Navigating the Future of Financial Regulation
Wednesday, October 20, 2021
5:30-8 p.m. PDT
Virtual, San Francisco
(Thursday, October 21, 2021
8:30-11 a.m. SGT
The 14th Asia Symposium was held virtually on October 20, 2021 from 5:30 p.m.-8 p.m. PDT, and was co-hosted by the Federal Reserve Bank of San Francisco and Monetary Authority of Singapore.
Our theme in 2021 explored the changing landscape of banking supervision and regulation. Current events have highlighted the need to finetune policies for financial inclusion, climate action, and global economic recovery from the ongoing pandemic. The agenda discussed how central banks and financial regulators are addressing these systemic issues, and how financial technology and industry solutions can work towards solving them.
|5:30 p.m. PDT
8:30 a.m. SGT
Azher Ahbasi, Executive Vice President, Supervision + Credit, Federal Reserve Bank of San Francisco
|5:35 p.m. PDT
8:35 a.m. SGT
|In Conversation: SF Fed President Mary Daly and MAS Managing Director Ravi Menon|
“The Evolving Role of the Central Bank: A Look at Social Priorities, Climate Risks, and Technological Disruption”
This conversation will cover lessons learned from the pandemic, the role of central banks and regulators in social and environmental objectives, and maintaining trust in the financial system amidst technological disruption.
Moderator: Stephen DeLay, Vice President, Office of Regional and Business Engagement and Regional Executive, Federal Reserve Bank of San Francisco
|6:35 p.m. PDT
9:35 a.m. SGT
|6:55 p.m. PDT
9:55 a.m. SGT
“An Inclusive Recovery Enabled by Digitalization”
This panel will examine the topic of leveraging the accelerated digitalization during the pandemic for an inclusive and broad-based recovery. The panel will explore digital financial inclusion, financial sector infrastructure and resilience, and fintech solutions for financial inclusion.
Timothy Flacke, Executive Director, Commonwealth
|7:55 p.m. PDT
10:55 a.m. SGT
Leong Sing Chiong, Deputy Managing Director (Markets and Development), MAS
Watch the Opening Remarks and San Francisco Fed President Mary Daly in Conversation with MAS Managing Director Ravi Menon
Opening RemarksAzher Ahbasi: Hello, welcome to the 14th Symposium on Asian Banking and Finance. This year’s theme is “Navigating the Future Financial Regulation.”
I’m Azher Ahbasi, Head of Supervision at the Federal Reserve Bank of San Francisco. It’s a pleasure to join you for the first time at one of Supervision and Credit’s landmark events.
I want to extend a special greeting to those of you who are joining us virtually from Asia this morning, and those of you joining from the United States this evening.
I also want to thank the Monetary Authority of Singapore for collaborating with us on this important event for the past seven years.
Now, the event has evolved to look forward at frontier risks with our Asian and global counterparts.
It’s also a space to discuss different approaches and solutions to these risks and learn from each other. As regulators, we can never be over prepared. We are proud to host this forum, which facilitates direct dialogue among regulators and stakeholders on crucial regulatory issues.
Open conversations help us identify information gaps and opportunities to collaborate and explore potential solutions.
This year’s Symposium looks at some of the common challenges facing regulators around the world today. [Of the top three challenges, the first is] financial inclusion.
Globally, about 1.7 billion adults do not have a bank account. Even though the United States is an advanced economy, 7 million U.S. households remain unbanked. Financial inclusion challenges intertwine with social challenges, especially racial inequality.
This prompts regulators to consider inclusion impacts on the robustness of the financial system and the role financial institutions play in financial inclusion and financial health.
Number two: Climate risk. Awareness of climate risk is going among businesses and households.
A Pew Research survey shows that nearly two thirds of Americans said that climate change is having at least some effect on their local communities.
This represents brand new challenges for policymakers, including research, data collection, and rethinking how to approach climate risk in regulation and supervision.
And third, global economic recovery from an unforeseen pandemic. Economists have pointed out that the COVID-19 pandemic has led to a widening of economic inequality.
As the world recovers, policymakers are looking at the evolving economic environment and considering how we can ensure a more inclusive recovery.
The global pandemic has accelerated the digitalization of financial services coinciding with a shift in user behavior and reach of fintech providers in numbers and scale.
Global fintech investments in the first half of 2021 totaled $98 billion with around 2,500 deals of which the U.S. accounting for half of that amount with $42.1 billion.
Several large fintechs, including neobanks, now have double-digit billion-dollar valuations.
How can this accelerated digitalization and the role of emerging technologies be leveraged for an inclusive and broad-based recovery? How can financial services help those most in need? What are some of the long-term structural barriers that country should tackle? How will these challenges shape the future of financial regulation? This is what has brought us here today: to have a thought-provoking conversation.
Now I’m thrilled to give the floor to the Managing Director of Monetary of Singapore, Ravi Menon, and the President of the San Francisco Fed, Mary Daly.
The topic of today’s conversation is the Evolving Role of the Central Bank, a look at the social priorities, climate risk, and technological disruption.
Our moderator is Stephen DeLay Vice President and Regional Executive in the San Francisco Fed’s office of Regional and Business Engagement.
Welcome, Mary, Ravi, and Steve.
In Conversation with Mary Daly and Ravi Menon on the Evolving Role of the Central Bank
Stephen DeLay: Thank you for that introduction, Azher, I really appreciate it. So, as Azher said, I’m Stephen DeLay. I lead the Federal Reserve Bank of San Francisco’s Office of Regional and Business Engagement.
And it’s my privilege to moderate the session with our distinguished guests Mary Daly, President and CEO of the Federal Reserve Bank of San Francisco, and Ravi Menon, the Managing Director of the Monetary Authority of Singapore. It’s a pleasure to be here with both of you. Thank you for joining us. We’re going to touch on a number of topics that Azher already pointed out. So, we’ll go ahead and get jump right into it.
The first subject we’ll touch on is the pandemic and lessons learned from the pandemic. And Ravi, I’m going to kick this one to you after I asked to introduce the topic. But I want to both of your points of views on each of the topics so feel free to be as conversational as possible.
So, the first question is: the pandemic has clearly challenged us in in many ways, and unfortunately it’s still not done with us. As you think back over the past almost two years now, what are their biggest lessons learned from your dealing with the pandemic?
And Ravi I’ll go ahead and kick this one off to you.
Ravi Menon: Thank you, Stephen and good to see you again Mary and Azher. I’m glad we can get together to do this Symposium, although in this fashion.
The crisis isn’t quite over yet. I think for most of us the memories of 2020 are still very vivid, especially in the early phase. I think what I took away in large measure is the critical importance of resilience when you’re faced with a situation like this.
Resilience on many fronts. First, I think financial system resilience. From a central banker and regulators point of view, when something like this hits you, the first thing you’re worried about is “so, is the financial system going to hold up? Is that going to be a crisis of confidence? Is there going to be a funding shortage? Risk aversion?”
We’ve seen this before, time and again, and every time something bad happens that’s the first instinct. And this time, of course, it is an unprecedented stoppage in economic activity. It’s not your normal cycle of you know crisis-driven cycle. This is a stoppage in economic activity, a freeze of sorts. And much of the world went into lock down progressively. So really, our concern was the banking system and we’re very fortunate. And I think the most of the countries in the world, which undertook the regulatory reforms post the Global Financial Crisis in a serious committed way, have themselves to thank, because if we had not built up those buffers, that strength, it would have been quite a strain.
The Singapore banking system has always been strong in terms of capital and liquidity buffers. But it also helped us greatly because of our very open and exposed position. That the banking systems in the major centers of the world in Europe, in America, and elsewhere were also strong. And so, there was not too much of a contagion effect. So this is really key.
This resilience of the financial sector has been very critical in how most of our countries have managed the crisis. Because, unlike 2008 and 2009 when finance was the problem, the financial sector was the problem, in large measure, I should say the financial sector in this crisis has been part of the solution.
And they’re able to be part of the solution, because of their resilience, because they are strong. And I think in each of our countries, we have conversations with our banks, “do not pull back credit unnecessarily; if you’re strong if you have the buffers continue to extend credit to the economy, this is a time when the economy needs it.”
It helps a great deal to have a strong financial sector when the economy tanks livelihoods, households, individuals, and I think all our countries have various kinds of relief measures. I was very glad the financial sector was able to do this.
In Singapore’s case, it also helped greatly of fiscal resilience. Public finances were very strong. We spent as much as 20% of GDP in fiscal support for households or businesses and other forms of assistance without a single dollar of borrowing. Because we had accumulated reserves, we could draw them down and that gave us tremendous resilience.
And I think the last bit of resilience I would speak about, is the resilience that the economy as a whole has. And again, I’m really thankful for all the technological advancements and investments that were made.
In Singapore, as well as another major economies, if COVID-19 had happened 10 years earlier, I think the consequences would have been a lot more devastating. I’m not sure we would have the opportunity to even meet like this, would if Zoom was around 10 years.
More importantly, the transmission of many economic activities, and especially financial sector activities to the digital platform. Digitalization has enabled a large part of the economy to continue to function and generate value, protect jobs, and soften the blow of what might have been an even more disastrous downturn. The economic resilience that came with technological and digitalization investments has been a huge savior.
Last, I think, perhaps the most important aspect of resilience — it’s human and psychological resilience — how all our countries, people came together. And in the public sector, the different agencies came together.
Whether this true, many of us have long tales of long nights, sleepless nights. I’m really proud of how people at the MAS, and I’m sure in many other central banks and regulators, worked really hard against very difficult circumstances to make sure that the financial sector is on an even keel, and we are able to support the economy, make sure monetary policies are conducive and supportive and all that. So my big takeaway was really resilience in all its dimensions.
Stephen DeLay: Thank you, Ravi. Mary, you want to give us your thoughts on that topic?
Mary Daly: I should, of course, so first I’ll say: hi Ravi it’s so wonderful to see you and I look forward to hosting you physically here in person when we can, and returning to Singapore when we’re able.
And Stephen nice to see you again, of course, and I’m just delighted to be here so.
Mary Daly: You know, I actually could just say I agree with everything Ravi said because resilience is the critical thing. I think if you had to ask me to pick one I would pick resilience, but since Ravi took resilience, I’m going to focus on something else that I think has been really important and actually dovetails nicely with resilience and that is agility.
If you think about what happened in the pandemic, central banks across the world, and banks across the world, and financial institutions, pivoted for being mostly in-person doing their critical services to mostly at home doing their critical services.
And the technology wasn’t even as good as it is now. I don’t think many of us knew about zooming and how to do this, and what platforms to use. And I remember in the first parts of the crisis, we’re trying to get market functioning back to where we needed to be because it’s where at the foundation of the financial system and for the world, really. And there are people in New York in the market that’s working in their closets at home, in the middle of the night, trading so that you’re getting the things right, so that the financial system can function 24/7 while their children are sleeping and we’re in the middle of a health crisis. And, so that’s an agility that I know happened at MAS, happened at the ECB, happened at the Bank of England, happened at the Federal Reserve. There’s just this sense of yes, we can do it and we’ll just do whatever it takes.
And, of course, the digitalization that was already there becomes even more important. I thought about banks — community banks, when in the United States (and this has happened in lots of places), but large banks, small banks– when the fiscal agents put out the Paycheck Protection Program, which was what it was called here.
When you know big money was available, forgivable loans, if you met requirements were available to small businesses, you still have to facilitate how those businesses get that funding.
And, so, the Federal Reserve was partnering with a facility for these banks to take it off their balance sheets and they could lend more, but all of that is about being agile, because many banks didn’t have platforms that were able to do this. So, they were overnight getting their platforms ready, making sure there were they were rigorous and that they could get the money out.
And that agility to do that was crucial to doing the very thing that Ravi mentioned, which is ensuring that during a pandemic, when health is the paramount issue, that the financial system that interconnects people and allows them to have their livelihoods, and get the funding in from the fiscal side, get it into their bank accounts, get into the business bank account, and continue to provide the services that they do provide — that was critical and I think really an important part of it.
The final thing I’ll touch on is I think they will have been psychologically agile too. We’re human, so we’re routinized, right? We’re used to certain routines.
And the flip side of resiliency, I think, is this agility. If you’re resilient, you demonstrated in being flexible and being able to say, I will get my job done, no matter where I am. And so, whether you’re a frontline essential worker who had to go out in the pandemic to make sure people got vital services that can only be delivered in person, or you are working from home in your closet or your dining room or wherever you found yourself, that sense that we need to accomplish this, we need to get through this pandemic and we need to do it together.
That resiliency spilled into agility and that agility I think has created that resiliency which ultimately is showing through into a surprising amount of economic momentum and confidence to come out of this. That you might have thought we wouldn’t have in the depths of the pandemic. You might have thought, wow it’s going to be a long you know crawl back.
But it hasn’t. Certainly, we’re not out of the pandemic, it is still heartbreaking, and we’re still in it. But what I’ve been very encouraged by is whether you’re in Asia or America, people want to get out, they want to come back out and do things and engage in their lives, and they haven’t lost that and I think that is the resiliency that people have coupled with the flexibility or the agility to say, okay, this is what we’ve got but we’re not going to stop living our lives and doing our work and participating in our economy.
Stephen DeLay: Thank you, Mary.
Ravi Menon: Stephen, if I could just come in, I couldn’t help thinking how almost coincidental because just before you asked that question, I was reflecting on so, what is my takeaway from the crisis and I was debating between resilience and agility.
Really nice to hear Mary mention agility, because I wanted to make a point about that too, but I had to choose one, so I chose resilience, but really the two are like two sides of the same coin. But really reinforcing one another.
And I should just add, the agility that the Federal Reserve System showed last year, in March and April last year, have some incredible importance. I think it basically held up the global financial system. I knew there was very little data to act on.
But the series of actions that the Fed took to support the funding markets was very innovative, creative. I don’t know how they came up with it overnight in two or three days, but the CDs was taken, that is a real demonstration of agility I think the tech firms would be very impressed.
And things like that, but really, I think we all owe it to the Fed’s very quick actions during those critical months. And the agility shown for us. If not, it could have been much worse than what we experienced.
Mary Daly: You know, I’m just going to add Stephen, I’m just, we’re taking over a little bit, but.
Stephen DeLay: it’s quite all right, thank you.
Mary Daly: You know, Ravi, one of the things about, thank you for the kind about the Federal Reserve, but one of the things that we know, because I was right there in all of this, that is the fact that we all interact with each other on a regular basis. That we don’t, as central bankers, we don’t live in siloed worlds. We’re regularly exchanging information, going to conferences, working with each other to collaborate; it’s very easy, then, to understand the financial system and how interconnected it is, which makes the finding the solutions that much more important.
Like when the Treasury market was in trouble, it hit some dislocations; it’s very clear that that’s not only important for the US economy, but that every global partner, every economy in the globe, is also going to be affected by this. When the liquidity is at a premium and people want to cash in their treasuries and get liquidity, then we have to provide it. That’s where a lot of the lessons from the pandemic will ultimately come is we’re interconnected, whether we like it or not.
And what I really am proud about central banking is that we don’t live in silos. You’ll see many central bankers traveling across the globe, to meet with each other and have conferences and that helps us, because then we know what we’re up against when things like this terrible pandemic occur.
Stephen DeLay: Thank you, Mary. My next question for you is, as you’ve talked about already. The pandemic is certainly challenged you as leaders of your organizations, but can you talk about your experience of the pandemic from that perspective as leaders of central banks? I’m just wondering if there are any defining moments for you?
And, Mary if you could take that, I’d appreciate it.
Mary Daly: Sure, you know there are many defining moments that I look back on, but one of the ones that is still in my head is that, you know, the day that we decided to go out here in San Francisco and other banks did around the country, before the federal order was given in the United States. Or before, Ravi said acting on very little information, we saw just the inklings of what was ahead of us and we wanted to be ready, so we decided, okay we’re going to go out of the office. We’re going to take our people home.
And one of the really reasons we were doing that was to ensure that our essential onsite workers who were going to have to process cash and be here to, you know, fully services and facilities to keep the lights on and keep the building functioning, so we could do that. That we had to keep those workers safe by taking everybody else home.
And then those workers were so — that whole team was so — incredibly agile, some people left on a Friday, and they didn’t even get to come back on a Monday. We’re shipping computers in the mail, we’re getting people ready to do that, and, you know, we didn’t get a single complaint.
And I think that was really the defining moment of leadership for me. Is that when you have earnest people working for a mission that is public service that is really very easy to say here’s what we’re going to do, here’s our North star, here’s what we need to have from each of you, and then people just willingly did it. And so it ended up being one of my proudest moments really is that we were building facilities to facilitate, the financial system we’re making sure people get cash.
The onsite essential workers organize themselves because it was hard for them, they were working all these hard shifts. The stores weren’t open. You had to get in line to get groceries they had to actually use a badge, a special badge, to get them onto the street, to get to the bank, because only emergency workers could be here. All of that’s going on, and they still find a way to bring groceries in and diapers and other things. And stock like a grocery store that essential workers can shop and just take this stuff home, so that when they couldn’t stop at the grocery store, they can still feed themselves and take care of their families and so that kind of piece that just in that kind of organic emergence of humanity, which is always there in our workplaces, but really showed through.
That just made me proud of our organization, because it wasn’t just about what we got done it was about how we did it. And I told my teams again and again here, that we did it with dignity and humanity and that, that, to me is a defining moment.
Stephen DeLay: Thank you, Mary. Ravi, if you want to share your thoughts there that’d be wonderful.
Ravi Menon: Very similar sentiments. I think most of us are quite, running organizations, quite humbled by the kind of dedication and sacrifice so many of us demonstrated that during those times it’s just too much to ask of, and yet it was given because they know there’s another task at hand, much is at stake.
For me, one of the defining features of the pandemic crisis was really being very thankful for the strong partnership we have with the industry, the financial industry.
It’s like all relationships, when it comes to the crunch, does it stay strong? Depends in large part on what you’ve invested in it before. And because of the relationship of trust and partnership that was built up over decades and having gone through crisis together. This time around, the way the financial industry and the MAS came together was just quite amazing. The most what I would remember, is how over in less than two weeks or about 10 days, basically we put together a package of credit and insurance relief measures, unprecedented.
We knew that people were staying home, they were not getting incomes, how are they going to service their mortgages, how are they going to pay for their loans? Small and medium business and small and medium enterprises, especially, live hand to mouth. They don’t have much buffer during the lockdowns and even with the restrictions and mobility. They were not getting an income, there’s the government supporting fiscally, but they still have loans to service but there’s no revenue.
So we knew this was this was coming already. Very quickly, we got together with the banks, and we just discussed and said, Look, we have to weigh in on this and provide a range of reliefs. And so we worked out a package 100% deferment moratorium on loan repayments, including interest and principle for mortgages, because we don’t want people losing their homes as a result of this. And it was given for to the end of the year December 2020 for eight months. Likewise, for small and medium enterprises.
Again, I wouldn’t say was a difficult discussion, but it was a discussion that involved a very large careful weighings between what is in the public interest, as well as what is an interest of the banks, because they do need to watch that they’re not overly exposed and get laden with too much problems later on. And that’s something as a regulator, we are also mindful, so we’re a bit schizophrenic ourselves.
We didn’t want NPLs shooting through the roof with high debt burdens, at the same time, as a public organization, we want to make sure that the citizens and small and medium enterprises sail through this.
Very careful balances have to be struck so for small and medium enterprises, again moratorium world secured loans, a moratorium fully on the principal and just pay interest just to demonstrate that you can keep your head above water.
And, so, we had to work on many of these measures, credit card loans, we turns them into term loans, because people were drawing on their credit lines where the interest rates are very high.
And then, after the crisis they’re going to be like laden with this huge debt, it’s going to take years to pay off. So, again, the banks agreed convert them to a term loan with a much lower interest rate, which is something that can be paid off.
We spoke with the insurance companies and said look, this is a time and people cannot afford to lose their health and life insurance, but they can’t pay their premiums. So, we had a premium holiday, which is deferred also to the end of the year.
We worked out a variety of support measures in 10 to 14 days maximum. And we said, this will get industry baseline. Each bank or insurance company can be more generous if it wants to, but as an industry, this is a baseline.
We have no right to insist of this. We don’t have the regulatory powers to tell banks what interest you should charge or you should give a deferment. It was not even moral suasion it was just a collegial conversation of what is reasonable and what can be put out together. And because all of us are doing it together, the bank said safety in numbers and in company, and we rolled out the measures.
It was hugely important. A large number of people took it up. And I think it helped them tie over the crisis, without having to worry about servicing alone or paying your insurance premiums.
So, for me, that was amazing because it showed partnership at its best. It showed public spiritedness at its best. And it was unprecedented and very creative, too. I mean we have to design it so that you don’t stock up problems for the future. So, for me that was one of the big takeaways of the pandemic crisis.
Mary Daly: I’m just going to piggyback on that, Ravi, because if I think about it, you know, when I think about the lessons that weren’t about the leadership of the Bank, but there were about what I learned from the financial sector, it was very similar in the United States. Where we have very many banks and very different kinds of banks.
And I spent, and did all the leaders of Reserve Banks across the country, and many of the Board of Governors spent, every day we were on the phone with groups of bankers — community bankers, minority depository institutions, regional banks, big banks. How can we get this forward? So we gave them supervisory guidance and relaxation.
And, yet banks are very skeptical of relaxation. Unless you have one-on-one conversations with them. So, we deployed our teams in Supervision and Credit and they had meetings, and really said here’s what we’d like you to do. And it’s okay to do that, and we are in cooperation. And what I saw was exactly what you mentioned.
The financial system, the banks came, the financial services institutions, they came in and said, we want to do this, and so they were just looking for ways to do it, so they could get out safely and soundly.
They weren’t putting themselves in a profitable situation, and yet they were able to do the right thing. And one of the things that I feel really good about and you mentioned this in the beginning, is that banks came into this very well capitalized. Because we had taken seriously the lessons of the Global Financial Crisis, had the regulations in place. Banks had to buy those things, and we ended up with a buffer that allowed banks to be a very big part of the solution, and then they added to that.
That they wanted to be part of the solution, they saw this as a pandemic. And community banks, in particular, you know, right before the pandemic a community banker said to me, I wonder if the future of community banks is grim? And in the middle of the pandemic, the same gentleman said to me, now people understand the value proposition of community banks. And I think that was partly because everybody looked to these financial institutions, but also because it didn’t matter if you’re a community bank or one of the big banks, you were in the communities doing this type of thing to make sure that everybody got through the pandemic, the best that they possibly could.
Stephen DeLay: Thanks, Mary. I talked to many backers, who was a source of pride for them, certainly in helping their communities.
I’m going to shift gears a little bit here we’ll stay on the pandemic piece. I think it’s fair to say that historically crises have helped shaped and defined financial systems, and clearly the pandemic is unprecedented in modern times here. How do you see the financial system changing and evolving as a result of the pandemic? And Mary I’ll ask you to lead us there.
Mary Daly: You asked me to start?
Stephen DeLay: Please.
Mary Daly: So I’m going to mention there’s a lot of ways, but I’m going to mention, too, that I’ve spent a lot of time thinking about, and then I think I’ve been critical in there at the at the big and the smaller end of things. So let me start with the Treasury market.
One of the things that we learned in the crisis that, I guess it’s obvious, we are the lender of last resort, the Federal Reserve if the Treasury market gets disrupted or any markets dislocate. The plumbing of the financial system goes down, we’re going to be there to help out.
But one of the things you realize, is that there was a global pandemic and a historic thing, but I don’t think many people in the global economy thought the Treasury market would ever be dislocated. And it was.
And so the thing to take away from that is what do we need to think about treasury market reform, whether it’s centralized clearing or a variety of other things. And you know, all these regulatory bodies, Treasury and other groups, are thinking hard about this.
What do we need to do to ensure that the Treasury market that liquidity feels available to people so that they don’t run for liquidity when there’s a crisis. Because that’s what we learned when we have a central bank in the first place, and having banks be well capitalized is the best way to not have a run. You know, the best way to not have a run is to have people have confidence that they don’t need to run.
And so, with the Treasury market, I think the same thing is true. How can people get the liquidity they need and how in recognizing what a pillar of the financial system that is. And that’s true in the global economy. We’ll be talking to our global partners and see how that works so that’s one thing that will come out of this. I believe it’ll take several years but it’ll come out of this.
The second thing that I personally find really instructive is to think about small dollar borrowers and how we can do better at small dollar lending. Because, you know, Ravi said this in just a moment ago. You know if you’re a big business, you have you have a buffer. And you can access capital markets pretty simply.
If you’re a small business, it’s really more challenging. You don’t have a buffer. And you don’t have access to capital markets. But we could make people have access to smaller dollar borrowing that would allow them to insure themselves in a disruption, hopefully not one as large as a pandemic, but in a garden variety economic shock and have more access to that. And that’s something that even in the pandemic relief that we saw we weren’t as good at getting to smaller businesses, as we were to big small businesses or medium sized businesses and getting relief. So that’s what I’m thinking about in fintechs to combining the fintechs and how they help with the access in those markets with banks, and thinking about how we can just expand financial inclusion.
Because, a key piece of resiliency in an economy is access to financing through rough times. In good times it helps you grow; in rough times it helps you survive. And I think that’s a big lesson that comes out of this as it’d be great if we were a little more there was a little more equity of help across that distribution, and it’s not for lack of interest, it’s for lack of just the plumbing in the setup to do that. So that’s another thing that I think will be changing.
Ravi Menon: I’d say the financial sector has been transformed in several ways as a result of the pandemic. Just to name a few.
One, and this is probably more central banking than the financial system, is of the substantive expansion of liquidity measures, safety nets, and so on. I mean as Mary said earlier, it was a test of creativity and agility during those months. And each of us had put in place things that, if that was proposed to us six months earlier you would say you’ve got to be out of your mind, that’s not good moral hazard, and all this stuff but it forced our mind. And we were able to respond quickly and unconventionally. So I mean I would never have thought MAS would give loans to banks at 0.1% interest, provided its own lending to small and medium enterprises, but that’s what we did.
That we would accept mortgages as collateral in exchange for central bank funding. You know, like all central banks, you take top quality triple A collateral right, and here we are taking mortgages and taking credit risk, but you know it was still it was necessary. And I think that opened up our minds to what we may have to do in future.
And questions are also now being asked, do central banks stop their lender of last resort function at banks or do they go to nonbanks? If the risk has gone to nonbanks, if the systemic importance of nonbanks has risen, then the argument applies.
So, I think it has opened up our minds in ways that we did not imagine possible and so, in that sense, something fundamentally has changed. That we now have a much broader set of tools. Of course, it’s time to retire most of the tools now, but we know what we can do in future and that’s a great thing.
Second, I think the very well-known factor, it was already a trend, but it’s been accelerated tremendously, is digitalization. Finance is now irrevocably digital.
We were very surprised, last year the Singapore economy contracted by 6%. You know, so open and with much of the world, they locked down, it was quite inevitable. But the financial sector grew 5%. It grew faster in 2020 than it did in 2019. And we just couldn’t make sense, why that’s the case and is continuing to grow strongly this year. Of course, there’s some kickback and credit growth because real economy is hurting, but, overall, the financial sector did very well. Because, the substantive of amount of activity in the financial sector proceeded as before.
In fact, there was some quotes like wealth management grew very rapidly, and I was asking the banks, why is wealth management growing so rapidly? And one of the responses, people who are on lockdown at home, they have more time to look at their finances and buying things and planning and financial retirement planning and so on. So all kinds of funny things that happened.
Without digital payments I don’t know how we could have gotten through the pandemic, especially for our migrant workforce because banks, because of safe distance measures we were controlling the crowds and bank branches. How do people order food and whole range of things and I think the importance of electronic payments as a very basic core infrastructure of a modern economy just came to the fore. Because if you can’t make digital payments, then forget about home delivery of groceries and food and everything else.
That was very critical and we saw even among elderly people, my mom, using the ride hailing Apps and so on. They just learned. For a longest time they resisted now, this is not for me you do this for me. Now they have no choice. The number of elderly people who took the digital finance, internet banking. It is really quite amazing.
So I think something is fundamentally shifted. And this has huge implications for banks and fintechs and future and all else.
The third thing that has fundamentally changed across the economy, but much more so in the financial sector, is the future of the workplace. Suddenly banks realized that they could pretty much function as before, with 90% of their workers back at home. I don’t think any other industry comes close to that. Finance, more so than any other sector, has been able to function off premise. Of course there is a cost in terms of teamwork, organizational cohesion and, over time, the social capital just erodes. But what it does mean is that for prolonged periods of time, you can actually function offline.
And you’ve already see this many banks today reconfiguring their workplace, real estate, and new work arrangements. All kinds of very interesting ideas are coming up about how we organize a work in the future. And I more than any other sector, the financial sector has been at the forefront of it.
These are some of the longer term implications and effects arising under the pandemic and it’s still early to see how each will pan out, but the directions, are quite clear. Stephen, thanks.
Mary Daly: To all of those, Ravi and Stephen, I actually think on that point about the workplace of the future, I think the financial sector is finding that some of the challenging things they had in terms of reaching different populations of unbanked are just easier when you’re using a digital experience.
And you’re not having to come to a branch. So the way that they’ve put a lot more investment in their digital platforms, than in their physical branches, I think, is actually contributing to a more inclusive situation. Which you know, will hopefully get to, but I just think that I’ve seen that shifted investment. So now even smaller banks have beautiful websites and lots of easier ways to get to them than just a branch that you have to drive to and might be kind of intimidating to go to and certainly isn’t as easy for everybody.
Stephen DeLay: Thank you, Mary. So you know, Ravi, you talked about digitization. Mary, you mentioned this also. I’m going to shift the conversation to financial inclusion.
And with that acceleration of digitization in banking services, Ravi I’m going to ask you just to talk about how do we leverage that digitization for financial inclusion purposes, and what are your thoughts there.
Ravi Menon: Some of this has to be guided by public policy and public infrastructure. And some of this you just have to leave it to the innovative spirit of the private sector in the financial industry and, finally, of course, the citizens’ ability to adapt to these things. And all three are important.
For digital finance, the payment rails are very critical. We are very fortunate that we put in place a 24/7 real-time retail payment system. And we connected account numbers, bank account numbers to mobile phone numbers, I mean people have to do it, I mean it’s not done automatically but 90% of the people in Singapore have done it.
And that means, I only need to know your mobile number, I can pay you. And if I’m ordering something from a company, they just need to send me the QR code which contains the unique identifier of that company, and I can just scan and pay. It’s automatic bank to bank transfer real time and free, costless.
The payment rail is the bedrock of a modern digital economy. So, I’m very glad we have that in place.
And now we are looking into connectivity with other countries, because there’s so much e-commerce and small and medium businesses transacting across borders in Southeast Asia, for instance. These facilities are key.
The modern, not the modern, I mean the cross border payments system that we have today, it is in the Stone Age. Bank networks, huge costs, it takes days for your money to reach a counterpart, and then you know you send $100 but only $90 gets there because there are a whole range of charges and fees in between. And yet, despite all those safety measures and security measures you still have money laundering risk, you still have tax evasion, and all kinds of things.
That system is really broken. If you look at telecommunications, it has come so far. The idea of paying for a telephone call, international call it’s now archaic. There are so many ways in which you can do that, but when it comes to payments, it’s so difficult. So, I think this is the next big problem that needs to be solved. The Bank for International Settlements, BIS, is working closely with the FSB, the Financial Stability Board, they are on to this.
Many countries are now doing bilateral, and Singapore has done one with Thailand, we are exploring with India and Malaysia, to set up these cross border rails. And I hope at some point in the future, we can do with the United States, too, where you can link the real time payment systems and make cross border payments easier. Mostly individuals and small and medium enterprises benefit from this.
This is a very important part of the forward-looking agenda for digitalization. Getting up payment rails in order.
Second is adoption. How do you get the most unreachable segments of the population comfortable with this? In most of our countries, our seniors, the more elderly, find technology quite intimidating and the idea of online payments can be quite scary for them. Will I lose money? Will somebody come in and take away all my money? These are the questions you frequently get asked when you talk to them about Internet banking.
And this is hard work. In Singapore, we work with our other government agencies, in particular the Infocomm Media Development Authority, and they designed a program called “Seniors Go Digital.” It is to assist elderly persons in their digital learning journey. Senior citizens go to these dedicated one-on-one learning sessions at community centers and so on, that are spread across the island, and then you get young people to act as digital ambassadors, and so they tell the elderly person, “Uncle this is how you do this, you press this this and this, don’t ever press this, and transact digitally.” Once you show it to them and how to make a payment, how to verify credentials, they are then comfortable.
We’ve done that with hawkers. In Singapore, we’ve got restaurants, and so on, but we’ve also got small hawkers really an Asian delight, actually. Now they operate very differently. There’s a stall that’s a bit like your hamburger stalls. How do they go digital? Because it makes so much more sense for them to transact in cash. There again, we reached out to so many of them to encourage them to adopt digital payments. QR code works very well for them. You just have to scan and pay. So you don’t need to flash out a visa card and all that; that that’s really cumbersome.
The end-to-end digitalization of the economy is going to be a major part of this, and it goes beyond the financial sector.
There are several layers that need to be put in place. A digital identity. I know not all countries will go down that way for right reasons. Thankfully, we were able to because we already had a national identity scheme since colonial times. The British left that behind and we kind of continued it. So transferring making that digital wasn’t a big problem. I guess in the U.S., the closest to this is a social security number for your digital identity. If you can find a way to make that digital, then you can transact digitally.
Invoicing is another area we’re looking at because it’s not enough to just pay and the instruction to pay is in paper form. So, you got to make the whole thing digital.
What we’re realizing is that you can’t digitalize in parts because the transaction goes through many stages.
Looking at trade finance, for instance, customs documentation — lots of paperwork that’s involved in shipping, in insurance, on a regular cross border trade transaction. So, we’re looking at all those individual bits. And it comes under different government agencies. Different industry players are involved. You got to get them all together and see how we can digitalize this end-to-end so that a single stack of digital documents, verified and true, can be used right through the processes consistently.
On the digitalization front, the agenda is about inclusion, reaching out to every person, and also about making an end-to-end so that it is truly friction-free and seamless. And true gains, we’re not quite seen the full productivity gains and efficiency gains from digitalization. And I suspect it’s because it’s not integrated, we’re using bits and pieces, but it’s not integrated. And until it is integrated, we don’t get the power of the sum of all the parts. I’ll stop there, Stephen.
Stephen DeLay: Thank you, Ravi. Mary, I’ll ask you to answer that question too but we’re at 6:20 now. We have about 15 more minutes. There’s a few questions, I want to get through to for the audience particularly around climate risk and trust in the financial system. So here if we can get your response to this question, I just wanted to give you a check on the time.
Mary Daly: Well, thank you and I’ll just be brief then, and I’ll focus on one thing here, that is, you know I agree with everything Ravi said. And one of the things that I have found is that the pandemic has accelerated some of the adoption challenges and even some of the end-to-end challenges. So, let me give you two examples.
Right now, if I walked down from the Bank where I’m at to one of the stores, there’s a lot of vendors in front that have their settings set up, and they’ve all moved to Venmo.
So, Venmo is not a real time gross settlements, but it is a way that they don’t have to take cash or a card. And the pandemic made it hard for people to feel that exchanging cash was clean. They didn’t know what to do, they would have to wear gloves, take them off. It was a big inconvenience, and they didn’t want to have to go to the bank all the time, so, then they just started taking this, using Venmo. So the adoption of technologies like that, where you’re just paying electronically, and the only way, you can buy things is to have this electronic access has just made people much more willing to adopt it.
The second thing is that because, and this isn’t happening cross border yet, and all the things Ravi, I completely agree with everything you’ve mentioned, and the Fed is making Fed Now, which is a real time gross settlement system not quite with a digital identity attached to it national identity, but still it’s something that makes it more easier, and people’s enthusiasm for that has skyrocketed since the pandemic.
But on the end-to-end things, what I’m noticing is that businesses are starting this from themselves. So right now, if you want to process say I was just doing this, setting up at a will, and all these other kinds of things and getting it all processed, it’s completely electronic. From digital signatures everything, every step of the way, all the money transfers all done digitally by exchanging information that people never would have let me do in the past. They would have made me drive to a to a place where there’s somebody signing a bunch of documents and lots of witnesses, and that would have taken you know 17 weeks to get all this done, and now it takes, you know top 17 days.
That is an end to end process that I believe people are getting more comfortable with.
And now we just have to build the infrastructure. We have the technology, it’s about being active and building the infrastructure to make sure that it can happen so we’re not just doing it for these small things, we’re doing it for the big cross border pieces as well.
Stephen DeLay: Thank you, Mary. In following up on your thoughts about financial infrastructure, do you do you think that the financial infrastructure supports an inclusive financial system that empowers and benefits its end users? And Mary I’ll have you answer that question and Ravi I’ll have you answer that one also.
Mary Daly: I think it could, and I think it does in some cases. I don’t think we can just say that it will miraculously spring up and all the problems that we’ve had for decades at getting to be fully financially inclusive are going to be resolved. But it has the promise of having to the hurdles to access to be smaller than they were before. You couple that in my mind with the lessons that banks and other financial institutions learned during the pandemic, that these are customers that they helped in those moments but they might want for life now, or that they saw pockets of need that when you fix those pockets of need and you give them support it actually supports the community in the economy, which creates a broader resiliency. I think you couple that technology and our know-how with that, and you can think to the private sector will build a lot of solutions that will work and then the issue is making sure that they understand and are incentivized by policymakers to do the things that we know are going to be important for the economy.
I think Ravi already said this, but I really don’t think we need to do all of this ourselves as regulators or policymakers. The private sector is eager to do these things, we just need to imagine a playing field where they can do it safely and soundly, and also, point to areas where we need them to do certain things so incenting them to do that is the right way. Like we always do with regulation and supervision.
Ravi Menon: I have very little to add. I think, Mary has said it very well. The range of issues that that the regulatory community and public sector can do. I just add on the last point that she touched on tangentially — a safe environment.
We need to be more diligent about cybersecurity and a whole range of associated technology risks and old-fashioned cheating and scams.
More people lose money online due to very simple scams rather than sophisticated cyber attacks. It’s not easy to attack the innards of a bank and take money out of your deposit – that doesn’t happen. What happens is people deceive citizens and make them do a transfer that is not intended. Credentials are compromised.
So, we need to, as we go on the digital part, if you want to maintain public confidence that this works, that this is efficient, this is better, and if you take basic precautions, basic cyber hygiene measures, this is actually more secure and safer than cash.
I sometimes do worry about it, because we do see elderly people falling victim to a variety of scams online, and they end up you know losing money or sending money to people that they did not intend to. This is one area where you need to be quite on top and make sure confidence is preserved.
Stephen DeLay: Thank you, Ravi I’m going to push us onto a different topic of climate risk. Clearly, we’re all feeling the impact of climate risk locally and we’re seeing local efforts to address those issues, however, it’s clearly a global interconnected problem.
And from that perspective, what global cooperation efforts and issues are critical from your perspective? Ravi if I could ask you to lead us off there, I appreciate it.
Ravi Menon: This is such a complex subject. Climate change and the drive towards sustainability. And key question for us, is what do central banks, financial regulators, and the broader financial industry do? How can we be a force for good to secure a sustainable future? I think several things.
One is managing climate risk. And that’s basic. I mean, we are in the business of managing risks, and so we need to move the global financial system to a position where they can manage environmental risks, as well as they manage credit risks today.
This is completely new stuff. There’s a lot of mutual learning that’s necessary, and I think regulators are talking to another actively to learn how to do this. How can we integrate environmental risk management into our core supervisory processes? It’s not easy.
There are lots of conversations internationally. The Network for Greening of the Financial System, the Basel Committee, the FSB, there are lots of conversations about these things. We are putting together supervisory best practices, so that we can learn from one another.
Likewise the industry. More and more of us countries are moving towards stress testing the portfolios. The Bank of England has done it. ECB just concluded one.
We are doing one next year to do an industry-wide stress test on climate scenario. Different scenarios may affect investment portfolio of insurance companies, their insurance books. This is something that requires tremendous coordination and cooperation and learning from one another. Because we are in very uncharted waters.
Second, by its very nature, most of the activities that need to climate change and global warming across borders. By nature, supply chains transverse the globe. And we need to take a global approach, which also means taking a consistent approach with some of these things.
For example, you need a disclosure and reporting. This is very key. If you don’t have good disclosure and reporting of your environmental exposures and risks, then it becomes very difficult to use finance to match the transition towards a lower carbon future. So, there’s active discussions internationally again on establishing a global reporting standard.
The US SEC is heavily involved. And, actually, the MAS and the US SEC are working very closely together in a technical group to go through the template for what we hope will be eventually a global reporting standard so that everyone’s reporting is consistent and comparable across companies and countries.
Today, that’s not the case. Everyone chooses how they want to report environmental risk, so I think that is very important.
We need to collect good data, and that means that technology will have to play a big part. How many of us know what our carbon footprint is? As an organization, as a financial institution, as a borrower and so on. And there’s a lot of greenwashing going on the claims being made that are not verified by data.
So, we need mechanisms to have that data collected. We need mechanisms to verify. We need agencies that will certify independently, so that you know that if you’re financing something that you think is green, it is actually green in reality. There’s a lot of work going on that front too.
Like everything about climate change, it is a global problem. The problem is global, the solutions have to be global. And there are many of these things that I spoke about cannot work by country alone. It has to be coordinated, it has to be global. Even taxonomies, for instance, what each person considers as green varies. We have to accept different countries have different definitions of what is green, because they have different circumstances.
But you need a way to compare those differences, so that you can make judgments. You don’t have to standardize the taxonomy, but you need to make sure that the taxonomy can be compared and understood, and to some extent, interoperable. A tremendous amount of work, but I’m very, very encouraged by the speed with which there’s been movement on this front.
Just the last two years, actually since the pandemic. I think it has just awakened mankind to the fragility of the nature of the ecosystem, the fragility of nature, the importance of paying heed to the environment.
It’s not directly related to the pandemic, but somehow in our mental map, we are making those connections that we better take care of the environment before we get ourselves into serious trouble. And so there’s a lot of commitment and seeing seriousness to this, and I’m very grateful for that.
Stephen DeLay: Thank you, Ravi. Mary, do you want to share your thoughts on the topic?
Mary Daly: Yeah, I’ll just be brief here, given the time. But let me just say that the point I really want to emphasize that Ravi said is that: all of the central banks across the country, across the globe rather, have different mandates about what they can do. And in the United States, we have very different regulators. It’s the SEC who’s working with MAS to talk about that taxonomy or how do you measure or define an environmental risk – what’s the reporting and disclosures.
So, the Federal Reserve as a central bank has a very different role in some of these things, then it does at the ECB or in MAS. And at the same time, we all have to understand what’s going on. And so that’s the critical piece; this is a global issue.
To my mind, Ravi, why the pandemic brought us this new clarity: there’s really two things. We had a lot of time to stay home and watch TV, and it allowed us to see extreme weather all across the globe take devastating tolls on different parts of the globe. And it’s really visible. You don’t have to just live in California to know that we were had all these wildfires. You can just see on TV that these have been terrible and devastating, and that it makes insurers and bankers think twice about ensuring and lending to those entities. And then that kind of spills over to all the other groups that say, “okay, this is not only a risk, but it’s a risk we need to think about and pencil in.”
The other thing that the pandemic did that brought climate to the forefront is it just highlighted how interrelated we all are. For most of us, the pandemic didn’t start at our doorstep or in our nation and our block would have it, yet we were affected. And really all you have to do is go outside at the ports, and well probably in Singapore it’s the same, the global supply chain is highly disrupted right now.
And recognizing that’s disrupted by a pandemic, but it could easily be just as disrupted by severe weather that just works its way across the globe at all different times and is hitting one country and the supply chain is very robust and very fragile all at the same time. And it backs up quickly if one component goes down. And so that’s made people much more aware that this is a real issue that we have to think about. And at the Federal Reserve, you know we’re focused completely on risk. What are the risks here? To the payment system, to the financial system, and to the economy more generally across all of those dimensions.
And it will take a global solution and I think that collaborating over the pandemic will hopefully and has already, I too Ravi am quite encouraged, will help us recognize the benefits of collaborating on climate. And really working towards building this to a more resilient future.
Stephen DeLay: Thank you very much. We’ve had such a robust conversation on the topic so far. We’re running out of time, here we have a couple of minutes left I don’t even know if we can introduce this last topic but we’ll try.
So it was really about just maintaining trust in the financial system. And given all of the technological change that’s going on in the system, how do you ensure that they’re still trust in the system? how do you maintain trust in the system amidst all of this technological disruption?
So we have a couple of minutes left so I’ll ask you to be concise here. And Mary, I’ll give that one to you first and Ravi we’ll have answer follow up if we have time, thank you.
Mary Daly: Yeah, I’m going to give a speed answer.
So people are not going to be afraid of technology. Even Ravi’s mother is using it to buy food and go on ride hailing. People [will trust] it if you show them how to use it. And then the critical piece is that we need to make sure that people understand the cyber risk. They understand the scamming risks. That we understand the cyber risks that underlie this from hacking and other things.
If people see too many of those disruptions, then the trust will falter. So, educate and keep educating, but also let’s make sure that we understand the risks ourselves and we’re teaching people what those risks are so that they use technology to their benefit. As opposed to they see it, and now it’s scary because they paid the wrong person or they’ve seen a business go under because they were they were hacked or something using these digital services.
So, people do trust the financial system. And, the pandemic helped them trust it more because it worked well to be a force of good in this terrible situation we find ourselves in. And that’s an important starting point for going forward.
Stephen DeLay: Thank you.
Ravi Menon: Totally agree, Mary. The trust is the bedrock of the financial system. It was severely dented in 2008, 2009, because so many in the country, well, plain misbehaved, took reckless risks, did not do the right thing by the customer, and you know brought about a crisis.
And it’s taken many years to repair. I don’t think it’s being fully repaired, especially in the advanced economies. Attitudes remain quite hostile towards the financial system. And thankfully, in Asia, its better. In Singapore, I would say the trust is good.
But trust is something you have got to work, nonstop. It’s always work in progress. And I think it has improved, even in the advanced economies, because of the crisis. Because if trust is built when you stand by your customer, and you are there to support when he is in need, it’s like the insurance company and the bank manager.
And they’ve done this by and large during this crisis. So, people know that the banks are with them. And if we can keep building on that spirit, trust will be maintained.
I spoke about scams. Recently, there was a series of scams and people lost their money. It wasn’t their fault, but it wasn’t the bank’s fault. Somebody penetrated the telecommunications system. Now in a situation like that, the bank could say, well it’s not my fault, I didn’t do anything wrong, so the payment is true. But the banks chose to step forward and say, I’ll compensate you for this; this is a small sum of money. It’s not our fault so we’re not admitting liability, but it’s not your fault either. Make this good, and we’ll work with the telecommunications companies to see how we can avoid this in future.
That’s how trust is built. When you look out for the customer.
And repeatedly through thick and thin, trust is built. And I hope we can continue doing that, even as we navigate our way out of the current crisis. Thank you.
Stephen DeLay: Thank you, Ravi. Mary and Ravi, thank you so much for taking the time to talk to us today.
We’re out of time, unfortunately. We could be on these topics for hours and it’s been really enjoyable hearing your views on them. Thank you so much for your time.
To the audience, we have a 20 minute break here, so you can just rejoin in 20 minutes for additional conversation. Thank you very much, Mary. Thank you very much, Mary and Ravi, appreciate your time.
Mary Daly: Thank you. Very delightful.
Ravi Menon: Thank you.