Moderator: Linda Yueh, Professor, London Business School
Panelists:
David Lipton, First Deputy Managing Director, IMF
Karnit Flug, Governor, Bank of Israel
Alicia Garcia Herrero, Senior Fellow Bruegel
Ryozo Himino, Vice Commissioner for International Affairs, Financial Services Agency, Japan
Davide Serra, Founder and CEO, Algebris Investments
The global financial landscape has changed significantly over the past decade. In the future, several trends will transform financial systems still further. Population aging, climate change, increasing credit intermediation through nonfinancial firms, and changes in global economic integration will continue to shape the future of finance. What would this future look like? How can policymakers and financial institutions best deal with these changes and help improve economic outcomes while adequately safeguarding the stability of the financial system? Panelists discussed the challenges and opportunities that policymakers and financial institutions would face during the transformation of finance going forward.
Key Points:
· An evolving system. Lipton remarked that the global financial crisis taught us that the banking system was too big and under-supervised. Today, non-bank financial institutions represent the same risks, and technological change is affecting both banks and non-banks. Flug noted that the evolving system is less bank-dominated, and regulations have not caught up to the variety of services being offered. Serra noted that the banking system is much safer now, and could withstand a $2-3 trillion dollar shock. Garciawondered if we are heading toward financial integration or disintegration, and Himino suggested some disintegration of the system may be necessary before the system is re-integrated.
· Challenges and solutions. Himino noted that populations are aging more rapidly in EMDCs than in advanced economies, and that by 2035, 50 percent of household financial holdings could be in the hands of someone with dementia. In addition, a digital divide excludes aging populations. Flug suggested more efforts to guide older populations to digital access. Serra noted that 80 percent of global savings are held in established Anglo-Saxon institutions, and rating agencies have too much power in deciding access to credit. Such concentration of power could result in arbitrary rules for investors. Lipton believed that regulatory arbitrage would take care of any uneven playing field between old and new institutions. If you act like a bank, you have to be regulated like a bank.
· Risk aversion. Flug asserted that the best way to deal with risk is to embrace new technology and gain the expertise necessary to regulate it well. Some new players had not survived a full economic cycle yet, and it would be helpful to see how they manage a downturn. Coordinating bodies should look at the system as a whole rather than worry over the categories of institutions. Liptonsuggested allowing experimentation within a framework of more international coordination. Some parts of the world will be willing to experiment more, which will likely result in fragmented growth.
· Going forward. Serra suggested that creditors and investors should depend on their own risk analysis instead of relying on rating agencies. Garcia called for strong efforts to avoid financial disintegration. Himino considered rising debt to households, corporations, and governments as the biggest financial stability problem. Lipton cited the importance of institutions for multilateral coordination to mitigate fragmented policy responses to new frontiers.
Quotes:
“Various standard setters are doing their work…but there is nobody to put together all those pieces in a consistent package.” Ryozo Himino
“We know that some banks were too big to fail, but now we have a cloud that may be too big to fail…the new internet platform firms are becoming financial firms.” David Lipton
“The way to deal with the risks is not by holding back on the adoption of technology.” Karnit Flug
Contributor: Aric Maiden
