, to conclude my second point, the completion of the regulatory decade to strengthen banking financial intermediation is not the end of the story; it's just the end of the beginning of a new era. The transformation of financial intermediation is full of opportunities but it also highlights the limitations of sectoral and entity-based regulations and the need to adapt regulation and supervision to a morphing financial intermediation.This leads me to my last point.3. The Banque de France's approach to all these new trends in financial intermediation is to harness the Fintech opportunities while preserving the financial safety nets and a level playing field(A) Managing the financial stability risks stemming from a more diversified intermediation model pleads for advancing sound principles and for tightening the links between financial and non-financial regulation. In that respect, the Banque de France's stance is threefold:First, well-articulated and complementary regulation and supervision ranging from micro-prudential to macro-prudential, and from prudential to consumer protection, anti-money laundering, data protection and anti-trust laws;Secondly, a technology-neutral stance, which accommodates Fintech innovation while preserving financial stability. In this respect, finding the right balance implies an open-minded approach and an in-depth understanding of innovation. That is why in 2016 we created a specific Fintech-innovation hub at the ACPR to engage in a dialogue with innovators: around 400 of them contacted us through this dedicated channel;Thirdly, an activity-based regulation and supervision, to ensure a level playing field between all entities pursuing the same financial activity. The current multiplication of licensing categories to reflect the diversification of business models entails the risk of a loss of regulatory clarity and regulatory arbitrage which needs to be addressed.(B) Of course, the financial stability implications of the morphing of financial intermediation that is underway are not limited to France, and cross-border challenges need to be answered. Doing so requires the smooth articulation of national initiatives, European convergence and international cooperation.To seize the opportunities and address the risks stemming from highly evolving financial technologies, initiatives often start at the national level. The case of crowdfunding is a good example. In 2014 France was a pioneer in issuing a new bespoke regime for crowdfunding and marketplace lending platforms. This new regime opened a playing field for new players while limiting the regulatory burden and strengthening the protection of consumers and investors. As a result, although crowdfunding will not replace traditional lending in the near future, the French market is today the biggest market in continental Europe for alternative financing for the fourth consecutive year.1 The latest figures for 2018, released by KPMG and Financement Participatif France (FPF),2 show that more than 33,000 projects, for a total amount of EUR 402 million, were financed by crowdfunding platforms. Compared to 2016, the total amount financed has increased by 20%. In the last three years, it has been multiplied by 2.4.Further to national initiatives, European convergence is always the ultimate goal. National initiatives are beneficial because they can be swiftly implemented and tested. By contrast, the European decision-making process is not known for its rapidity. But the size of the European market is critical for allowing our Fintech start-ups to reach an appropriate scale for their activities. That is why the Banque de France advocates a European regulation of crowdfunding platforms based on the French model.Because forefront technologies are based on the World Wide Web, central banks, supervisors and regulators will eventually need worldwide cooperation to ensure that their powers are still effective. Let's take the example of crypto-assets. Everyone in France can bet their money in Bitcoin and the likes today (but think twice before doing so!). Yet, none of the Top 10 exchange platforms are located in France. This is the reason why back in February 2018 the Governor of the Banque de France and the French Minister of the Economy Bruno Le Maire, along with their German counterparts, asked that the issue be escalated to the G20 level. Thanks to this initiative, an international monitoring of the financial stability risks of crypto-assets is now in place and many initiatives are taken by international bodies to address the most pressing issues such as anti-money laundering, market integrity and consumer protection.(C) Finally, financial technologies should not only be seen as opportunities for the provision of new products and services or as a further threat to financial stability. Financial technologies can also be an asset to enhance compliance with regulation or risk management practices: that's what we call "Regtech". They can also help the supervisor to perform its task more efficiently: we then speak about "Suptech" (supervisory technology).In both areas, the prospects are promising. Think of the potential gain of efficiency for a supervisor if he could take advantage of big data and artificial intelligence, for example, to analyse the huge amount of quantitative and qualitative data reported regularly to him as well as weak signals collected in the market. Or if a supervisor could turn his backward looking monitoring tools into predictive processes.Of course, supervisors are just at the beginning of the learning curve and they will clearly face a number of challenges: facing risks inherent to innovative projects, understanding the capabilities and limitations of new technologies, enhancing a modern data culture in supervision, hiring people with new and rare skills.But these challenges must be overcome because the stakes are high. And it is not only a question of efficiency: it also has to do with supervisory credibility. How can a supervisor be in a position to supervise processes based on new technologies if he has no in-depth experience of it? On the contrary, a supervisor who engages in the "suptech journey" gives a clear and positive signal to market players: he is willing to accompany an evolving sector so that supervisory methods can be adapted and remain relevant and consequently, the financial system can remain safe and trustworthy. That is clearly the road that we, at the Banque de France and the ACPR, want to take.ConclusionI would like to conclude my speech by quoting Bill Gates:"We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten. Don't let yourself be lulled into inaction."3The Banque de France tries to heed this warning. Although we do belong to the (very) "old world" - the Banque de France was created more than 200 years ago by Napoleon -, as any incumbent, we need to adjust and adapt to the "new world". In order to do so:We have adapted our organisation and governance with the creation of a Fintech hub within our supervisory function, the appointments of a Chief Digital Officer and a Chief Data Officer, and the launch of a Lab to foster innovation within the Banque.We experiment with new technologies: the Banque de France was the first central bank to implement a full-scale project based on DLT which is fully operational4 and we successfully run eight artificial intelligence projects.We also host discussions between regulators, academics and industry: for example, the ACPR task force on artificial intelligence delivered an issue paper last December for a two-month consultation period (ending 28 February).But this call for action is addressed to everyone, and especially to you, the new generation. As students at the ESSEC business school and as future economists, bankers, start-upers and researchers, you will have a big role to play to ensure that, irrespective of the big changes to come in tomorrow's financial intermediation, our compass continues to point toward the common good of financial stability.Thank you for your attention.1 Cambridge Centre for Alternative Finance, 3rd European Alternative Finance Industry Benchmarking Report, 2018.2 Baromètre 2018 du crowdfunding - KPMG/FPF (January 2019).3 The Road ahead, 1995.4 Madre.About the authorDenis BeauMore from this authorRelated informationMore speeches from "Bank of France"Country page: France
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[description] => Several approaches to setting bank capital requirements are competing for policymakers’ favor: the current risk-weighted approach embedded in Basel III[1] and variants; a leverage ratio; and the use of stress tests. In practice, as is currently true in the US, some combination of these will be used.
One of the key questions in considering capital requirements is what the incentive effects on banks will be and therefore how their behavior will change with different modifications to the requirements. This paper examines the issue by answering the following questions:
Why would banks change their behavior based on capital requirements?
What are the incentive effects which are desired by policymakers?
How will banks decide how to respond to capital requirements?
What are the likely effects of different capital regimes?
How will multiple approaches interact when used together?
In offering answers to these questions, I will be drawing on both my theoretical analyses and discussions with other analysts and also on the roughly two decades of experience I had earlier in my career as an investment banker advising financial institutions.
A key point of this paper is that the sophisticated banks that dominate the financial system will directly incorporate the effects of capital regimes into their internal pricing models. This will result in the incentive effects flowing directly through to almost all decisions about business mix and pricing. Thus, incentive effects will be much more than academic constructs, they will play through into actual business decisions via banks’ internal markets much as changes in monetary policy trigger substantial changes in market prices in the economy as a whole
Why would banks change their behavior based on capital requirements?
Banks view capital as more expensive than other forms of funding and therefore attempt to minimize its use while achieving the desired, or required, level of safety. At first blush, the rationale is obvious. Common shareholders of banks historically indicated that they required expected returns of roughly 15% annually, although they seem to have been willing to accept something closer to 10% after the fact. In the current market, double-digit expectations still seem to be built into pricing, despite historically quite low inflation levels and interest rates, perhaps in part reflecting the great uncertainty currently surrounding the banking business and its regulation. In contrast, deposit funding is far cheaper, with explicit rates of close to zero currently, plus allocated costs for branch networks, advertising, etc. that add perhaps another percentage point or two. Bank debt issued in the capital markets is somewhat more expensive, but still much cheaper than the required return on equity.
However, Modigliani and Miller, two Nobel Prize laureates, proved years ago that, under very specific conditions, a firm’s total cost of funding should not change with changes in its mix of funding sources. There are some academics who argue that this is true for banks as well, when viewed from the point of society as a whole, and therefore policymakers should require much higher capital levels than is currently the case[2]. I have written extensively in opposition to this view[3]. Regardless of where one comes out on that argument, it is important to realize that virtually no one argues that banks as private actors are indifferent to capital requirements, in part due to the tax deductions that makes interest payments cheaper than stock dividends. Therefore, they should, even in theory, attempt to minimize capital usage within other constraints.
More importantly, banks clearly show through their actual behavior that they consider equity to be substantially more costly than debt or deposits. It is indisputable that, in practice, they make strong efforts to minimize their capital usage within the constraints of their other objectives and regulatory requirements.
What are the incentive effects which are desired by policymakers?
The Basel Committee on Banking Supervision recently released an excellent discussion paper on bank capital requirements that summarizes three key objectives for capital requirements: risk-sensitivity; simplicity; and comparability[4]. Risk-sensitivity is crucial, because the core reason for banks to have capital is to protect against the risk of bad outcomes, especially insolvency. Therefore, the level of capital needs to be commensurate with the risk. However, simplicity and comparability are also important, because they help make it possible in practice to be comfortable that capital is indeed adequate and that required capital levels are reasonably similar across banking jurisdictions and within them. (If requirements differ significantly, there is a danger of regulatory arbitrage, with business moving to the laxer jurisdictions.)
The core approach of Basel III, the third version of the global Basel Accord on Bank Capital, is to calculate the capital needs of a bank by weighting each asset category according to its risk and then adding the totals. This achieves a great deal of risk-sensitivity and would probably continue to be the single approach used by most jurisdictions, if policymakers and others thought the risk weightings were perfect. Instead there are a whole series of problems that have considerably harmed the credibility of the risk weights[5].
Policymakers are now generally looking for a combination of approaches, including fixing problems with the risk weightings, that will retain the risk-sensitivity of the risk weightings while countering the worst potential problems. In particular, Basel III adds, as a supplemental measure, a leverage ratio calculation that is fairly insensitive to risk. The US has used a leverage ratio as a second constraint for some years.
In brief, policymakers want a capital adequacy regime that captures the bulk of the differences in risk across asset categories while ensuring that there is a certain minimum level of total capital per dollar of assets, (and asset equivalents for off-balance sheet items), even if the risk weighting on its own would allow lesser levels of capital. The leverage ratio constraint is intended to counter the dangers of “gaming” of risk weightings by the banks as well as the intellectual errors that can lead banks and their regulators to believe that certain items, such as sovereign debt, have low levels of risk when in reality the risks are higher than that. (Although I am not sure this can be proven, my intuition is that the biggest dangers from faulty risk weightings come from assigning zero or near-zero weights to assets that may truly be relatively low risk, but should have risk weights well above zero.)
Therefore, the desired incentives are for banks to set aside capital in proportion to the risk of different assets while also ensuring that total capital is sufficient to handle a shock whereby banks lose a few percentage points of value across the board, to reduce the dangers from consistent misperceptions of risk levels.
How will banks decide how to respond to capital requirements?
Because they view capital as costly, banks try to use the lowest amount that also allows them to meet all of their safety objectives. Conceptually, this means that they use the highest minimum capital requirement from a set of different measures, including:
Regulatory requirements, plus a buffer. Banks will be forced by regulators to hold at least certain minimums, plus banks will add a margin for error to avoid serious risk of slipping below these minimums if they take losses.
Rating agency requirements, plus a buffer. Similarly, banks usually target a certain credit rating that carries with it some minimum capital requirements. Higher ratings make it easier to attract customers and counterparties, but bring with them greater capital needs and costs.
Economic capital requirements. Banks run their own models to determine how much capital they need in order to operate with their desired level of safety, as measured by the probability of insolvency in any given year. They may be willing to accept a risk of failure every 1,000 years or perhaps 200 years, depending on their conservatism. The models for economic capital requirements tend to be similar to the ones used for regulatory risk weightings, but there can be substantial differences in detail.
Other constraints. In theory, equity investors or other constituents might have stiffer requirements for the bank than these other measures, but it is generally not the case in practice.
At any given time, one of these constraints will be the binding one, meaning that it requires more capital than the others. The incentive structure for the bank depends significantly on which constraint is binding. It appears to be the case that the binding constraint for many banks going forward will be the regulatory capital requirements, which is why the choice of regulatory capital regime may have major incentive effects. This is a quite different situation from the case a few years ago, when relatively low regulatory capital requirements generally meant that large banks determined their capital either primarily through ratings targets or from their own economic modeling.
In practice, capital requirements affect decisions by sophisticated banks through the formula used to price capital throughout the bank. Banks generally try to ensure that each of their units and each of the transactions of those units earn the bank enough profit to more than cover the target cost of capital multiplied by the amount of capital allocated to that unit or transaction. Thus, they effectively set up an internal market for capital in order to maximize the efficiency of their firm-wide capital allocation, in much the same manner that our economy as a whole relies on market mechanisms to maximize efficiency.
In theory, a bank would calculate all possible combinations of activities and use a complicated program to determine which set of activities would produce the maximum profit for a given level of capital and to determine whether additional capital should be raised or some capital returned to shareholders.
In practice, this is infeasible. Instead, the bank will generally construct a much simpler formula to be used in pricing transactions that attempts to roughly calculate the marginal impact on total capital requirements of a particular activity. If risk-weighted capital is the binding constraint, then the appropriate risk weighted asset (RWA) figure for that activity is used. If the leverage ratio were the binding constraint, then the amount of assets and asset-equivalents related to the activity would be fed in.
However, the amount of capital for a given activity may be radically different depending on which capital requirement is binding at a given time. This creates a risk that the simple approach just described would cause a sharp enough change in the bank’s behavior, and indeed business model, that the originally binding constraint may cease to be the binding one going forward. One could imagine a bank caroming back and forth in its business strategy as the binding constraint shifts over time, which will occur not only due to its own decisions, but market factors that are out of its control, including movements in the financial markets that may raise or lower its total capital level.
It seems probable that banks will therefore include multiple factors in their capital pricing and allocation formula in order to reflect different potential constraints, with greater weighting on the constraint that is most binding. When I was working at J.P. Morgan prior to the crisis, the pricing formula for a transaction included a capital charge that related not just to risk-weighted assets, but also to the total assets involved in the transaction. I understood that this was intended to reflect the fact that one or more of the rating agencies were concerned about the leverage ratio, in addition to risk weightings, and therefore J.P. Morgan wanted to ensure there were incentives to pay attention to total assets as well as RWA. It seems likely that such an approach will be common going forward. The formulas will presumably also be tailored to take account of the likely impact of a given activity on the capital required to meet the criteria of stress tests, such as the Comprehensive Capital Analysis and Review (CCAR) exercise. The latter will generally be of similar nature to the RWA approach, but the effective weights may differ from the ones employed under Basel III.
In essence, the capital pricing formula will be intended to move the bank in the direction of the theoretically optimal mix of activities that would take place under the binding capital constraint. This will often be a “corner solution” where any further movement of activity in the same direction would cause the originally binding constraint to produce a lower capital requirement than a new binding constraint, such as moving from leverage as the constraint to RWA as the constraint. Thus, the formula will create incentives for decisions on the margin that are similar to what the bank would do if the binding constraint were the only constraint, but with automatic stabilizers to avoid excessively rapid changes that could lead to instability and excessive movement in strategic and tactical direction.
It should also be noted that there will be other regulatory elements that affect the pricing formula used in evaluating bank activities and individual transactions. In particular, the new Basel III liquidity constraints incorporated in the Liquidity Coverage Ratio and Net Stable Funding Ratio will limit the degree to which banks could respond to the leverage ratio as a constraint by reducing high-quality, and low return, liquid assets such as short-term Treasury securities. Banks will almost certainly include a charge in their pricing formula for activities that create a drag on the LCR or NSFR and a credit for those that ease the liquidity constraints.
What are the likely effects of different capital regimes?
The most obvious differences in incentive effects relate to those that are created when RWA is the binding constraint as compared to when the leverage ratio is. The RWA calculations incentivize banks to undertake those activities where they are sufficiently well paid for the level of risk undertaken, as measured under the Basel III rules. All else equal, this encourages lower-risk activities, unless the pricing advantage of taking on more risk outweighs the additional capital need. In consequence, this also encourages those activities for which the regulatory risk weights are too low, such as may be the case with some sovereign debt and some mortgage transactions, and away from ones where the RWA is too high, as may be the case with some trade finance transactions.
On the other hand, the leverage ratio is relatively insensitive to risk and therefore encourages higher risk activities at the expense of those with lower risk, since the same capital can earn a higher expected return associated with the higher risk. Thus, the leverage ratio pushes banks away from sovereign debt and towards higher risk loans. One of the reasons many support the use of leverage ratios as a complement to RWA calculations is in the hopes that the leverage ratio’s penalization of activities with excessively low risk weights will appropriately offset the built-in incentives in the RWA calculations.
How will multiple approaches interact when used together?
The principle effect of using multiple regulatory capital approaches, such as the leverage ratio alongside the RWA calculations, is likely to be to push banks towards “corner solutions”. That is, they start with their existing business mix and move in the direction encouraged by the binding constraint until they are on the edge of finding that the other constraint becomes the binding one. The reason that there is likely to be movement all the way to the corner is because the incentive effects of the two radically different capital approaches push towards very different business mixes. As long as the initially binding constraint remains binding there are likely to be powerful incentives to keep moving towards optimization under that constraint by shifting business mixes. It is only when the corner is hit, that the incentives for further movement in that direction vanish.
This push towards the corners could be reduced if banks view the potential volatility of business mixes as too harmful and incorporate in their capital pricing formulas a substantial weighting for the initially non-binding constraint in order to reduce the tendency to change strategies. This would have a cost, however, by producing sub-optimal business mixes at each point in time.
The actual changes in business mix are hard to determine from the outside and, indeed, may be quite hard to predict from the inside. The direction of change will be fairly clear once one knows the initially binding constraint, but it will be harder to know how far the bank will go in that direction and in what ways the individual business units will achieve the new targets. In this sense, it may be like raising fuel efficiency standards for cars. Some things will be clear. All else equal, there will be an attempt to reduce the weight of cars and to improve the efficiency of engines. However, there will remain many different ways in which the overall goal can be achieved.
The banking industry is correct to point out that very low risk activities, such as holding Treasury securities, will be severely penalized by a leverage ratio constraint as compared to RWA constraints, and that this is very likely to reduce bank’s holdings of those securities and related activities such as securities financing transactions. However, it may be difficult to discern what the total mix of changes will be within the bank, since not all changes will occur in regard to the extreme cases and there are other constraints such as the liquidity rules or specific business needs that may limit the response through the most obvious actions. Areas of activity where banks dominate may also see price responses that fully or partially offset the increased cost of the capital allocated to that activity.
There is much that could be learned by trying to construct internal pricing rules that mimic those we would expect banks to use. Asset mixes, with associated pricing, could then be introduced to see what banks are likely to do in those situations. These mixes and prices would necessarily be fairly simplified, but they could still be broadly realistic. This type of exercise could help considerably in finding an appropriate calibration of the various regulatory standards.
[1] Basel III refers to the current version of the Basel Accord on Bank Capital, the global guidelines created by the Basel Committee on Banking Supervision. Basel III is being phased in in most major jurisdictions over the next few years.
[2] See, for example, The Bankers’ New Clothes by Anat Admati and Martin Hellwig. Simon Johnson and others have endorsed the arguments in various publications.
[3] See Douglas J. Elliott, “Higher Bank Capital Requirements Would Come at a Price” https://www.brookings.edu/research/papers/2013/02/20-bank-capital-requirements-elliott
[4] See “The regulatory framework: balancing risk sensitivity, simplicity and comparability,” July 2013, The Basel Committee on Banking Supervision
[5] See my comment letter on the Basel discussion paper for a discussion of some of the key flaws ([put in the link]).
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[description] => Contribution by Mr Frank Elderson, Member of the Executive Board of the European Central Bank and Vice-Chair of the Supervisory Board of the ECB, on the panel "Sustainable finance: what is expected from transition scenarios?" at the Eurofi High Level Seminar 2022, Frankfurt am Main, 23 February 2022.The views expressed in this speech are those of the speaker and not the view of the BIS.Central bank speech | 23 February 2022by Frank EldersonPDF full text (24kb) | 2 pagesMany thanks to the organisers for letting me participate remotely in this panel alongside such distinguished speakers. And thank you to the Chair of the panel for allowing me to open the discussion with some remarks on the importance of transition planning. I fully appreciate the irony of what I'm about to say, what with you in Paris and me here on-screen, but we are all on the path to Paris. Citizens, firms, banks and prudential supervisors alike are working towards the climate goals agreed in 2015 as the EU and national governments roll out policies implementing the Paris Agreement.In previous speeches, I have stressed the need for banks to put in place transition plans compatible with EU policies implementing the Paris Agreement – plans with concrete intermediate milestones to enhance banks' long-term strategies and decision-making. More and more banks are already doing this themselves, while the European Commission also called for enhanced transition planning in its sustainable finance strategy published in July 2021.For ECB Banking Supervision, the main concern that needs to be addressed by these transition plans is the level of banks' risk exposures and the effectiveness of their controls. Have the exposures been sufficiently mitigated and are they prudent? As climate-related and environmental risks become increasingly widespread and more material, banks will, inevitably, be exposed to them, through both physical and transition risks. Banks therefore need adequate risk mitigation measures in place. This is what we need to assess as the prudential supervisor.Introducing a legal requirement for banks to have a clear, detailed and prudent transition plan in place would increase the consistency of the regulatory and supervisory framework and contribute to maintaining a level playing field. Needless to say, we are very happy to see that this is exactly what the European Commission has proposed in its review of the Capital Requirements Directive, which is now with the co-legislators.But it doesn't stop there. For banks to be able to manage their transition risks adequately, they need to have information on how their customers are performing relative to a Paris-aligned transition path. This is where the European Commission's proposal for a Corporate Sustainability Reporting Directive comes in. The ECB welcomed this proposed directive in a legal opinion and it is now awaiting approval by the co-legislators.The current standards on sustainability disclosure are insufficient to ensure that sustainability-related financial risks are properly understood and priced by market participants. The proposed Corporate Sustainability Reporting Directive is a necessary step to address the gaps that currently hinder the development of appropriate sustainability policy, risk assessment and risk monitoring frameworks for the financial sector. This is because it will not only explicitly ask large banks to disclose their transition plans, it will also ask banks' corporate clients to do the same. This last point is crucial, as it will enable banks to assess the climate-related and environmental risks in their asset portfolios. These disclosures are therefore an important element in ensuring that banks manage all material risks, in line with what we as the prudential supervisor expect them to do.The climate-and-environmental puzzle is still highly complicated, but we can now see the pieces slotting into place. Against this backdrop, it is crucial that the elements included in the Commission's proposals are implemented in actual binding legislation entering into force without undue delay. This will smooth the path to Paris for all.About the authorFrank EldersonMore from this authorRelated informationMore speeches from "European Central Bank"Country page: Euro area
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[description] => Summary of document history Previous versionPreviousconsultationThis versionSubsequentconsultationSubsequentversionThis versionBCBS | Implementation reports | 05 October 2022 | Status: CurrentPDF full text (1,171kb) | 84 pagesTopics: Definition of capital , Leverage ratio , Liquidity riskToday the Basel Committee on Banking Supervision publishes a second evaluation report assessing the impact of the implemented Basel reforms regarding buffers usability and cyclicality.Following the issuance of the reforms, the Committee has prioritised evidence-based evaluations of the effectiveness of the Basel III standards. The first report Early lessons from the Covid-19 pandemic on the Basel reforms made an initial assessment of whether the Basel reforms have functioned as intended in light of Covid-19 pandemic. This follow-up report conducted an in-depth analysis of buffer usability and cyclicality in the framework, areas that were highlighted in the first evaluation report as warranting further consideration.The report examines the lending implications and market reactions regarding:(i) capital buffer usability;(ii) countercyclical capital policy;(iii) liquidity buffer usability; and(iv) expected credit loss provisioning, capital and procyclicality.Given the findings in the evaluation report, as well as the longer-term impacts of the pandemic, ongoing geopolitical events and the potential for new risks to emerge, the Committee stresses the importance of the prudent build-up and use of buffers at banks to smooth the impact of internal and external shocks. To increase the capital buffers that can be explicitly released in the event of sudden shocks, including those unrelated to the credit cycle, such as the impact of the Covid-19 pandemic, some authorities have set a positive cycle-neutral countercyclical capital buffer rate. In a newsletter also published today, the Committee notes its support for the ability of authorities to take this approach on a voluntary basis.Related informationPress release: 5 October 2022
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[description] => Speaker: Andrew Bailey, Chief Executive
Event: AFME, ICMA and ISDA breakfast briefing
Delivered: 1 March 2018
Note: this is the speech as drafted and may differ from the delivered version
It is a great pleasure to be at the Association for Financial Markets in Europe (AFME), International Capital Market Association (ICMA) and International Swaps and Derivatives Association (ISDA) briefing this morning and can I thank all of you for having the appetite for a speech on wholesale financial markets at breakfast-time. Of course, for the true devotees, I am sure there is nothing at all unusual about this.
And, that's a convenient introduction to my first point, which is a very long overdue thanks to a former colleague at the Bank of England and I know a mainstay of ICMA, Paul Richards. It is fashionable these days, for obvious reasons, to look for the magic ingredients that make London such a successful wholesale financial centre. What is it that marks London out? There is no single answer, of course, but one thing London does have is a tradition of people who can bridge the worlds of policy and practice and help us to knit the two together. And, I can tell you from more than twenty years of knowing Paul, that he is one of the finest exponents of that art. We first worked together at the Bank when Paul was leading something called Practical Preparations for the Introduction of the Euro. The UK wasn’t going to join the euro area, but the Bank was determined that London would be ready to trade and clear the euro as well as provide the full range of capital market services. And London was ready, thanks in good part to Paul’s work. It was prescient as we now know. Wind the clock forward, and you can probably work out how pleased I was that Paul and ICMA – along with AFME and ISDA – are deeply engaged in work on Brexit and that Paul is chairing a key group on practical plans for reforming London Inter-bank Offered Rate (LIBOR).
While I am on the subject of thank yous, can I also extend it to AFME, ICMA, ISDA, Martin Scheck and all the many people involved in your work. I have to say that for me AFME, ICMA and ISDA are role models for how we as an authority work with markets and trade bodies. We benefit greatly from your deep knowledge and unfailing willingness to help us and help market participants.
For the rest of the time, I am going to talk about developments in markets, the introduction of MiFID II and say something about our work on LIBOR.
Throughout last year, one of the themes of discussion on financial markets was just how insulated they were to news, and particularly news which appeared to increase risks to asset values or increase the general level of uncertainty. And, there was no shortage of such news last year. I have seen this before, and as a policymaker who is required to assess risks, it never feels comfortable when markets are so resolute in their ‘treatment’ of risks.
It never feels comfortable when markets are so resolute in their ‘treatment’ of risks.
I should say that in overall financial stability terms, this is only one part of a bigger picture, and there are important countervailing developments, not least the progressive and increasing resilience of the core banking system which is the product of a decade of heavy lifting in terms of policy reforms.
We had to wait until a month or so ago to see sharp falls in the price of risky assets and a corresponding rise in volatility. Realised and implied market volatility spiked and the Chicago Board Options Exchange’s Volatility Index (VIX) experienced its largest ever one day move reaching its highest level since 2015. But falling equity prices were not accompanied by a commensurate increase in spreads of high-yield corporate bonds, and there was little movement in investment-grade spreads.
Volatility may have been amplified by some investors needing to close out leveraged volatility based strategies. The net effect of several large market-based players trading in the same direction created a ‘herding effect’ which may have exacerbated the market moves. We also know that in conditions when market moves become larger, liquidity, which will dampen the effect of smaller moves, will decrease. What we do know is that the experience of the spike in volatility has led to a significant fall in outstanding exposure to inverse VIX products which can be used to sell volatility. Market information also suggests that some large investors reduced their short volatility positions ahead of the spike up in volatility. There are, however, already some indications that short volatility positions are beginning to be re-established.
Stepping back from these events a little, what we have seen in recent times is the lack of inherent market volatility has led to the growth of strategies targeting volatility by investors, thus increasing risk-taking when volatility falls and cutting exposure when it rises. It is not clear yet to what extent such strategies may have contributed to amplifying recent market moves. But there is clearly scope here for pro-cyclical behaviour, and that brings its own risks. It would, of course, be easy to say that such strategies are an inevitable feature of a search for returns in a world of very low, real interest rates though this should not be overdone as an argument since volatility will be traded irrespective of the level of rates. But should we ignore the risks to the financial system that can accompany these strategies? Far from it, we should be vigilant and inquisitive.
If I step back further, it is of course possible to tell stories to explain last year’s dismissal of adverse news as a response to revisions to both the prospects for, and evidence of, growth in the world economy, and a continuation of subdued inflation expectations. These have been key features of the supportive environment for asset prices. With that has come a compression of estimated term premia relative to historical levels, and broader evidence that investors are accepting lower compensation for risk. These are all signals that we need to be on high alert, but in doing so recognise the resilience that has been built into the system post-crisis.
Now, there is a respectable argument that this resilience is concentrated in the banking system and not in the world of market-based finance. Moreover, meanwhile, the reaction to the financial crisis has been to see a shift in the form of financial intermediation from bank balance sheets to market-based activity by investors typically through investment management vehicles. There is a logic to this shift evidence for which can be seen in the rapid, too rapid, growth of bank balance sheets before the onset of the crisis a decade ago. This was particularly pronounced in the trading books of banks. Today, the picture is very different.
But this change in financial intermediation does beg some important questions. Three stand out. First, does the decline in bank intermediation mean that their role as shock absorbers by expanding dealer inventories in times of market correction mean that the system is now at risk in a way that threatens stability? And, second, is the system exposed to pro-cyclical behaviour by investors as they seek to exit en masse? Third, are there features of the structure of the system today, such as the larger number of open-ended investment funds, which mean that there are risks to stability which need to be tackled?
I have argued in the past that I think we should be cautious about assuming that in the good old days dealer inventory stood in the face of the storm and absorbed and checked falling markets. Moreover, the era of larger trading books was short-lived before the crisis, and it didn’t end well. Still, we have to take these risks seriously because it would be tragic if all the progress on bank resilience was undone by a flaw somewhere else in the system. So, what have we learned from recent events? We should be circumspect here. We had a fairly short-lived spike in volatility, and some major price moves. So far, the system has stabilised and the episode was fairly short-lived. And, to be clear, that is not a prediction of what will or will not happen next. So far, the system has dealt with this spike in volatility and fall in asset prices. But, if this is it – and again no prediction intended – it hasn’t been a major system-level event. So, let’s not get carried away.
It won't deflect us from a number of important pieces of work that we have underway in this field. I would point out two areas here. First, we have been looking hard at the risks from open-ended fund structures following the experience with property funds after the European Union (EU) referendum. Again, that was a major event at the time, which can look a bit less major with the benefit of time and perspective. But, we didn’t know this at the time. What I think is important here is that investor expectations and understanding matches well the form and structure of the investment vehicles they use.
What I think is important here is that investor expectations and understanding matches well the form and structure of the investment vehicles they use.
The second important piece of work, and something on which the FCA and Prudential Regulation Authority (PRA) recently put out papers, concerns algorithmic trading. We have some quite notorious examples of cases where algos are used poorly, and there can be wider fall-out.
To be clear, our intent is not to stand in the way of the use of algos, but rather to ensure that firms have robust governance, risk management and compliance standards. Used well, they are an obvious innovation in trading, but used badly they can cause wider risks to the system.
The last two months have seen another important event, the introduction of Markets in Financial Instruments Directive II (MiFID II) in early January. AFME, ICMA and ISDA played an important role here too, bridging the world of policy and practice, for which many thanks.
For our part, we were very clear that the highest priority was that the introduction of MiFID II, which was a massive undertaking, did not lead to market disruption. Sometimes I get challenged on this, on the ‘rules are rules’ basis – it doesn’t matter what happens to markets as long as the rules are obeyed. No. We have had a lot of experience in London of balancing our objectives whilst ensuring the continuity of markets.
We were very clear that the highest priority was that the introduction of MiFID II, which was a massive undertaking, did not lead to market disruption.
A few days after MiFID II came in, a senior market practitioner said to me, I think as a compliment, that it had gone much more smoothly then they expected. It was too good an opportunity to miss to point out that this probably said more about their expectation than the actuality. But, still, in the world of implementing complex EU legislation, don’t turn down a compliment.
Whatever you think of MiFID II, you can't deny its ambition. It seeks to boost investor protection and enhance market transparency, efficiency and oversight. An important part of this objective is to migrate significant volumes of trading from over-the-counter (OTC) markets towards more transparent trading venues. If you want to engage in debate on the EU as a rule-making body, then MiFID II is for you – over 30,000 pages of rules.
It is, of course, very early days. But we can now say that the new systems have accommodated heavy trading as market volatility spiked in February, and stood up to the test. We have seen a pronounced downturn in OTC equity trading, as expected. There have been delays in introducing some of the planned measures, notably the double volume cap which limits dark trading. I have no doubt that across the EU, the data systems will get up to speed and enable this to happen and I am relaxed that it will happen robustly without disrupting markets. The European Securities and Markets Authority (ESMA) has said it will happen in March.
Likewise, we have not seen disruption to bond markets. It is hard to pick out any particular MiFID II effects on bond spreads given all the other developments in markets over the last two months.
Capital markets that support the real economy need to be accessible, efficient, clean, resilient and sufficiently liquid. MiFID II tackles these objectives by taking into account the particular role played by venues providing access to capital for smaller firms; extending transparency from equity to bond and derivatives markets, with the aim of promoting efficiency in those markets too, while maintaining access to liquidity; enhancing the scope of instruments within the market abuse regime and the quality of the data provided to us to police it with; and reinforcing the controls in place to support resilience in times of extreme market conditions.
It is too soon to say whether these aims have been realised. But we can reflect on our experience of the initial implementation. Wholesale firms made a very significant effort to prepare for the implementation of MiFID II, for which many thanks. I know that this comes with a cost. Despite some inevitable roughness around the edges, the preparations paid off with no major operational disruptions to trading – and evidence that the changes have not adversely affected liquidity across equities, bonds and derivatives.
Obviously, we are continuing to monitor the effects of MiFID II, which we recognise will only play out in full over a period of time. Also there is inevitably more to do on implementation for both firms and regulators, particularly on reporting. We expect firms to be working to tackle issues and we also recognise that there remain some important interpretative issues to address.
Prior to implementation we said that our approach to enforcement of MiFID II would be consistent with our general effective and proportionate approach to the use of our enforcement powers. To be clear, it was not our intention to offer forbearance; we expect firms to comply with their obligations. But we thought it important to confirm that we would not use our enforcement powers in a disproportionate manner.
We discussed implementation extensively with firms last year. We are continuing our supervisory engagement with firms and our 2018/2019 Business Plan will set out the thematic work we will conduct over the next year on issues relating to MiFID II.
A key challenge for firms in implementation was the expanded transaction reporting requirements. These involved a step change in both the volume and quality of data we receive regarding transactions taking place in the market.
The FCA, alongside ESMA, undertook extensive technological work to be ready to receive, interrogate and ultimately learn from this dataset. We estimate that under MiFID, we will capture some 30-35 million transaction reports a day, up from 20 million before its introduction. The volume of reports reflects the role of London as a global financial centre. There is a determination on our part to exploit the full possibilities of these data to support our efforts to deter, detect and punish market abuse.
That’s enough MiFID II for one breakfast. Just when you thought it was safe to go out as I have finished on that one, let me end with a few words on LIBOR.
As I have said before, LIBOR reference rates are no longer supported by significant volumes on transactions. This puts panel or submitting banks in a difficult position. Work on the transition to alternate reference rates is underway around the world. In the UK this is being driven by the cross-market group (as referenced earlier) which is focused on sterling bond markets, under Paul’s able leadership. It brings together sell side, buy side and non-financial firms. Its work spans derivative and cash markets, with sub-groups already meeting on bond markets, loan markets, and pensions, amongst other issues.
Work on the transition to alternate reference rates is underway around the world.
In the United States, the Alternative Reference Rates Committee (ARRC) has also been reconstituted to facilitate a broader transition. In Switzerland there is focus now on specific retail and derivatives transition issues. In Japan the Risk Free Rates Working Group is encouraging financial institutions to use the Overnight Indexed Swap (OIS), which is critical to transition. The market led work is now starting in the euro area, and the European Central Bank (ECB) has decided it will publish an overnight rate, starting in 2019.
There seems to be a consensus that interest rate markets will, in future, be centred on the Risk Free Rates chosen by various industry groups – like (Sterling Over Night Index Average) SONIA in the UK and Secured Overnight Financing Rate (SOFR) in the US. The expectation is that this will lead to a stronger financial system. For the many LIBOR users for whom it was never an ideal reference rate, a shift of liquidity into the chosen risk free rates offers an opportunity for better hedges and lower risk exposures.
Those who want to hedge interest rate risks will be able to choose a reference rate that does not include an unwanted, but economically significant, credit risk component. Borrowers should have better access to variable rates that do not make them carry the risk that their interest payments will go up because confidence in their banks has fallen.
This leaves a very big question unanswered. It is all very well to talk about a future with new benchmarks, and one that importantly matches closely to interest rate risk, but what about the very large legacy of contracts? There will be cases where it is not practical or economic to change reference rates. The Intercontinental Exchange (ICE) Benchmark Administration has opened up the prospect of a voluntary arrangement to sustain LIBOR after the end of 2021. I don’t rule this out, but I would stress that I don’t see a prospect of a reversal in the decline of the market activity that LIBOR seeks to measure, and the FCA has not changed its position that it is not going to use powers of compulsion towards submitters beyond that point. My best guess is that some panel banks would already have departed were it not for the voluntary agreement to stay in until the end of 2021 that we were able to obtain.
Now, I would not rule out that it might be possible to produce a form of LIBOR proxy which could satisfy the legal definition of what LIBOR is taken to be and serve as a legacy benchmark. This is at root a question of legal interpretation. Would it, for instance, be possible to create a synthetic LIBOR which amounts to a risk-free rate plus an add-on? I’m not sure, but we are encouraging this issue to be assessed as soon as possible. I do not, to be clear, see this as an alternative to the risk free rates as the best measure of interest rate risk, but it is worth assessing whether this could be the way to assist with the legacy.
Let me conclude. There is as you can see no shortage of issues on the agenda, and I have managed to get through this morning without mentioning the B-word. We will continue to work very closely with AFME, ICMA, ISDA. We appreciate the support you give to us and we benefit from your insights. Thank you for this opportunity.
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[description] => Good evening everyone.
It’s a pleasure to be hosting you all this evening, it is very good to see so many of you here at the start of UK Fintech week.
Fintech week is looking at innovation in the round. This evening, I want to focus on just one aspect. How can regulation foster innovation in financial services? And as part of that how can we ensure that we have a regulatory environment fit for future innovation?
I’d like to start with the question, why does the FCA care about innovation? Primarily because of our duty to promote competition in the interests of consumers. One of the best ways we can promote competition is to foster disruptive innovation.
Disruptive innovation drives a number of dynamics in the market. A few firms will emerge as genuine competitors at scale to the existing incumbents. Many will be sufficiently interesting business models that they may find themselves purchased by bigger players and their technologies adopted in the mass market. And both of these developments may drive other incumbents to compete harder to retain or gain customers.
Getting these competitive conditions isn’t something that only the regulator is interested in. That’s why we have diverse representation here tonight from a cross-section of financial services firms, including start-ups, incumbents, as well as trade bodies, consumer groups and government.
Whilst we come to this event with different viewpoints, business models, and perspectives, one thing that we can agree on is that the environment in which we are operating is significantly different from just 18 months ago.
The 2015 EY Fintech adoption Index that surveyed six markets around the world found that on average 15.5% of digitally active consumers are users of fintech. The survey suggests that the average rate of adoption could double in the next 12 months.
It’s a sobering reminder of the pace at which the digital landscape is evolving and the scale of the challenge for us as a regulator to bear in mind when we think about both the risks that financial innovation may bring and how to balance that against creating unnecessary barriers to the many opportunities.
Our main way of addressing this set of issues has been Project Innovate and I wanted to say a little more about this now.
As the Innovation Hub matures we are seeing firms that we supported being authorised. Out of the first wave of firms we supported, 18 have been authorised, and 21 are in the process of going through our authorisations process.
We launched Project Innovate in October 2014.
It has two main strands of work. The first is providing direct support to innovative firms and the second is policy and process improvement.
What does direct support mean? It’s born out of the recognition that extended periods in development can burn cash for innovators. It isn’t free consultancy or picking winners. Instead, we assist innovative firms to work with us. Some tech start-ups are completely unfamiliar with financial regulation which can be daunting; larger firms are more familiar with regulation but often have complex questions about their new propositions. We are here to help both types of queries as long as propositions meet our criteria that they are innovative and we can see benefits to consumers.
The Innovation Hub team also offers guidance pre-authorisation and gets the firm to think about how to best prepare for this. This year we want to make Project Innovate’s service work end-to end. Firms that have received initial support from the Hub will have their applications handled by a specialised Project Innovate authorisation process. After authorisation we will provide dedicated supervisory support, normally for one year.
The key to success here is an early engagement model that results in a better understanding of risks and benefits from both our perspective and also the firms progressing through this regulatory process. We don’t just want firms to learn from us, but we want to capture their experience too in evolving markets.
Take for example one start-up firm who are here in the audience today. WealthKernel is a provider of automated wealth management solutions to institutional clients and in particular they want to use technology to change how smaller institutional clients receive financial advice.The Innovation Hub helped with their thinking before authorisation and they are currently going through that process now. At the same time we were able to explore the pros and cons of automated advice with comparison to the US market where this has gained a huge amount of traction and WealthKernel was able to play a role in our robo-advice forum. Engaging early on was as much as a discovery journey for us as it was for them.
In regards to new products, we have been able to be at the forefront of seeing these come into the market. For example, the insurance firm, CUVVA is a business that provides ultra-short term car insurance, allowing users to buy car insurance covering a period of a few hours, and allowing people to borrow or pool friends’ cars. The Innovation Hub helped the firm think carefully about how their business model may fit into regulation. The firm has now been authorised by the FCA and is open for business.
To put these examples in a bit more context, through the Hub model, we have now received 413 requests for support and supported 52% of these firms. It is important to note that the 48% of firms we did not provide support to was because in most cases the idea was already established, in which case they can still take a standard route to authorisation, or more rarely we did not think it was likely to be in the interest of consumers.
As the Innovation Hub matures we are seeing firms that we supported being authorised. Out of the first wave of firms we supported, 18 have been authorised, and 21 are in the process of going through our authorisations process. That is about a 30% conversion rate. The firms that have been authorised include investment firms consumer credit firms and insurance intermediaries.
While these examples and statistics illustrate successes domestically, the international context is just as important. In the past year, we have had over 25 non-UK innovators approach the Hub either for support or to learn more. Furthermore, if we want disruptive innovators at scale we need to think about how they can expand internationally with the minimum of friction.
This year through Project Innovate we aim to ramp up our international engagement. We are looking to have cooperation agreements in place with some key regulators to reduce some of the barriers to UK authorised firms looking to grow scale overseas and to assist non-UK innovators interested in entering the UK market. I am off to Australia next month to exchange views and ideas with ASIC, which in March 2015 launched its own “Innovation Hub”.
A number of overseas regulators have also introduced initiatives to promote innovation in financial services. Last year the Japanese FSA has launched a “FinTech Support Desk”. The Monetary Authority of Singapore has also formed a FinTech & Innovation Group responsible for regulatory policies and development strategies to facilitate the use of technology and innovation in the financial sector. And the CFPB in the US has Project Catalyst aimed at small firms. So we are not the only ones in this space and we can stand to benefit from learning from each other along the way.
While we have made great progress to date with Project Innovate, it’s essential we don’t stand still. Our coming area of focus will look at policy and process improvement. We set ourselves an ambitious goal to create something practical and useful to foster innovation and are opening up the possibility of answering regulatory uncertainties through testing in a live environment. This will be known as the sandbox.
The Sandbox will allow businesses to test out new, innovative financial services without incurring all the normal regulatory consequences of engaging in those activities. It is safe to say that we have been inundated with interest about the sandbox.
We will offer a range of options for firms such as authorisation for testing; no enforcement action letters, and individual guidance and waivers for all firms. Safeguards for consumers and the financial system while testing will be agreed between the businesses and the FCA. One thing that we won’t compromise is lower standards of protection for consumers.
We also recommended options, the virtual sandbox as a testing environment and an umbrella scheme to allow one or more bodies to act as a sponsor for innovation. We see industry leading these working together and with the regulators in a more collaborative way.
In December 2015 we held a Sandbox event to elicit feedback from industry on FCA and industry recommendations made in our report. We had Innovate Finance, BBA, and ABI present their thoughts on industry recommendations outlined in the report. We are currently reviewing the feedback received on FCA options and plan to have the sandbox unit up and running later this Spring.
In addition to this, we are also looking at ways of encouraging firms to be innovative with technology and helping them to help identify ways to integrate these new technologies into their business models. Most people refer to this as regtech – thinking about solutions to issues that already sit squarely within the sphere of regulation.
Since our initial discussions with industry, we have launched a call for input to seek broader views on how we should progress our RegTech work. There are some key opportunities here, which include managing regulatory requirements more efficiently, and, an opportunity for us to understand how we can best support developments and potentially adopt some RegTech solutions ourselves.
One example could be distributed ledger technology, sometimes more popularly known as ‘block chain’. There have been countless column inches devoted to this subject. The current development of distributed ledger technology has the potential to revolutionise financial services; whether it is the panacea of all ills in the financial world is yet to be seen. However it’s clear that there are a lot of regulatory and consumer issues that will need to be discussed as the technology evolves. For example, how individuals gain access to a distributed network and who controls this process, along with what data security exists for users are vital considerations for us as a regulator.
Innovation can be an iterative process and the development of a digital solution is therefore unlikely to be perfect first time round. During the phase of any digital development, it’s crucial that innovators are allowed the space to develop their solutions. The FCA continues to monitor the development of this technology but is yet to take a stance until its application is clearer.
In the meantime, we continue to work with firms developing distributing ledger technology solutions via the Innovation Hub to ensure consumer protections are being factored in during the development phase of this technology and the Hub liaises with the rest of the organisation to ensure a coordinated and informed approach.
We are particularly interested in exploring whether block chain technology can help firms meet know your customer or anti-money laundering requirements more efficiently and effectively. We are engaged in discussions with government and industry on this issue.
The key challenge for government, industry and regulators is to continue to ensure the regulatory environment fosters the best of financial innovation. Our ultimate goal is that the benefits of competition can be realised in the interest of UK consumers.
So in conclusion, as the regulator we want to see a thriving market for financial innovation in the UK.
We only have to look at the fact that Project Innovate has been copied around the world to know that we operate in a competitive international environment.
Project Innovate has had a good introductory phase, what we need to do is keep pushing forward and not rest on our laurels.
The Sandbox is the logical next step and offers us, industry and consumers a good opportunity to test business models and products in a controlled environment.
The key challenge for government, industry and regulators is to continue to ensure the regulatory environment fosters the best of financial innovation. Our ultimate goal is that the benefits of competition can be realised in the interest of UK consumers.
We all have a part to play in that, and I look forward to our discussion this evening.
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[description] => Welcome to the 31st edition of the Primary Market Bulletin (PMB).
We begin by highlighting our approach to assessing eligibility and listing applications for cannabis-related companies. Further, we provide updates on the implementation of the European Single Electronic Format, Coronavirus-related temporary policy measures on corporate reporting, and recent changes to the Prospectus Regulation.
We also remind issuers and their advisors of their continuing obligations and provide an update on our Primary Market Specialist Supervision function (formerly Sponsor Supervision).
Finally, we present two articles summarising our recent review work. One is on listed companies’ compliance with the FCA’s rules relating to corporate governance disclosures. The second article is about Delayed Disclosure of Inside Information notifications. By publishing articles on our review work here, we hope to improve the transparency of our work overseeing primary markets, in particular highlighting good practice and areas where we see room for improvement. We aim to improve standards in the markets we oversee more generally.
In the future, we hope to continue to publish similar articles on our review work in relevant primary market topics.
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[description] => On 8 April 2014 the Financial Conduct Authority’s (FCA) Non-Executive Directors appointed Simon Davis of Clifford Chance to conduct an independent inquiry into the handling of the FCA’s announcement of proposed supervisory work on the fair treatment of long standing customers in life insurance. The FCA has now published the report of Mr Davis’ review in full.
Mr Davis has produced a comprehensive and rigorous report based on a forensic analysis of a significant amount of evidence, both written material and interviews with individuals. The report has been produced in accordance with the published terms of reference and protocols which were agreed at the outset.
In his report Mr Davis makes a number of criticisms of the way the FCA handled the launch of the 2014/15 Business Plan and in particular the communications of the scope of the proposed thematic review of life assurance.
The FCA Board fully accept Mr Davis’ criticisms and on behalf of the FCA we apologise for the mistakes that were made and the shortcomings in systems and controls which his report has revealed.
We are making a number of changes to our structure and operating model in order to sharpen our focus, which will also address some of the issues identified in the report.
The report provides a detailed account and a thorough analysis of the events leading up to and immediately after the publication of the Daily Telegraph story about the FCA’s planned life assurance review on 27 and 28 March 2014. Although it is a lengthy document, Mr Davis has provided a concise Executive Summary (Chapter 4) and a summary of his recommendations (Chapter 19).
Of particular relevance is the following extract from paragraphs 4.4 and 4.5 in the Executive Summary:
The FCA’s strategy of giving an advance briefing to The Telegraph in relation to the scope of the Life Insurance Review was well intentioned: the FCA had sought to avoid the nature and scope of the Life Insurance Review being misunderstood when it was announced for the first time in the Business Plan, to be published on Monday March 31 2014.
The strategy and the manner in which it was pursued was, however, high risk, poorly supervised and inadequately controlled. When it went wrong, the FCA’s reaction was seriously inadequate and fell short of the standards expected of those it regulates.
As well as errors by individuals, the report identifies a number of shortcomings in the FCA’s systems and ways of working.
In Chapter 19 the report makes recommendations across seven areas about changes to our systems, processes and ways of working, which would help to avoid the situation ever occurring again.
We accept all of these recommendations and have already made progress in acting on them.
In parallel we have completed three separate pieces of work looking at:
the handling of price sensitive information the external communications strategy the FCA issue and crisis response framework.
The outputs of all three are now being implemented alongside Mr Davis’ recommendations.
Good progress has been made in the following areas, which were identified by Mr Davis as particularly important.
We have introduced substantial improvement in the procedures relating to the identification, control and release of price sensitive information. We have informed staff of the revised policies and guidance. We have begun central training about these revised procedures for all managers and further training and awareness initiatives will be rolled out to all staff within their divisions shortly.
In future the annual Business Plan will be released to all market participants at the same time.
We have reaffirmed our existing policy and practice that we will not brief price sensitive information externally under any circumstances. In addition, selective media briefing without an embargo on any thematic review, or indeed any other announcement, will only take place after the relevant team have agreed the communications approach and with the express approval of the Chief Executive.
We have agreed and implemented new sign-off procedures for all external and internal communications.
We are developing new operational protocols which will apply to communications with our audiences, including the media. These will be benchmarked against those of other regulators.
We are enhancing our frameworks to support incident, issue and crisis handling, recognising that speed of escalation and decision-making are critical in such situations.
We recently announced a number of changes to our structure and operating model. These changes, which result from a recently completed review of our strategy, are primarily designed to sharpen our focus and increase our effectiveness. The review and the new structure were published on Monday 8 December and details can be found on the FCA website.
We have achieved a great deal over the 18 months since the FCA was established and have much to be proud of. This review will build on that success and we remain committed to our mission as a forward looking, judgement based and proactive regulator.
Although not a direct response to Mr Davis’ report, we believe the changes we are making will also address some of the issues and challenges he has identified.
As a consequence of the new strategy and organisational structure Executive Committee members Clive Adamson and Zitah McMillan have announced that they have decided to leave the FCA.
In considering Mr Davis’ report the FCA Non-Executive Directors recognised that a number of individuals made errors. Having thoroughly reviewed the report the Non-Executive Directors have agreed the following actions.
Chief Executive, Martin Wheatley, Director of Supervision, Clive Adamson, Director of Communications and International, Zitah McMillan and Director of Markets, David Lawton will not be receiving a bonus for 2013/14.
Reflecting their collective responsibility, the 2013/14 bonus payments for all other members of Executive Committee have been reduced by 25%. Other disciplinary action has been completed as appropriate.
An independent report of this length and complexity inevitably calls for a high level of specialist expertise and has incurred some costs. The total costs of the report since it was commissioned in April this year have been £3.15m excluding VAT, and £3.8m including VAT.
We are grateful to Mr Davis for the care and detailed consideration he has taken with this comprehensive report.
As a regulator we recognise that we must hold ourselves to the highest standards and we have learned a great deal from this report. We will do our utmost to ensure that a situation like this will never happen again.
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[updated_at] => 2025-12-02T22:47:29.000Z
[description] => Speech by Mr Michael S Barr, Vice Chair for Supervision of the Board of Governors of the Federal Reserve System, at the 40th Annual National Association for Business Economics (NABE) Economic Policy Conference, Washington DC, 14 February 2024.The views expressed in this speech are those of the speaker and not the view of the BIS.Central bank speech | 16 February 2024by Michael S BarrPDF full text (170kb) | 10 pagesThank you for having me here today. After having had to miss this conference last year, I greatly appreciate the opportunity to join you. As you might expect, I was a little busy in March 2023, and I will share some thoughts on lessons learned from the stress in the banking system at that time, in particular what we have learned in terms of liquidity risk management.But first, I will start by discussing recent economic developments and the implications for monetary policy. I will then turn to the banking sector and will focus on some topics that lie at the intersection of the composition of the Fed's balance sheet, market functioning, bank liquidity risk management, and the Fed's role in liquidity provision.Starting with economic developments, I think it is helpful to reflect on how surprised most watchers of the economy were by developments in 2023, me included.Perhaps like many of you, at the start of 2023 I had projected that tighter monetary policy would cause a slowdown in both inflation and economic activity. Then, with the March 2023 banking stress, I was concerned that a potential credit contraction could further weaken the economy.At the same time, I also worried that inflation might remain elevated, even if we had weaker economic activity, as supply chain problems and job-matching challenges continued to be prominent elements of the pandemic's disruption to the operation of our economy.I am glad to say that those worries did not come to pass, in part due to the official sector response to the banking stress, sound monetary policy, and a healing economy. Economic activity expanded at a solid pace, the labor market remained strong, and inflation came down significantly.Disinflation and a growing economyThe current mix of outcomes we are experiencing would have seemed improbable one year ago, and we might ask, how did we end up with disinflation and an economy with brisk growth? The short answer is the healing of the economy. The pandemic brought our economy to a screeching halt. During the second quarter of 2020, the unemployment rate jumped to a high of 14.8 percent and gross domestic product plunged at a 28 percent annual pace. These dynamics hit some of the most vulnerable populations the most, though strong government responses helped to both ease the effects and make many households much more resilient. Once the economy restarted, demand rebounded quickly, while supply was hampered by supply chain difficulties. These supply snags were compounded enormously by a shift in demand away from in-person services and toward goods, which generally have a larger exposure to shipping and supply chain problems. Supply shocks to the global economy were subsequently compounded by Russia's war against Ukraine, which severely disrupted food and energy markets. And labor markets were disrupted by the pandemic as well. Employers could not find enough workers, and job-matching was impaired.About the authorMichael S BarrMore from this authorRelated informationMore speeches from "Board of Governors of the Federal Reserve System"Country page: United States
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[description] => BIS Working Papers | No 1129 | 16 October 2023by Sebastian Doerr, Jon Frost, Leonardo Gambacorta and Vatsala ShreetiPDF full text (2,372kb) | 38 pagesSummaryFocusLarge technology companies, or big techs, are increasingly venturing into finance and transforming financial markets. Their activities in the financial sector have attained macroeconomic significance in several countries. Big techs owe their success to business models that generate a large stock of user data, which are then used to provide financial services. This paper focuses on the implications of the expanding footprint of big techs in finance.ContributionWe explain the business model of big techs and highlight the data-network-activity feedback loop. Building on this framework, we discuss the opportunities and risks arising from big techs' provision of financial services. We also study the role of public policy in balancing these opportunities and risks. In particular, we shed light on the role of central banks, financial regulators as well as data protection and competition authorities in achieving public policy goals of ensuring financial stability, competition and data privacy.FindingsBig techs' reliance on large networks, non-traditional data and machine learning can improve financial inclusion, for example, access to credit. At the same time, the business model of big techs can create new risks of market dominance, price discrimination, algorithmic discrimination and threats to consumer privacy. Big techs' activities in finance hence lead to complex trade-offs between public policy objectives and require more coordination between national and international authorities.AbstractThe entry of big tech companies into the financial services sector can bring significant benefits in terms of efficiency and financial inclusion. Yet big techs can also quickly dominate markets, engage in discriminatory behaviour, and harm data privacy. This leads to the emergence of new trade-offs between policy goals such as financial stability, competition and privacy. Regulators, both domestically and internationally, are actively working to address these trade-offs. This paper provides an overview over the state of the literature and the policy debate.JEL classification: E51, G23, O31Keywords : big techs, financial inclusion, competition, financial stability, data privacyThe views expressed in this publication are those of the authors and not necessarily those of the BIS.About the authorsSebastian DoerrMore from this authorJon FrostMore from this authorLeonardo GambacortaMore from this authorVatsala ShreetiMore from this author
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[description] => Investments in power generation assets are risky due to high construction costs and long asset lifetimes. Technology diversification in generation portfolios represents one option to reduce long-term investment risks for risk-averse decision makers. In this article, we analyze the impact of market imperfections induced by risk-aversion on the long-term investment portfolio structure in the market. We show that risk-averse electricity market agents who receive a managerial profit share may shift the technology structure in the market significantly away from the welfare optimum. A numerical example provides estimates on the potential scale of this effect and discusses sensitivities of key parameters.
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[name] => Perfect Competition vs. Riskaverse Agents: Technology Portfolio Choice in Electricity Markets
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[description] => The FCA perimeter determines which activities require authorisation and what level of protection consumers can expect for the financial services and products they purchase. The perimeter is decided by the Government and Parliament through legislation.
In June 2019, the FCA published its first annual perimeter report, which sought to provide greater clarity to stakeholders on the FCA’s role and set out specific issues that had arisen, most notably those facing consumers in the retail investment sector.
This year’s report gives updates on the issues discussed in last year’s report. This includes the issuing of a temporary product intervention in January to ban the mass-marketing of speculative illiquid debt securities and preference shares to retail investors for 12 months. The FCA is currently consulting on proposals to make this ban permanent.
The report also identifies where others, such as big tech firms like Google, can do more to protect consumers in areas on the edge of the perimeter.
The report also sets out other areas where progress has been made or where there is continued harm to consumers and market users around the perimeter, particularly in light of the coronavirus (Covid-19) pandemic.
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[description] => My serious concern is that if we’re not careful, economic recovery will bring so much investor pressure for growth stock that questions of culture will become second or even third order issues.
I want to start with a thank you to the company for its important community work, particularly in areas like financial education and inclusion.
As we look to understand and rectify all that went wrong pre-crisis, it’s easy to forget that pre-pre-crisis, the growth of financial services was inextricably connected to social responsibility of this kind.
At the start of the 20th century, Max Weber famously linked the expansion of Western European capitalism to the Protestant work ethic, Calvinism and a belief in predestination. The idea that we have all calling in life.
Two of our largest domestic firms, Lloyds and Barclays, were given to us by the Quaker movement.
And this focus on ethics and integrity continued, largely untroubled, well into the 20th century. For a long time few questioned the social utility of finance.
Today of course, the world is very different. The string of post-crisis crises has fashioned a new, Wolf of Wall Street public narrative. LIBOR emails, angry traders ripping their own shirts off their backs, mis-selling, opacity, casino-banking and so on and so forth.
So, we’re now, essentially, in a position where the financial sector is confronting a world with fewer advocates than it would like: but also perhaps fewer advocates than it deserves.
Over the last 18 months or so, we’ve seen a mini-cultural revolution taking place. The majority of big banks and firms now have change programmes in position. Ross McEwan last week openly talked about RBS scrapping the likes of teaser savings, cashback offers and zero per cent offers on credit transfers. He also challenged RBS’ rivals to follow suit.
At the same time, we’re seeing the rise of new models of banking and finance from entrants like Aldermore, Handelsbanken and Crowdfunder. On the one hand complementing existing players in the market: on the other confronting them.
A priority challenge for leaders in regulation, in politics and industry, is how we keep this emphasis on culture as we enter the next phase of the UK financial cycle?
My serious concern is that if we’re not careful, economic recovery will bring so much investor pressure for growth stock that questions of culture will become second or even third order issues.
We’ve already seen annual, global dividend pay-outs total more than $1tn for the first time. What are the odds that in five, ten or 15 years, expansion becomes an irrepressible force for short-termism, with chief executives pushed and pushed for year-on-year, quarter-by-quarter growth?
Will we then see more ‘interest only negative-amortizing adjustable-rate’ subprime mortgages? A form of ‘enchanted wealth’, as Thomas Carlyle described it after the industrial revolution.
Or will we instead see growth and profitability based on productivity, high quality products and high quality client service?
For all of us today, these are questions of the greatest societal importance.
We have the narrowest of windows here to make cultural change stick before memories of financial crisis fade. The narrowest of windows to restore the long link between ethics and growth that dominated financial services for most of their history.
The key challenge is how we take advantage of this ‘opportunity’, if you like.
Two key areas of focus that I want to touch on tonight: First, the importance of creating effective, future-proofed regulation. Second, the importance of effective self-regulation.
On the first, our priority issue at the FCA has been, and will continue to be, moving the regulator away from a low value culture of reacting to events.
Warren Buffett, the only man alive with his name in more book titles than the Dalai Lama, famously remarked that in the business world, ‘the rear view mirror is always clearer than the windshield’.
For the official sector, this problem has been particularly acute. Around the world there’s been a culture of reacting to conduct issues; whether mini-bonds in Hong Kong, currency swaps in Korea, structured agricultural products in Australia or of course PPI in the UK.
So the first FCA priority is simply to anticipate better and be more forward looking, if you like. In other words, to prevent culture from going south as profits head north.
Key examples so far include the positive work the FCA has done with banks on areas like interest only mortgages: writing to some 2.6m homeowners and alerting them to the importance of having capital repayment plans in place.
And, in June last year, the new retry system: effectively, an agreement by lenders that if an account payment is unsuccessful in the morning, it will be attempted again later in the day – saving retail consumers an estimated £200m a year.
The second FCA priority has been to re-assess the regulatory balance between ethics and rules. Should one dominate the other?
In his excellent book Ethicability, Roger Steare argues for a more sophisticated interpretation of integrity in business. One that is not simply defined by the ethics of obedience, so what is legally right or wrong, but actually looks towards the ethics of care and the ethics of reason.
Steare talks about rules subordinating ethics, suggesting that, ‘at their worst, laws, regulations and red tape have a tendency to multiply because they remove our responsibility for deciding what’s right.’
His chief concern here: the fact that governments tend to respond to scandal with regulations, without considering that it’s this ‘obedience culture’ that often fails in the first place.
So, if we take the FSA as just one example of this culture. You see its guidance increasing by some 27% during 2005-08, a period that coincides with many of the most explosive crises we’re dealing with today.
Now, clearly regulators and firms still require rules to function effectively. But experience tells us red tape is more easily hurdled than principles. So as we move forward, firms will begin to see themselves held up against stricter ethical standards.
The key issue here, how do firms create cultures that are genuinely different from those pre-crisis? And, crucially, how do we encourage change that keeps pace with economic growth? In other words, a culture strong enough to resist short termism.
And this brings me onto my final point today: the importance of good self-regulation by firms.
The key issue here, how do firms create cultures that are genuinely different from those pre-crisis? And, crucially, how do we encourage change that keeps pace with economic growth? In other words, a culture strong enough to resist short termism.
One of the most important issues here is incentives.
In the Big Short, Michael Lewis famously uses the example of some US hospitals removing more appendixes than others because they get paid more for doing so, to underline the point that: ‘if you want to predict how people will behave, you look at their incentives.’
Within the finance community, rewards are clearly an ongoing matter of national debate. Not just within corporate or investment banking. But on the frontline as well, and the relationship between how we reward staff on the one hand, and how they sell products, like PPI, on the other.
The FCA published its own analysis of sales incentives this morning. The broad story is extremely encouraging. All the major banks have either replaced, or substantially reformed their incentive schemes.
And I do want to applaud businesses for taking these steps.
Clearly, these reforms mirror European efforts to revisit incentives in the City as well, with the introduction of deferred awards, claw backs and the like.
But there is a wider issue here around how boards ensure these positive signals are not corrupted as they move down the line.
One of the more worrying stats to emerge last year was a survey of senior executives in UK financial services by the Economist Intelligence Unit.
In a poll that should set alarm bells ringing, some 53% of financial service executives reported that career progression at their firm would be tricky without ‘flexibility’ over ethical standards – rising to 71% of investment bankers.
There are serious questions within these statistics for boards to consider as we move forward and also serious future risks to manage.
Fairly or otherwise, financial service leaders have not always been held up as great communicators. Alan Greenspan’s wife notoriously failed to understand what he was saying the first time he proposed.
These Economist figures suggest some business leaders are still struggling to get their message across. That not all cultural reform proposals have been understood or accepted; it is an imperative they are.
But I do want to finish with a thank you boards for at least beginning this difficult conversation around culture in their firms.
Will we look back in 25 years and see this as a turning point? Only time will tell.
Perhaps our best hope for the future, alongside structural changes in the official sector , remains the fact that the promotion of strong ethics in firms is not a zero-sum game; where for one side to win the other has to lose, like a game of football or tennis.
This is, at its heart, a ‘non-zero sum game’ in which we rise, or fall, in lock step. In his inaugural presidential address in 1937, Franklin Roosevelt said: ‘We’ve always known heedless self-interest was bad morals, we know now that it is bad economics’.
In other words, a crisis does not generally affect only one firm’s share value or reputation. It affects the whole world that society and business depends on for growth: per capita GDP, employment, political imperatives, regulation and so on.
We cannot hope to avoid all future crises, or anticipate every issue that bubbles up. But we can safely say it’s in all our interests to choose long term, sustainable growth – over short term ‘enchanted wealth’.
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[description] => Summary of document history Previous versionPreviousconsultationThis versionSubsequentconsultationSubsequentversionThis versionBCBS | Consultative | 20 December 2001 | Status: ClosedPDF full text (428kb) | 29 pagesTopics: Operational riskNote: This consultative document has been superseded by Sound Practices for the Management and Supervision of Operational Risk (February 2003)IntroductionThe purpose of this paper, prepared by the Risk Management Group of the Basel Committee on Banking Supervision (the Committee), is to further the Committee's dialogue with the industry on the development of Sound Practices for the Management and Supervision of Operational Risk. Comments on the issues outlined in this paper would be welcome, and should be submitted to relevant national supervisory authorities and central banks and may also be sent to the Secretariat of the Basel Committee on Banking Supervision at the Bank for International Settlements, CH-4002 Basel, Switzerland by 31 March 2002. Comments may be submitted via e-mail: BCBS.capital@bis.org or by fax: + 41 61 280 9100. Comments on this paper will not be posted on the BIS website.
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[url] => CBE CRT Proposal.pdf
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[blurb] => Market-level suptech solution to enhance financial consumer complaints analysis.
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[description] => We designed and implemented a working prototype for a market-level SupTech solution to strengthen this financial authority’s consumer protection and market conduct supervision. The solution automated the collection and reporting of consumer complaints data, integrating new, granular datasets from supervised entities and external sources. This improved data flow enhanced the authority’s ability to conduct data-driven regulation, informed decision-making, and more timely interventions.
The prototype was designed for extensibility, allowing future integration of advanced features such as AI-powered trend analysis, root cause identification, risk detection, benchmarking across financial institutions, and real-time supervisory dashboards. Eventually, the solution could enable predictive analytics, providing early warning signals for emerging market risks and consumer harm.
Throughout the project, various AI and machine learning techniques were explored to evaluate their potential for enhancing supervisory processes. This proof-of-concept demonstrated the feasibility and value of transitioning from reactive complaint handling to proactive, intelligence-led supervision, laying the groundwork for future scaling of the solution across the market.
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[date] => 2024-09-18
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[description] => Inaugural address by Mr S S Mundra, Deputy Governor of the Reserve Bank of India, at the 1st Banking Research Conference, organized by Gokhale Institute of Politics and Economics and IBS (ICFAI Business School) in collaboration with IBS Hyderabad, Hyderabad, 29 January 2016.The views expressed in this speech are those of the speaker and not the view of the BIS.Central bank speech | 04 February 2016by S S MundraPDF full text (166kb) | 7 pagesAssistance provided by Smt. Rekha Misra, Shri Sanjeev Prakash, Shri Radheshyam Verma and Ms. Anwesha Das is gratefully acknowledged.Introduction1. Dr. J. Mahender Reddy, Vice Chancellor, ICFAI Foundation for Higher Education (IFHE) University; Shri S.V. Seshaiah, Director, IBS, Hyderabad; members of faculty from Gokhale Institute of Politics and Economics, Pune and IBS, Hyderabad; Delegates of the Research Conference; ladies and gentlemen ! I am grateful to Gokhale Institute of Politics and Economics, Pune and IBS, Hyderabad for inviting me to deliver the inaugural address at the 1st Banking Research Conference this morning. Both are premier educational institutions of the country. IBS Hyderabad has made important contribution in the field of management education and research in a very short period of time. Gokhale Institute of Politics and Economics (GIPE), Pune, is one of the oldest research and training institutes in Economics in the country and continues to be an institute of repute for economic research. I complement their efforts towards education and research.2. Banks are the bedrock of financial system in all emerging economies and India is no different. The banks in India have been quite effectively performing the vital function of financial intermediation. The health of the banking system and that of the economy share a symbiotic relationship and at this juncture when the global growth is still stuttering, the banking system also faces a multitude of challenges. Each of these challenges has different genesis and probably different solution. But, challenges also throw up opportunities. In order to overcome current and impending challenges and also to exploit emerging opportunities, it is imperative that the sector devotes adequate time and resources in conducting meaningful research. At this stage, when the banking sector is on proverbial "crossroads", I feel this Banking Research Conference is very timely. I am sure that the deliberations in the conference would provide new insights into the issues facing the banks and also pave the way for further research which would generate fresh ideas for improving the efficiency and effectiveness of the banking sector.Why research is important?3. According to Ben Bernanke, himself a researcher and a practitioner, research provides an important long-run perspective on the issues that we face on a day-to-day basis. Theories that evolve out of profound research remain relevant forever. Let me quote from our latest Financial Stability Report. "When current wisdom does not offer solutions to extant problems, old wisdom can sometimes be helpful. For instance, the global financial crisis compelled us to take a look at the Minsky's financial instability hypothesis which posited the debt accumulation by non-government sector as key to economic crisis. As part of his work, Minsky identified three types of borrowers - the "hedge borrowers" (those who could meet their debt obligations - both principal and interest through current cash flows from investments), "speculative borrowers" (those who could service their debts, that is - pay only the interest but had to roll over the principal periodically through cash flows from current investments) and "Ponzi borrowers"(whose current cash flows were insufficient to meet debt obligations but borrowed on the faith that an appreciation in the asset values could take care of such obligations). The dominance of the Ponzi borrowers can cause disruptions in the financial system when asset prices stop rising." As IMF and other financial research houses moan over high indebtedness of corporate houses in emerging markets and its consequent implications for global financial stability today, it reaffirms the relevance of Minsky's "Financial Instability Hypothesis".4. Let me give another example. Many of you here must be aware of the ongoing debate on what is called as "Re-embracing Keynes." The standard 'return to Keynes' argument is the need for fiscal stimulus to boost the economy from the depths of recession. The burden of the deficit is not seen as the main drawback of government intervention, but a necessary measure to address a failure in aggregate demand. It is important to emphasize here that the theory was first presented by John Maynard Keynes in his book, The General Theory of Employment, Interest and Money, published in 1936, during the Great Depression. Keynes said "we cannot, as a community, provide for future consumption by financial expedients but only by current physical output." Of course, there are many economists who vehemently oppose his views on efficacy of fiscal stimulus. Economists, both in Britain and across the Atlantic in the US have suggested that action by Government on rapid reduction of budget deficit than currently planned would be better to support a sustainable recovery. As some of you may be aware, the debate on increasing government deficit to support the economy also figured prominently in Government's pre-budget consultations with the economist in our country. In sum, the very fact that Keynesian theory stays relevant evoking strong reactions from supporters and baiters alike even after eight decades of being first published, in itself is a great testimony to the quality of research undertaken by him.5. The need for deep-seated research in the area of banking, which itself is a highly dynamic field, with close linkages to economic fortunes of the country, can be hardly over-emphasized. Given the dynamic nature of the sector, banking research has to continuously evolve. Failure to ignore emerging trends or risks can be catastrophic. As former FDIC Chairman Irving Sprague put it after the onset of the Global Financial Crisis, "Unburdened with the experience of the past, each generation of bankers believes it knows best, and each new generation produces some who have to learn the hard way."6. To keep pace with the changing times and to produce relevant research, researchers today need to raise new questions, explore new possibilities, regard old problems from a new angle, which would require creative imagination and mark real advance in the field. But in my talk today, rather than discussing more distant research topics like "Effects of Population Aging on Economic Growth" or 'What ails a Demand Constrained Model of Growth', I would like to focus on some 'bread and butter issues' confronting Indian banks, which the sector would do well to study in greater depth.Some important research undertaken by RBI/ Government in past and outcome7. As you may be aware, RBI and the Government of India have a rich history of policy research. Policy oriented research has led to adoption of various pro-active policy measures which helped in making our banking system more inclusive and development oriented. One of the earliest examples of application of research and surveys relating to credit/banking are two studies commissioned by the Reserve Bank in 1936 and 1937 which highlighted that almost the entire finance required by farmers was supplied by moneylenders and that credit co-operatives and other agencies played a negligible role. This prompted the Reserve Bank to play an active role during 1935-1950 in promoting the co-operative credit movement through a variety of initiatives.8. Similarly, the Report of the All India Rural Credit Survey (1954) highlighted that agricultural credit not only fell short in terms of quantity, quality but also failed in serving the right purpose and the right people. The outcome of the survey was developing co-operatives as an exclusive agency for providing credit to agriculture together with outlining a role for commercial banks in delivering credit for agriculture in specialized areas, such as marketing, processing and warehousing. Similarly, All India Rural Credit Review Committee set up by the Reserve Bank in July 1966 (Chairman: Shri B. Venkatappiah) emphasized on an increased role for commercial banks in delivery of rural credit based on its research findings.Issues at hand9. The above instances highlight the significance of timely and effective research. As I have argued above, the need for upping the policy research in banking at the current juncture is very high. The sluggish economic revival following the GFC has adversely impacted the banking sector. Some of the issues which concern the sector relate to those of asset quality, capital adequacy, profitability, risk management and governance. Reflecting the concerns and risk aversion, banks' business (deposits and credit) continues to show moderation. Slowdown is evident in the growth in the balance sheets of banks which set in since 2011-12 and has continued during 2014-15 as well. The return on assets (RoA) of banks, particularly public sector banks (PSBs), a common indicator of financial viability has remained weak in recent period.10. It is well recognized that a competitive, sound and inclusive banking system is sine-qua-non for a growing economy like India that aspires to be globally competitive. Going forward, banks will need to achieve the mandated higher capital standards, stricter liquidity and leverage ratios and a more cautious approach to risk. This implies that the banks would need to improve their productivity and efficiency. They would also need to make a quantitative assessment of revenue streams from each product and service and an efficient transfer-pricing mechanism for efficient capital allocation.11. At the same time, the banks would also need to venture into hitherto untapped segments to identify profitable business opportunities. One key segment that banks are increasingly looking at is the customers at the bottom of the pyramid. Financial Inclusion, as you all know, is the new buzzword. While everyone agrees that the segment has immense potential, it is certainly not a low hanging fruit. If the banks wish to profit from financial inclusion on a sustained basis, they would need to innovate and leverage technology.12. Regulatory initiatives like opening up government business to more banks, licensing of new banks and subsidiarisation of the foreign bank branches, on the one hand, and the changing profile and simultaneously rising aspirations and expectations of customers on the other, is making the turf more competitive. Under the circumstances, the need for supportive research so as to find out an optimal business delivery model, target set of customers, product profile etc., suitable to the risk profile of each individual bank, can hardly be overemphasized. The banks also need to respond to the changing environment around them. The country is witnessing some significant changes in demographic patterns, literacy levels and resultantly in consumer behavior. The rural- urban divide is quite remarkable and also influences the choices the consumers make. Banks have to be constantly aware of the dynamic changes in consumer preferences and hence, the need for research gets buttressed.13. Let me now come to a few 'bread and butter' areas which according to me have remained under-researched. Among others, these include, credit to agriculture, Micro, Small and Medium Enterprises (MSMEs) and private sector leverage. An analysis of the trends in bank finance to these sectors throws up quite a few research questions. I would delve into some of these in detail.Agriculture14. A significant transformation has taken place in the character of agricultural credit since the decade of 2000s. The common perception about agricultural credit is that it has rural orientation and given the pre-dominance of small landholdings in the country, small-sized loans would account for a greater proportion of agricultural credit. It is also expected that there would be a fair mix of credit given for crop-loans and investment credit. However, when one analyses the data, which is the first step in any meaningful research, most of these perceptions prove to be wrong. I would present some salient features of agricultural credit in recent times purely in terms of trends which would underscore the need for research in the area.15. As per the latest available All-India Debt and Investment Survey, the proportion of debt owed by cultivator households to formal sources stood at around 64 per cent as compared to 36 per cent owed to informal sources. Moreover, the proportion of debt owed to formal sources has seen a decline from 66.3 per cent in 1991 to 64 per cent in 2013. These figures provide an insight into the existing unmet demand for credit among cultivator households, which is evidently being met by informal sources. On the other hand, as per the recent RBI Internal Working Group1 set up to revisit existing priority sector lending guidelines in March 2015, the commercial banks have failed to achieve the targeted level (of 18 per cent) credit to agriculture sector in all but three years between 2001 and 2014. Hence, the sector witnesses two contrasting trends: unmet credit needs of the farmers on the one hand and shortfall in lending targets of the banks on the other despite agriculture being designated as one of the priority sectors for bank lending.16. Agricultural credit, like overall bank credit in India, has traditionally been concentrated in the southern and northern regions of the country. In 2012, the southern and northern regions together accounted for about 62 per cent, with the southern region alone accounting for 41 per cent of total agricultural credit. Further, there was concentration of agricultural credit in select districts. In 2012, 15 districts accounted for about 21 per cent of total agricultural credit. Some elucidation is needed to explain this concentration.17. The small and marginal cultivators (operating less than 5 acres of land) continue to be marginalised in terms of their share in agricultural credit. The share of small and marginal farmers has hovered around at levels less than 50 per cent despite the fact they account for more than 80 per cent of total cultivators in India. Likewise, it is also observed that the share of long-term credit in total agricultural credit has experienced a secular decline reaching 32 per cent in 2013-14 from 74 per cent in 1990-91 suggesting a neglect of capital formation in agriculture.18. Few other patterns that are noticeable in the farm sector are:Decline in average size of operation landholding to around 1.15 hectare from more than 2 hectare about four decades ago. To put it in perspective, this size is 1/10th that in Thailand and about half of that in Indonesia while in the USA the average farm size is 170 hectaresFamilies operating less than 1 hectare farm size are dis-savers even after including non-farm income80% of the borrowings of large farmers (>10 hectare land) are from institutional sources while for the landless farmers this figure is only around 15%19. The core areas of research which emerge from the forgoing discussion are:Is there a direct correlation between increased agricultural credit and productivity in agriculture / allied activities?Whether focus on agriculture as a priority sector has been effective in encouraging agricultural investment? Have small farmers benefited relative to large farmers?Have incomes of the farmers smoothened if not actually enhanced?While in villages, non-farm sector provides more income generating activity than farm sector, why do people still continue to stick to farming? Can 18% of GDP produced by agriculture sustain 47% of the workforce?What has been the impact of land fragmentation on agricultural productivity? Post-fragmentation, whether the farmers have the capacity to service the loan?What needs to be done for making the credit delivery system for farmers more efficient in terms of timeliness?Micro, Small and Medium Enterprises (MSME)20. MSMEs play a vital role in the Indian economy. They not only employ a large number of unskilled and semi-skilled people but also support large industries by supplying raw material, basic goods, finished parts and components. There are an estimated 49 million MSMEs in the country, providing employment to 111 million people which is next only to the agricultural sector. The sector accounts for 45 per cent of the manufacturing output and contributes close to 40 per cent of all exports from the country. Further, about 55 per cent of the MSMEs are located in rural areas, thus offering a great potential for rural development and inclusive growth.21. Despite a large contribution of the MSME sector to the GDP, the sector often complains about lack of financing from institutional sources. Fourth Census of MSME sector (2006-07) revealed that only 5 per cent of the units (both registered and unregistered) had availed of finance through institutional sources. As on March 2015, only 8.4 per cent of the gross non-food credit from scheduled commercial banks (SCBs) was lent to MSMEs against 11.0 per cent in March 2010. This is despite increased distress in banks' books in their lending to large corporates over the same period.22. There is growing realization that if the country has to move to a higher growth trajectory, then MSME sector would need to play a central role. In recent years, both Government as well as RBI have made substantial efforts to ease various constraints faced by the sector. While GoI has established Micro Units Development and Refinance Agency Ltd. (MUDRA) for developing and refinancing all micro-finance institutions (MFIs) which are in the business of lending to micro and small business entities engaged in manufacturing, trading and service activities, RBI has prescribed a target of 7.5 percent of net bank credit for micro enterprises for achievement in a phased manner. Further, medium enterprises23 have also been brought into the ambit of priority sector credit. In order to improve liquidity for MSMEs, an electronic Trade Receivables Discounting System (TReDS) is being set up RBI to enable a speedy realisation of receivables. RBI has also launched a National Mission for Capacity Building of Bankers for MSME Financing (NAMCABS) for sensitising the bank staff about the financial and other lifecycle needs of MSME borrowers. While the steps taken by the authorities are commendable, a fundamental question remains whether the remedial measures that are being administered are based on proper diagnostics?23. Against this backdrop, research related MSME sector could focus on:Reasons for sickness / quick mortality in MSME sector and to what extent is delay in sanctioning by banks responsible for it? What are the lifecycle needs of the MSMEs? What is the appropriate credit delivery model for the MSMEs?Is there a case for a differentiated prudential norm for MSME borrowers as against the rule based prescriptions applicable to big corporates?Corporate Sector Leverage24. Corporate sector leverage has currently become an issue of great concern for the economy in general and the banking system in particular. In the lead up to the crisis and even beyond, some of the Indian corporate houses raised unsustainable amounts of debt from various sources including bank finance and oversees borrowings. As we notice now, several indiscriminate corporate houses continued market borrowing with a view to increase their market share and to expand capacity without any regard to domestic and global demand situation. In fact, the rate of sales growth of the corporate sector particularly of listed manufacturing companies, declined from an average of 28.8 per cent in Q1 of 2010-11 to 11.4 per cent in Q2 of 2012-13 at a time when inflation (CPI (IW)) averaged3 around 10 per cent. Some of these borrowers necessarily fall into the category that Minsky calls "Ponzi borrowers", which I had alluded to earlier. While banking system could also be held partly responsible for continuing to lend to these highly leveraged corporate groups, most of the times they were confounded by the labyrinthine maze that these corporate houses had created to access finance through group companies or thorough special purpose vehicles. The obvious fallout of this indiscriminate borrowing is a severe deterioration in their ability to service debt, besides casting an adverse impact on banks' balance sheets. An indirect outcome of higher corporate leverage is also likely in terms of poor transmission of monetary policy impulses as corporates may not be in a position to benefit from falling interest rates due to already high levels of debt.25. Against this backdrop, there are a multitude of areas that should be looked at in more detail by way of research. The distribution of leverage is very important. In India, about a third of total corporate debt is owned by companies with a debt-equity ratio of more than 3. Given the concentration of debt, there is a need to assess the risk associated with multi-layered structures - in the form of holding companies and special purpose vehicles. Further, while the corporate profits wait for a turnaround in the economy, there are also instances of companies trying to meet their debt obligations in different ways, one of which is deleveraging. Many companies are now deleveraging - paying off debt by selling off assets, more so as banks cease to restructure their bad debts. It is important to weigh the effectiveness of such methods against the costs it imposes on the growth of the economy.26. While one is quick to demonize the borrowers that are unable to repay their debt to the lenders, it would be unfair to say that all of these highly leveraged borrowers are "Ponzi borrowers". Ways and means have to be found to segregate the fraudsters from the genuine borrowers. Our experience suggests that a number of these borrowers had borrowed heavily to set up infrastructure projects that have got stalled due to external factors. Several projects have faced time and cost overruns due to delays in receiving various clearances, cancellation of coal or gas linkages, protests from environmentalists etc. It is in our collective interest that productive capacity that has been created is not jeopardized and right lessons are drawn for future guidance. It is, therefore, important that some meaningful research could be conducted into 3-4 of these stalled projects, undertaking a threadbare analysis of the development of the project from scratch including the means and structures used for obtaining finance, extent and quality of equity brought in by the promoters, subsequent developments at various project stages, end outcome and so on and develop them as case studies for reference not only at management institutes but also by all stakeholders including Government machinery, regulators etc.Conclusion27. I have listed in brief a few basic issues that need the attention of researchers. These are indicative in nature and deal with the core areas that the bankers deal with in their everyday functioning. Besides, the issues that I have discussed in details above, some of the researchers present here could also focus their studies on the behavioral impact of credit guarantee schemes and interest rate subsidy on the end users and the intermediaries. Couple of other areas in which I would like to see some quality research done is on whether financial inclusion efforts should be savings led or credit led; and entire gamut of issues surrounding education loans. Another interesting area of research could be the policy of public sector banks with regard to posting of officers to rural branches as I feel this aspect has a significant bearing on progress in agriculture and MSME credit in rural areas.28. While I have spoken enough about the subjects for research, there are issues related to research methodology per se. The first and foremost of which is, whether adequate and reliable data is available. Very often, even within RBI also we have to grapple with inconsistent, incoherent and incomplete data sets which severely undermine policy formulation. There are also problems around data design and data architecture like varied definitions, different reporting dates, etc. Quality of research would also depend a lot on the survey methods employed, adequacy of sample used etc. What could be done to address these issues?29. Before I close, I would like to thank the organizers once again for inviting me to this first ever banking research conference. The issues that I have raised during my address today are not exhaustive and I am sure there are many more interesting research ideas which would be engaging the attention of our researchers. I hope to see some quality analytical research conducted in banking in the days to come.I wish the Conference all the success and hope that the deliberations are engaging and insightful.ReferencesReport on Trend and Progress of Banking in India 2014-15 and Financial Stability Report December 2015 (RBI)Re-embracing Keynes(Scholars, Admirers and Sceptics in the Aftermath of the Crisis (Maria Cristina Marcuzzo)Rural India: Report by IIFL Institutional Equities1 RBI (2015), "Report of the Internal Working Group to Revisit the Existing Priority Sector Lending Guidelines", March 2.2 Credit limit is ? 50 million per unit for Micro and Small Enterprises and ? 100 million for Medium Enterprises engaged in providing or rendering of services.3 Average over April - January 2012-13.About the authorS S MundraMore from this authorRelated informationMore speeches from "Reserve Bank of India"Country page: India
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[description] => Blog by Mr Gabriel Makhlouf, Governor of the Central Bank of Ireland, 27 May 2021.The views expressed in this speech are those of the speaker and not the view of the BIS.Central bank speech | 10 June 2021by Gabriel MakhloufPDF full text (51kb) | 3 pagesA couple of weeks ago, I attended a webinar organised by the Foundation for Fiscal Studies on the theme of wellbeing indicators and their potential use in Ireland's Budget. I had been invited to talk about my experience in New Zealand in the development of that country's first Wellbeing Budget a couple of years ago.The background to the Wellbeing Budget started many years before when some of us started to look at how we could improve public policy or indeed economic policy-making.1 Reflecting on our efforts (in my case from 2011), a feature that characterised a lot of the work can be summed-up in one word: patience. Patience to develop a new framework for policy-making, patience to allow it to be understood, tested, used and refined, and patience to wait for results.Patience isn't the first characteristic that one thinks of in the world of economic policy-making. If we take media or financial market commentary as a guide, the focus is on a decision that may have just been made and what it may mean for the next decision, or whether today's economy was operating at its potential. Perhaps that isn't surprising: it's easier to tackle issues that you can see, and even more satisfying to work in a time horizon which delivers tangible outputs.But history has shown us that successful economies need time to develop sustainably.2 They need time to develop the human and social capital that is the foundation of every successful economy, time to grow and nurture their natural capital, and time to build the financial and physical capital that is foundational to improving living standards. All of these capitals represent our economic capital as, when combined, the stocks of natural, human, social and financial/physical capital generate flows of tangible and intangible outcomes and ultimately the conditions that individuals, communities and countries live in.I believe that the objective of economic policy is to grow our stocks of economic capital in a sustainable way.The challenges aheadAs I reflect on the impact of the pandemic and the significant economic transitions that started before it and remain ahead of us (climate change and demographic change in particular), it is clear that they require long-term and more integrated thinking across a number of dimensions. And, as economists and policymakers, we should ask ourselves whether the decision-making frameworks we've used in the past are the ones that will help us grow our economic capital in the most effective way for the future.I'm persuaded that some change is necessary. The long-term challenges we are facing – and not just in Ireland but across the European Union (EU) and beyond – require long-term thinking about the growth and resilience of our economic capital. And the nature of those challenges also requires more integrated and multi-disciplinary thinking. None of the individual stocks of capital exist in in a vacuum.To meet these structural challenges, policy frameworks need to invest in developing an integrated analytical framework that brings together different disciplines, maintaining their individual strengths but also leveraging their synergies. For example, as Diane Coyle wrote recently, "one of the lessons from the pandemic must be the high cost of not having better integrated social, medical and natural science research. There has been great work across disciplines, on the hoof – it should have been in place to start with. If we don't fix this now, how on earth are climate change, biodiversity loss, demographic pressures and other big challenges going to be tackled?". I agree with her.We need a framework that helps us to look at the bigger picture. Or, to put it in more familiar terms for some of us, our macroeconomic framework needs a greater intergenerational focus.We need to be thinking broadly and over longer time horizons to fully capture the trade-offs we face, not least because many of these structural challenges also require a global policy response. Policies to address climate change, for example, may appear costly in a short time horizon, but deliver large net benefits in a longer horizon that makes clear the benefits of avoiding catastrophic increases in global temperatures.The European contextIn Ireland, much of our macroeconomic framework is embedded into that of the EU and the euro area.As members of the EU and its common currency, we share an institutional architecture to manage the deep integration between our economies (including the European Central Bank (ECB), European Commission, European Parliament and European Council). An important part of that architecture are sets of rules which govern how we work, some of them in regulations and others in the Treaty on the Functioning of the European Union (such as the ECB's monetary policy role and the Stability and Growth Pact (SGP) which governs fiscal policy and the pursuit of sound public finances by Member States).As we emerge from the pandemic, it seems timely to consider how the EU's macroeconomic framework is working and, in particular, whether it needs a greater intergenerational focus. (As it happens the European Commission started an Economic Governance Review before the pandemic to look at the way the SGP was working, and the ECB is in the process of reviewing its monetary policy strategy.)I welcome the contribution that others have made to this debate in recent years.3 Looking at the SGP itself, sound public finances and sustainable debt are prerequisites for good policymaking. Only with these can economic policy turn to the task of growing the stocks of economic capital in a sustainable way for the long-term.But if we take an intergenerational and more integrated view of our macroeconomic policy challenges – and continuing with climate change as an example – we should be looking at our existing measures of debt sustainability against the investment required to manage the transition to net zero emissions by 2050. In highlighting the challenges of the 'green transition', the EU's Recovery and Resilience Fund (RRF) recognises the pivotal role of fiscal policy in achieving this objective. It also points to an important differentiation between expenditure – which often has an automatic or stabilisation focus – and investment (in the four capitals), which has implications for growth, productivity and resilience, and thus for longer-term debt sustainability.4 This means moving beyond a sole focus on the Structural Budget Balance and recognises the importance of the composition of investment and expenditure as well as its size. (I would argue that the assets on a sovereign's balance sheet are also relevant when taking a longer term perspective: net worth is a good indicator of sustainability.)ConclusionAn important focus of economic policy should be to build resilience to systemic risks and to the transitions that have already started. As we build that resilience, we also need to continue to learn from, and adapt to, events as they unfold.Many of our most important macroeconomic policy frameworks were developed 30 years ago. As we contemplate the future – not least the challenges posed by the net zero target – the issue we need to debate is whether those frameworks are what we need for the next 30 years. What changes do we foresee? Are our frameworks helping us to manage climate, demographic or technological change? Are we strengthening our stocks of economic capital? Are we building economic resilience and helping communities to manage economic transitions ahead?There will of course be debate about priorities and choices but we need to make sure we are making decisions in the best possible way, and that we are analysing the options through the most effective lens.These questions are not only relevant to Ireland nor only to the EU. They're relevant to anyone who is interested in good public policy and good economics. They are questions that economists and policymakers need to address. They do not diminish the importance of macroeconomic stability and sound public finances, nor the fact that the composition of expenditure and investment matters, that properly functioning markets matter, that a well-regulated financial system matters, that price signals matter and that incentives matter. In fact they emphasise that it all matters.1 In my view, the raison d'être of economics is good public policy. As Nobel Prize winner Jean Tirole wrote in Economics for the Common Good, "economics not only documents and analyses individual and collective behaviour; it also aspires to recommend better public policy". Economics is one of the most important tools in a policy adviser's tool kit.2 See for example Why Nations Fail: The origins of power, prosperity and poverty by Daron Acemoglu and James Robinson and The Wealth and Poverty of Nations by David Landes.3 To highlight just a few, a contribution from a group of French and German economists in 2018, Reconciling risk sharing with market discipline: A constructive approach to euro area reform, a Martin, Pisani-Ferry and Ragot paper from last month, Reforming the European Fiscal Framework, another recent paper from Blanchard, Leandro and Zettelmeyer, Redesigning EU fiscal rules: from rules to standards and The return of fiscal policy and the euro area fiscal rule from Vítor Constâncio in 2020. 4 The European Fiscal Board has argued along similar lines. See, for example, Thygesen et al. (2020): "Growth-enhancing expenditure needs to be protected. The crisis underlined how certain items of government expenditure that are essential to support growth, such as investment, have declined over time, especially during periods of fiscal consolidation. This expenditure therefore needs an effective shield in the future, notably by allowing certain increases in investment when assessing compliance with the expenditure rule". The European Commission made similar points in its own Review (EU Commission, 2020).About the authorGabriel MakhloufMore from this authorRelated informationMore speeches from "Central Bank of Ireland"Country page: Ireland
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[description] => Comments by Mr Erik Thedéen, Governor of the Sveriges Riksbank, at the Finance Panel on "Why is the Swedish krona so weak?", of a seminar organised by SNS and the Swedish House of Finance, Stockholm, 22 September 2023.The views expressed in this speech are those of the speaker and not the view of the BIS.Central bank speech | 22 September 2023by Erik ThedéenPDF full text (10kb) | 4 pagesThe krona is currently undervaluedMany, including the Riksbank, assess that the krona is currently undervalued if one compares with what is justified by fundamentals, that is, economic developments in Sweden compared with those in the rest of the world. For example, the IMF says that the krona is undervalued by about 10 per cent, trade-weighted.1 Economic fundamentals thus indicate that the krona should strengthen in the slightly longer term, in real and also nominal terms.If one looks a little further back in time and studies how the value of the krona has changed in relation to the currencies of Sweden's most important trading partners, it is also clear that the exchange rate has weakened during periods, and sometimes weakened substantially as during the global financial crisis. But it has also tended to strengthen again eventually. If, on the other hand, we focus on the shorter term, the krona has weakened clearly since the beginning of 2022, both against the dollar and against the euro. Just a few days ago, the exchange rate against the euro was at its lowest level ever. How can this be the case when many still agree that the krona should strengthen both in real and nominal terms?Those who read the newspapers receive many different suggestions of reasons why the krona has weakened recently. But it is often difficult to deduce whether, and if so, how much, different factors have affected the exchange rate. There is also a tendency to try to understand the movements in the exchange rate in response to specifically Swedish factors that seem relevant at the moment: the NATO debate, interest-sensitive households, perceived signals from the Riksbank and so on. Such factors can certainly play some role and push the market slightly in one direction or another. But if we broaden our perspective, we can, for example, note that the Norwegian krona has weakened largely in line with the Swedish krona. So it is not as simple as everything being explained by, for example, problems in the Swedish property sector.Financial agents account for most of the krona tradingGiven how the krona market functions in practice, there may be tendencies to give this type of factor too much weight as an explanation for the development of the exchange rate. More than 90 per cent of the krona trading is between different financial actors, and the majority of the krona trading is not in Sweden but in major financial centres abroad. For example, almost 50 per cent of all krona trading takes place in London. There is nothing special about the krona here – that is the way it is for many currencies. But the point is that the vast majority of trading takes place between financial actors abroad.This is different from how the foreign exchange market is usually described in our Economics textbooks. There, the description of the market is often based on trade flows that create supply and demand for the krona. In itself, this is also an important element in foreign exchange trading in practice. But if one looks at the flows of capital in the krona market, there are more often flows with other purposes: diversification of large funds' portfolios, hedging against losses due to exchange rate fluctuations and even pure speculation in how the krona will vary. For example, there may be strategies where investments are chosen based on the trend in the krona's movement and that the trend – recently a weakening – will continue in the future.The consequence of this is that trading in the krona is largely driven by purposes that do not necessarily place so much emphasis on the "fundamental" value of the krona. During periods, the exchange rate of the krona may therefore vary in a way that is difficult to explain by macroeconomic developments. Economic research has branches that address this and try to explain why, for example, investment strategies that should not be profitable in efficient markets can still be so. And also why the capital flows that result from such "non-fundamental" currency trading can drive exchange rates.2The focus is then often on the microstructure of the foreign exchange market, where banks are market makers and act as intermediaries between buyers and sellers of currency. For example, as the market works, it may matter which actor initiates a foreign exchange transaction, and both the ability and willingness of intermediaries to take currency risk may have an impact on the way exchange rates move.In practice, this means that the krona exchange rate will function not only as a "shock absorber" that adapts to variations in the supply of and demand for kronor following on from economic developments in Sweden in relation to those in other countries. The exchange rate rate can vary in the short and also slightly longer term in a way that has only a weak link to developments in the real macroeconomy, for instance, it may weaken over a relatively long period of time.Good economic base will strengthen the krona eventuallyHowever, the krona cannot drift away indefinitely. The longer it is undervalued and the weaker it becomes, the stronger the forces will become that protect against further weakening and work towards strengthening. We are a small open economy that has a lot of trade with our neighbours. When the krona is weak, it becomes profitable to invest in Sweden. Swedish equities, bonds, property, etc. should therefore ultimately appear attractive to foreign investors. In addition, exports will benefit and imports will be disadvantaged. Increased tourism and the purchase of more expensive capital goods by foreign private individuals, such as cars and boats, also favour demand for the krona.When many factors eventually move in the same direction, the krona will strengthen and this could go quickly. But it is difficult to say exactly when and how much the krona will strengthen. If speculations of a continued decline for the krona have contributed to recent developments, the krona may strengthen relatively quickly once the turnaround occurs and investors take up new positions on the basis of the trend having been broken.The Riksbank has no target for the exchange rateSo what is the Riksbank's role in this – what can and should we do? It is the Riksdag that decides which exchange rate system Sweden should have and it has chosen a system with a floating krona. The Riksbank's responsibility in this system is to hold inflation low and stable. We therefore have a target for inflation, not for the exchange rate. But the krona is of course an important variable for us.It is always important for monetary policy, because the exchange rate affects the outlook for inflation. There is also research showing that the impact of the exchange rate on prices may be greater when inflation is high. In this way, it can be said that developments in the krona's exchange rate have become more important for the analysis work at the Riksbank recently. When the krona is weak, it becomes more difficult to bring down inflation, which is worrying not only because inflation has been too high for too long, but also because the impact on prices may be higher than normal. On a more general level, exaggerated variations in the exchange rate are not good for real economic developments and the Swedish economy as a whole.The exchange rate regime is not decisive for a country's prosperitySo the krona is important and the significance of the exchange rate development should not be underestimated. But nor should one exaggerate the importance of the exchange rate for a country's welfare. Sometimes one can get the impression from the debate that Sweden's economy stands and falls with the value of the krona, and that a strong krona means that Sweden is doing well and vice versa. But of course it isn't that simple. Welfare is not created by the level of the exchange rate, but by good long-term growth. This in turn is determined by the productivity of companies and citizens, good innovations and how well the economy as a whole functions. And here too, low and stable inflation is an important factor in creating a foundation for economic growth and welfare.Comparing welfare in different countries is always tricky and there are many different ways to do so. But if we compare Sweden with two of our Nordic neighbours – Denmark with a fixed exchange rate against the euro and Finland, which has adopted the euro – it turns out that there have been no major differences in real economic development in recent decades, despite different exchange rate regimes. GDP per capita has grown roughly as much since the introduction of the euro in 1999.The krona will strengthen, but it is difficult to say exactly when and how muchTo sum up, the krona is currently undervalued and there are forces that can continue to keep the value of the krona down in the near term. But the longer its value is held down, the more important the "fundamentals" will become. Because the Swedish economy is essentially well-managed and sooner or later this will lead to a stronger exchange rate. Sweden has strong public finances, a well-educated workforce, responsible wage formation and underlying good competitiveness. As everyone who has tried to make forecasts for the exchange rate knows, it is genuinely difficult to say exactly when it will strengthen and how much. But it can happen quickly once the trend is broken and the krona strengthens again.1 The IMF's assessment is that the undervaluation of the krona in 2022 was between 4 per cent and around 15 per cent in trade-weighted terms, see External Sector Report: External Rebalancing in Turbulent Times, July 2023, IMF. Since the start of 2023 the krona has weakened about 7 per cent against both the euro and the dollar.2 A review of the research literature regarding segmented international financial markets with different types of friction can be found in, for instance, M. Maggiori, (2022), "International macroeconomics with imperfect financial markets", Chapter 5 in Handbook of International Economics vol. 6, Elsevier.About the authorErik ThedéenMore from this authorRelated informationMore speeches from "Sveriges Riksbank"Country page: Sweden
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[description] => Keynote address by Mr S S Mundra, Deputy Governor of the Reserve Bank of India, at the Mint Annual Banking Conclave on the theme "Disruption, Innovation and Competition", Mumbai, 4 February 2016.The views expressed in this speech are those of the speaker and not the view of the BIS.Central bank speech | 09 February 2016by S S MundraPDF version (158kb) | 4 pagesAssistance provided by Smt. Usha Janakiraman and Shri Sanjeev Prakash is gratefully acknowledged.Dr. K. C. Chakrabarty, Former Deputy Governor, Reserve Bank of India; Smt. Chanda Kochhar, MD and CEO, ICICI Bank Limited; Shri Aditya Puri, MD, HDFC Bank Limited; Shri B. Sriram, Managing Director, State Bank of India; Shri P.S. Jayakumar, MD and CEO, Bank of Baroda; Shri Uday Kotak, Ex- VC and MD, Kotak Mahindra Bank; other senior colleagues from the banking and financial sector; members of the print and electronic media; ladies and gentlemen!2. At the outset, I thank the Mint Management for inviting me to deliver the keynote address at this Annual Banking Conclave. The galaxy of speakers that headline this event provides a testimony to the importance of this event. A lot in the Indian banking sector has changed since I first spoke at this conclave three years ago. Disruptive events have taken place; innovative practices introduced and competition as it stands today, is stiffer than ever before and is likely to intensify further in the coming months.3. Some of you who attended this event last year might recall that I had briefly raised certain issues at the end of my address stating that they could emerge as potential challenges for the banking sector in the days to come. Many such challenges which were looking abstract or distant then are appearing imminent now. I have, therefore, chosen to elaborate on few such issues in my address today. These issues essentially revolve around "Disruption, Innovation and Competition" in the banking sector, which is the theme of the Conclave. You may also recollect that in my address last year, I had referred to Brett King's book "Bank 3.0" in the context of a single channel solution to multiple product offerings. I would once again invoke him. In the concluding chapter of the book, King has raised 15 questions as a checklist to assess whether a bank is prepared to withstand the disruptive process that is currently underway. According to King, answer to these questions would determine whether you are in trouble or you are not making the shift. While some of these questions may not be relevant in the context of Indian banking today, they will become so, soon. Many, however, are already relevant for us. Let me mention a few:Do you still require a signature card for account opening?Do you have a distinct Head of social media in an executive role?Do you have a Head of Mobile, and do you have apps already deployed for your customers?Can you approve a personal loan application for an existing customer with a salaried account in real time, instantly?4. I acknowledge that some of the banks present here can surely claim that they are making the necessary shift. They can move to other eleven questions while remaining ones can make a beginning to address these four questions. The predominant message from the foregoing is that digital innovation and disruption are progressing at a fast pace and are already a subject of huge debate. Hence, I would not dwell any further on them but move to few other areas which can have equal or even greater impact on the way banking is conducted going forward.5. So, let me now come to those issues that I want to highlight today.(i) Account Number Portability: Just consider the possibility of a dissatisfied or less than satisfied customer asking for shifting his banking relationship; lock, stock and barrel to another bank. He/she would ask "If I can switch my mobile service provider without changing my mobile number, why not banking service provider without changing my account number." This possibility can no longer be dismissed as a wishful thinking. This would need a "shared" payment system, regulated independently, where all account number and payment instructions are warehoused (such as standing instructions/direct debit etc.),an unique customer ID and a central payment system. Credits/debits would be linked to the unique ID. Interesting bit is that some international banks are already supporting the idea. With Aadhaar as unique ID and NPCI as a central payment system, we are quite well placed to translate this into a reality. Our past record as a country of having swiftly embraced anonymous "screen based" bond trading or switching from "open cry" system on the bourses, should portend a much shorter timeline for this transition than a period of few years many in international arena are presently presuming for this to happen. Why can't we be a global first in this? Imagine how this can empower a customer and give an entirely new dimension to the competition, ensuring best of the breed customer service and fair pricing. Let me give a call today to all the banker friends here to commence a serious discussion on making "account number portability" a reality.(ii) Competition from non-bank players in payment system: All along we have believed that banks would retain the privilege to serve as the sole payment service providers even while their other traditional functions like dispensing credit might have competition. Ground realities have changed. Payment system is no longer the sole preserve of banks. There is competition and how? Large data companies like Google, Vodafone, Apple have been taking over transactional roles. A set of payment banks have been granted licenses and then, there are non-bank payment system providers. A massive disruption is possible based on the technology using Block Chain which would make distributed ledger possible. For the uninitiated, "distributed ledger" allows a payment system to operate in an entirely decentralized way, without intermediaries such as banks. The banks would need to either develop own capability or seek proper alliances. I say this, however, with a caveat that we or rather the global regulatory community elsewhere have not taken a final stance on the use of distributed ledger technology. It is important to highlight here that Financial Stability Board has already started consultations on developing better understanding of the intricacies involved. Some of the large institutions like Goldman Sachs or J P Morgan Chase have set up internal groups to work in this area. Is it not the time for the Indian banking system to wake up to this possibility?(iii) Impact on Lending Business: A key concern that I had briefly hinted at last year also is whether the large corporates would continue to borrow from the banks or whether the banks themselves would be keen to fawn over them after their on-going experience with such lendings? Many large corporate houses have lately been able to access funds on their own at cheaper rates without needing to reach out to banks. In mature markets, it is usual for the large corporates to access financial markets directly for their funding requirements rather than through banks. As the Indian economy and our financial markets mature further, more and more large corporates are likely to bypass banks for their funding requirements. Even medium enterprises may find alternate avenues of finance. Under the circumstances, banks would need to look at substitutes for deployment of funds. This void could most likely be filled by lending to small and micro enterprises and retail clients. As you are aware, the assessment of credit needs of small & micro enterprises and retail, is a different ball game altogether. A non-disruptive shift would require the bank staff to acquire new capabilities for credit appraisal of self-employed individuals and people with little or no credit history. The competition in the shape of small finance banks, with a mandate to focus exclusively on small business units, small and marginal farmers, micro and small industries and other unorganized sector entities, which would operate through technology-focused, low cost structure, is already on the anvil.As part of this strategic shift, banks would also need to improve their analytical abilities for big data. As I spoke earlier about lending to customers with little or no credit history, banks would need to employ some non-conventional tools for assessing credit worthiness of such customers, which can, among others, include credit card usage, travel patterns, bill payment history and so on. Lack of attention to these segments by the banks might allow P2P lenders to sneak in and compete for the piece of the pie. Here again, I would like to use the caveat that we are yet to finalise our regulatory stance on P2P lending.(iv) IFRS Implementation: With the MCA announcing the much awaited Ind AS implementation road map for the financial sector, scheduled commercial banks (other than RRBs) are required to comply with the standards for accounting periods beginning from April 1, 2018. In this endeavour, the banks would need to deal with challenges resulting from implementation of Expected Credit Loss (ECL) based provisioning framework, classification and measurement of financial assets and impact of alignment of the regulatory guidelines with Ind AS on regulatory capital computations under the Basel III framework, leverage and liquidity ratios, etc. As a supervisor, our off-site reporting formats would need to be revisited. In essence, huge capacity building initiatives at the level of both the regulator and the regulated are required.While it may not be possible to precisely quantify the impact of Ind AS implementation at this stage, rough estimates globally indicate a transitional impact of 25-50% increase in provisioning levels on account of implementation of ECL based provisioning framework. A 2014 international survey1 of select banks indicated that over half of them expected an impairment provision increase of up to 50 per cent across all asset classes. Though our policy stance on ECL impairment provisions including possible prudential floors remains to be finalized, it is important that our banks start work on strengthening their data capture and risk management systems to enable impairment assessment.In this context, I wish to raise an issue today for larger debate. The regulatory experience with the internal models employed by the global banks to assess the risks under the Basel framework has not been very pleasant. The assessments carried out since the Global Financial Crisis have pointed out the complex models used by the banks for risk computation under advanced approaches had significantly underestimated risks that the banks had on their books. Since, the ECL framework would involve principle based assessment of credit risk (using models), the concern would be around underestimation of risks by the institutions. Hence, I wonder that as we prepare towards IFRS, could we conceive of an independent, umbrella entity to prescribe or validate models, within the framework of the accounting standards or to at least examine the approach adopted by the banks in computing expected losses so as to ensure consistency in assessment across the sector, besides having supervisory comfort on the adequacy of accounting provisions.Finally, one last question is whether we could draw some lessons from how banks globally have transitioned to IFRS from local GAAP? While we could get some perspectives about the challenges involved in the transition, the fact is that the challenges would be much greater here in India as we do not have an IAS 39 equivalent framework unlike other jurisdictions which migrated to IFRS from local GAAP largely aligned with IAS 39 or US GAAP. In that sense, IFRS transition is a paradigm shift in the Indian context.(v) Consumer Protection: The profile of the customer that the banks deal with is undergoing a major transformation. This also calls for a transformation in the way banks position their products and services for their customers. Customers as a group are no longer satisfied with off- the- shelf products and would rather have products customised to their individual needs. Towards this end, the banks have to leverage Big Data and proactively offer products and services that suit the needs of individual customers.A regulatory red flag I would raise here is around rampant mis-selling in sale of third party products, especially insurance. Another recurring consumer grievance is around compensation for failed transactions/frauds. Of course, as institutions, banks have more muscle as compared to "resource poor" individuals, but as guardian of customer rights in our role as regulators, we would quite closely monitor misuse of such might against the customers. If violations are observed, the banks wound need to not only compensate the customers, but also be forced to pay penalties.(vi) Financial Inclusion: I don't want to touch this topic in any detail but would just like to caution banks on some aspects in dealing with newly acquired accounts. A large number of new accounts have been added under RBI's Financial Inclusion focus and under the PMJDY push. Periodic updation of the KYC records in these accounts and continuous monitoring is vital. Just to give one example- a news item had appeared the other day mentioning that Rs.1 crore was parked and withdrawn in a labourer's bank account which he was unaware of till he received an IT demand of a tax of 40 lakh rupees. Many similar instances are being reported. This means that the recently opened accounts are susceptible to misuse by money mules and hence, banks must remain vigilant.(vii) Other issues: Lot of debate has surrounded the future of brick and mortar branches and their obituaries been written several times. However, they have survived and are doing well. Of course, the functions they undertook earlier, extent of client interface they had, has undergone a sea change, but my sense is that the brick and mortar braches would continue to remain relevant in India in the foreseeable future. Management would, however, have to think through the future of these branches in terms of the role and functions they envisage for the branches going forward.Another issue is around the future of ATMs and the plastic money. If Mobile Banking continues to grow at the pace that we see today, would cards still be needed and what use would be there for the ATMs? There is a justifiable call for reducing "cash transactions" in the system and hence, if more and more people moved to mobile/ internet based payments, the plastic cards and the investments made thus far in ATM networks would be rendered useless, unless put to more imaginative uses.Last but not the least, I would also like to sound another note of caution for the bankers present here. With all talks surrounding changing profiles, social habits and requirements of the gen-next customer (Gen Y or the millennials), the banks must not lose sight of aging population. The next 15 years would see approximately 70 mn more people crossing the age of 60 years. These old age people would have different banking needs and would need to be serviced through appropriate delivery channels. Similarly, the pace of urbanisation in the country is only going to get heightened in the coming years and hence, banks would need to be geared up to cater to the requirements of this migrant population also.Conclusion6. I think I have scared you enough by highlighting the impending challenges that the banking sector is likely to face going forward. As Clay Christensen, Harvard Professor puts it "Disruptive Innovation can hurt, if you are not the one doing the disruption." Most of the scenarios that are going to play out are external to our system and hence, you need to be prepared, lest you get hurt.I believe the elite panel gathered here today would deliberate and reflect on some of the issues I have raised today. I once again thank Mint and Tamal for inviting me and wish you all a fruitful deliberation.Thank you!1 The Fourth Global IFRS Banking Survey by Deloitte: The survey includes the views of 54 banks from Europe, the Middle East & Africa, Asia Pacific and the Americas. Responses were received from 14 of the 29 global systemically important financial institutions (G-SIFIs) and 25 of the top 50 global banking groups measured by total assets listed in the Banker Top 1000 World Banks 2013.About the authorS S MundraMore from this authorRelated informationMore speeches from "Reserve Bank of India"Country page: India
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