Speaker 1: Hello, and welcome to another episode of the Odd Thoughts podcast.
Speaker 1: My co host Joe Wisenval is away this week. I've
Speaker 1: actually noticed a pattern to Joe's absences, which is that
Speaker 1: he suspiciously goes missing whenever we're scheduled to talk about
Speaker 1: negative rates on the show. In any case, we recently
Speaker 1: had the annual gathering of monetary policymakers in Jackson Hole, Wyoming,
Speaker 1: and as you can imagine, negative interest rates were a
Speaker 1: big feature of that meeting, and in fact, the title
Speaker 1: for this year's symposium was Challenges for Monetary Policy, which
Speaker 1: kind of gives you an idea of the headspace that
Speaker 1: a lot of central bankers are operating in at the moment.
Speaker 1: But one of the most interesting things to come out
Speaker 1: of Jackson Hole this year, certainly a thing that got
Speaker 1: a lot of attention, was a speech by Bank of
Speaker 1: England Governor Mark Karney, where he talked about the idea
Speaker 1: of getting rid of the dollar as a reserve currency
Speaker 1: and basically replacing it with a virtual currency that would
Speaker 1: look a lot like Facebook's Libra in the sense that
Speaker 1: it could be a sort of consortium of digital currencies
Speaker 1: maintained by central banks, a multipolar virtual currency. He actually
Speaker 1: called it a synthetic hegemonic currency, or s h C
Speaker 1: for short. Now, Carney's idea did raise a lot of eyebrows,
Speaker 1: not least because central banks have been critics of cryptocurrencies
Speaker 1: in general and of libra in particular. So I thought
Speaker 1: to myself, who better to help us gain more insight
Speaker 1: into Carney's thinking and to also talk to us about
Speaker 1: negative rates and the future of payments and the future
Speaker 1: of all of finance in fact, than Hugh van Stine's.
Speaker 1: Hugh charired a review of the future of finance for
Speaker 1: Mark Carney and was his senior advisor at the BOE.
Speaker 1: He'll also be shortly joining UBS as an advisor to
Speaker 1: their CEO, and he's taking a break from his gardening
Speaker 1: leave to come on odd lots Hugh. It's so good
Speaker 1: to have you, Tracy, Thanks very much for having me.
Speaker 1: So I guess we need to start with Carney's Jackson
Speaker 1: Hole speech. But we do know that Carney is due
Speaker 1: to leave the BOE in a few months, So I
Speaker 1: guess my question is, since you are someone who worked
Speaker 1: quite closely with him, how seriously should we take his
Speaker 1: proposal for this sort of multipolar virtual currency. Well, look,
Speaker 1: I mean I'm going to speak myself here rather than
Speaker 1: for for the mark. I mean, I thought it's a
Speaker 1: really great speech because it put its finger on a
Speaker 1: number of the dilemmas that policymakers are wrestling with. I mean, first,
Speaker 1: let's let's be clear. Technology is transforming the basis advantage
Speaker 1: and financial services, and big texts are entering, fin texts
Speaker 1: are playing scale is far more important, and the regulations
Speaker 1: to catch up. So I think first and foremost, it's
Speaker 1: about the way technology is transforming the system. I think
Speaker 1: second is that payments is the battleground between big tech
Speaker 1: payments firms and banks, and it's kind of existential. And
Speaker 1: as you've pointed out regularly, Tracy, the combination of negative
Speaker 1: rates and a disruptive environment is one which is an
Speaker 1: existential threat for for banks. And I think the challenge
Speaker 1: for firms entering payments liber Facebook is just the first
Speaker 1: of which most recent of which is pretty challenging. And
Speaker 1: I think that one pushback that some had is that,
Speaker 1: you know, this was a little bit right out there
Speaker 1: in terms of forward thinking. But one question I often
Speaker 1: got challenged is what can we learn from the Chinese
Speaker 1: financial system is it just the gallapagus of the financial world.
Speaker 1: And I think it's not science fiction. I mean, there
Speaker 1: you've got and Financial and we chat pay controlling of
Speaker 1: online payments, and Financial now has got the most customers
Speaker 1: of any financial services firm in the world. If you
Speaker 1: can combine what they've gone in China and India, it's
Speaker 1: over a billion five time city group. So I think
Speaker 1: that the payments, both in terms of currency and in
Speaker 1: terms of new entrants, being the battleground. I think he's
Speaker 1: put his finger on something really important right in China
Speaker 1: has actually announced that it is close to releasing its
Speaker 1: own cryptocurrency. Whether or not that's going to be an
Speaker 1: actual cryptocurrency or something that's more akin to digital cash,
Speaker 1: we don't know just yet, but but definitely there seems
Speaker 1: to be some interest from some central banks, at least
Speaker 1: in virtual currencies. So, just on the notion of payments,
Speaker 1: you know you've said before and you just said it
Speaker 1: then that payments are now the battleground. Can you expand
Speaker 1: on that a little bit? Why is there so much
Speaker 1: pressure around this particular space in financial services, particularly low rates.
Speaker 1: They're not that many areas which have got strong growth
Speaker 1: and payments clearly is one where people are moving offline
Speaker 1: to online. I mean, one thing that we on earthed
Speaker 1: in our port was that, let's take a sweet, we've
Speaker 1: had an eight reduction in cash transactions the last decade.
Speaker 1: The UK is probably four or five years behind that,
Speaker 1: the US is probably another four or five years behind that.
Speaker 1: There is a very long tailwind of shifting commerce online
Speaker 1: and everyone wants to be the gateway into the online
Speaker 1: commercial world. So I think that's one key aspect around payments.
Speaker 1: I think second is these are person to person apps,
Speaker 1: whether it's you know, Ali in Pay in China, whether
Speaker 1: it's Swish and Sweden, whether it's Ideal in Holland. These
Speaker 1: are sort of category killers. You know, they really munch
Speaker 1: through cash and are provide convenience and flexibility for customers,
Speaker 1: which you know customers are quite frankly lapping up. So
Speaker 1: I think there's that transformation. But I think the big
Speaker 1: thing for financial regulator and a particular central bank where
Speaker 1: you know money is what it's all about, is the
Speaker 1: role of big text either becoming a toll road that
Speaker 1: they just want to be the toll which people get
Speaker 1: into the commercial world, but potentially be coming much bigger
Speaker 1: and financial services, and that with their advantages of scale
Speaker 1: with other related businesses quite frankly a way of thinking
Speaker 1: which is very different from financial services. So if you
Speaker 1: take the Libra white paper plus all the other papers
Speaker 1: they put out on that day, you know, there's over
Speaker 1: eighty pages on the tech and there's just under a
Speaker 1: dozen pages on the way the syndicate work. There's not
Speaker 1: a single page on regulation. And I think that's really atypical,
Speaker 1: and I think that's something which that means it's really
Speaker 1: difficult for a traditional policymaker regulator to get their heads
Speaker 1: around because there's just nothing there. Well, I was going
Speaker 1: to ask you the fact that a lot of these
Speaker 1: tech companies have made such massive inroads into payments so quickly,
Speaker 1: is that actually down to the tech or is it
Speaker 1: down to regulatory arbitrage in the sense that they are
Speaker 1: not hindered in the same way that banks are. I
Speaker 1: think there's an element of an un leveled playing field
Speaker 1: where they are coming in on a different basis. But
Speaker 1: it doesn't have to be that the big text win.
Speaker 1: I mean, just go back to Sweden. Swishes a bank
Speaker 1: consortium app which allows anyone to pay one at anyone,
Speaker 1: So you need to get over the hurdle of antitrust
Speaker 1: about how banks collaborate with each other. But there's a
Speaker 1: country where actually it wasn't the big text who drove
Speaker 1: the innovation. So I think this is much more about
Speaker 1: do the banks have the budget, do they have the
Speaker 1: ability to respond? And of course, going back to one
Speaker 1: of your favorite topics, in a world of negative rates,
Speaker 1: bank profitability is pinched and as a result of that,
Speaker 1: they just don't have the tech budgets that some of
Speaker 1: these other firms have. And I think the other bit
Speaker 1: is that you know, I mean I met with over
Speaker 1: entrepreneurs and fintech companies for the review I did for
Speaker 1: the governor. They have a very different profit motivation. They
Speaker 1: can withstand losses for three five more years. There's not
Speaker 1: a single bank which can really do that art for
Speaker 1: for a five year basis, so they just start with
Speaker 1: a very different basis of competition. I do want to
Speaker 1: ask you about regulating payments come panies, but before I do,
Speaker 1: you've mentioned China several times as being very ahead in
Speaker 1: the payment space. Um, we have things like Ali pay,
Speaker 1: and we chat over here. How did they get to
Speaker 1: that place? Because a lot of people would call them
Speaker 1: a sort of special case in the wider evolution of
Speaker 1: technology and financial technology in particular. I think it's a
Speaker 1: really important exam question to think about what we can
Speaker 1: understand and what may be borrowed from other markets, and
Speaker 1: what's what's different. So first is the payment firms are
Speaker 1: really pump primed by a big tech firm. So whether
Speaker 1: it's Ali with U and Financial or we Chat with
Speaker 1: we Chat pay, they use their existing cleon tell and
Speaker 1: network effects to the hugely sair advantage. I think second
Speaker 1: is that they really did offer phenomenal promotions to get acceptances.
Speaker 1: So in one case they offer taxi drivers in ebaging
Speaker 1: a premium if clients paid with Ali pay, and also
Speaker 1: gave the clients a discount if they're paid, So they
Speaker 1: were really smart about discounting and generating client interest. And
Speaker 1: then and the third of course is maybe what is
Speaker 1: different is they've got a whole financial supermarket. Now in
Speaker 1: most Western regulatory structures, different regulators have have have purchased
Speaker 1: on different parts of the financial system, and you've got
Speaker 1: one financial supermarket which is a bit different. The other
Speaker 1: error which is is different to China is identification. There
Speaker 1: is an element that everyone is identified, and one of
Speaker 1: the big issues that everyone's wrestling with in the West
Speaker 1: is how you can make how you reduce fraud, and
Speaker 1: how you make sure you know who your client is.
Speaker 1: And actually some of the emerging markets probably have leapfrogged
Speaker 1: the West on on this and maybe and obviously quite frankly,
Speaker 1: have a different sense of um, you know, libertarian values
Speaker 1: about what the States should or shouldn't know about you. Right, So,
Speaker 1: how much of the China example would be replicable in
Speaker 1: for instance, at the UK or the US. Well, I
Speaker 1: think so, First, you've already got some pretty strong capacitors.
Speaker 1: And I love Alex ram pull at A sixteen Z
Speaker 1: has got a great line that the quintessential debate between
Speaker 1: an incumbent and a new entrant is does the new
Speaker 1: entrant get distribution before the incumbent gets innovation? And I
Speaker 1: think that battle is really about you know, what China
Speaker 1: shows us is that the new entrant got distribution incredibly quickly.
Speaker 1: And I think as you look into the States, you've
Speaker 1: got some pretty serious payment firms Visa, MasterCard, MX, PayPal,
Speaker 1: as well as some of the key banks, JP, organ
Speaker 1: and so forth, which have got really big positions in
Speaker 1: payments already, I think two very few big texts want
Speaker 1: to have the hassle of bank and payments regulation and
Speaker 1: all the capital that goes with that. So most of
Speaker 1: the firms so far I've tried to be a wallet
Speaker 1: or or or a toll road on the back of
Speaker 1: the existing banking system. But you know, what I think
Speaker 1: we could see is that over a period of time
Speaker 1: these firms could grow broader and deeper. And many of
Speaker 1: the financial FinTechs that I met have ambitions for, you know,
Speaker 1: quite frankly, world domination. And I think therefore it's about
Speaker 1: making sure that the banks and the payment firms respond,
Speaker 1: you know, and really understand that existential challenges pretty real, right,
Speaker 1: So as these tech firms potentially grow bigger and encroach
Speaker 1: ever more on the financial space, and to your earlier point,
Speaker 1: what are the challenges posed by that for central bankers?
Speaker 1: How are they exactly supposed to respond to this new
Speaker 1: group of financial intermediaries. So there's a couple of things,
Speaker 1: and it does vary country by countries. So first is
Speaker 1: around innovation. Most geographies want to encourage innovation of new firms,
Speaker 1: but in many jurisdictions you've got a concept of a
Speaker 1: startup or you've got a systemic financial payments firm, and
Speaker 1: very little in between. And so I was struck that
Speaker 1: the Singaporeans in the last year injected a new third
Speaker 1: category saying, actually, if you've got half a million and
Speaker 1: billion customers, we need to deal with you in a
Speaker 1: different way. And so payment regulation has to probably be
Speaker 1: updated to reflect that these are now very large firms
Speaker 1: which may not yet be systemic, but whose failure would
Speaker 1: be pretty brutal for the system. I think second is
Speaker 1: around what it means for the banking system. I use
Speaker 1: skimming off the cream of profits for banks and leaving
Speaker 1: them just simply as dumb pipes, in the words of
Speaker 1: one of my colleagues who who looks at this space,
Speaker 1: or maybe even maybe not done pipes. That's undfair, high
Speaker 1: cost due diligence machines, but nonetheless not very profitable. I
Speaker 1: think that's worth well, yeah, I think that is, and
Speaker 1: I think that but that that it is interesting that
Speaker 1: quite a few of the payments firms are trying to
Speaker 1: rely on the know your customer checks that the banks do,
Speaker 1: and then they don't get rewarded for it, and so
Speaker 1: there is to be honest, a slight unleveled playing field
Speaker 1: between payment firms and banks in most but to be honest,
Speaker 1: not all jurisdictions. But the third thing tracy there is
Speaker 1: coming back to actually who's being left behind? And I
Speaker 1: know that that I was struck by a huge interest
Speaker 1: in what does the decline of cash mean for those
Speaker 1: who potentially may be getting left behind, whether it be elderly,
Speaker 1: disadvantaged or potentially disabled. And if you look at Sweden,
Speaker 1: where cash has fallen by eight percent of the last decade,
Speaker 1: they start to hit some crunch points. And one thing
Speaker 1: that I spent some time looking at in the review
Speaker 1: is how close are we to those crunch points in
Speaker 1: the UK or other markets? And what would you do
Speaker 1: to make sure that there is a minimum or even
Speaker 1: a viable infrastructure to at least maintain that cash system.
Speaker 1: And so you end up with some quite out there
Speaker 1: discussions of should in the long term it be the
Speaker 1: responsibility of the state or the central bank to keep
Speaker 1: the cash economy viable. But I think you know, for
Speaker 1: many listeners in the States that sounds like a bit
Speaker 1: of site sci fi, but it's something which in Norway
Speaker 1: and Sweden, where less than ten per cent of transactions
Speaker 1: are now done with cash, is something which is pretty important.
Speaker 1: So why exactly do we need cash? So there's a
Speaker 1: big debate as always about what is the right mandate
Speaker 1: for the central bank. At the moment, it's society's decision
Speaker 1: how we pay, not the central banks. And so I
Speaker 1: think that the Bank having like other central banks, takes
Speaker 1: it as a political decision what the future of cash
Speaker 1: should be. And if you look at the sort of
Speaker 1: a debate in history, I mean in the nineteenth century
Speaker 1: there were some pretty big debates about who had the
Speaker 1: responsibility to print money, should you have private sector money
Speaker 1: or not. Today we're gonna be debating who how much
Speaker 1: should there still be cash in the system. I think
Speaker 1: over the next ten years what we're talking about is
Speaker 1: not cash less, but just increasingly cash light as a
Speaker 1: year by year more payments are done online. But I
Speaker 1: think it's really a political discussion, and if you look
Speaker 1: in Sweden, it's getting more intense about you know, where
Speaker 1: the politics lie. And I think at the moment, the
Speaker 1: assumption is there should be some cash to allow people
Speaker 1: to transact. But you know, you and I can debate,
Speaker 1: you know, twenty years out what that should be just
Speaker 1: when it comes to the sort of value of cash
Speaker 1: in a society. If we go back to the negative
Speaker 1: rates idea, I mean, negative rates basically make cash uncompetitive,
Speaker 1: whether it's physical and you're stuffing it under your mattress,
Speaker 1: or whether you know you're putting it in a bank
Speaker 1: and it's a sort of digital number. What does that
Speaker 1: mean for central bankers who whose purview is you know,
Speaker 1: of course monetary policy. It's all about the money and
Speaker 1: cash is uncompetitive. So look on this I should really
Speaker 1: say this is my personal view than the banks view.
Speaker 1: But obviously we don't have negative rates in the UK.
Speaker 1: When I was Morgan Stanley, I argued vociferously that negative
Speaker 1: rates were a high risk experiment, and in particular that
Speaker 1: you know, most of modern macroeconomics takes the financial system
Speaker 1: and then assumes it away just basically ignores banks and
Speaker 1: intermediaries and their own actions. And I think ignoring that
Speaker 1: friction comes at a cost. And you can see that
Speaker 1: the way that negative rates are played out, As you
Speaker 1: know you were discussing a few weeks ago, Japanese bank
Speaker 1: regional banks are the least profitable in the world and
Speaker 1: actually have really been sort of supported by clipping coupons
Speaker 1: as government bonds get get revalued. I think that the
Speaker 1: corrosive impact of negative rates on bank profitability is very strong,
Speaker 1: and I think there's been two great new papers, one
Speaker 1: by Professor Charles Goodheart or the lsc in another and
Speaker 1: norgious nor justis Bank Working paper, both of which you
Speaker 1: challenge the orthodoxy and say, actually, if you ignore banks
Speaker 1: and insurers, you do it at your peril because as
Speaker 1: you get towards low rates and move into the les
Speaker 1: in Wonderland rule world of negative rates, the credit transmission
Speaker 1: simply becomes much less effective. And I think that's really
Speaker 1: something which policymakers need to weigh up as we think
Speaker 1: about confronting the global slowdown. I certainly, for my vote
Speaker 1: would be hardly against any further moves more negative. And
Speaker 1: I think also what really struck me doing the review is,
Speaker 1: you know, tech is really important, but also cyber defense.
Speaker 1: European banks, particularly Urozone banks, are spending almost half the
Speaker 1: proportion of their tech budgets on digital transmation then their
Speaker 1: US colleagues. Now some of that is being subscale, and
Speaker 1: ye know, we can debate whether there should be more
Speaker 1: M and A in Europe. But some of it is
Speaker 1: just the lack of profitability, and of which negative rates
Speaker 1: is a key component. So I think it's a it's
Speaker 1: a tough experiment, and that's before we go onto you know,
Speaker 1: people storing cash in deposits and and being disincentivized. So
Speaker 1: I think it's a remains a high risk experiment here
Speaker 1: three or four years on. But just on this point,
Speaker 1: this is one thing that I don't understand, because central
Speaker 1: banks must know that banks are important transmitters of monetary policy.
Speaker 1: So if banks are structurally unprofitable, doesn't that worry the
Speaker 1: central bank? I think it does. But I think that
Speaker 1: what you've put your finger on is a as a
Speaker 1: key difference between probably the Anglo Saxon world and else
Speaker 1: and some of the other systems, where I think the
Speaker 1: Anglo Saxon world firmly believes in a positive interest rate,
Speaker 1: even if it may be low. I think a second is,
Speaker 1: you know, because macroeconomics have just assumed this way, there
Speaker 1: is very very little in the literature that central bankers
Speaker 1: are relying on to understand how this works. And I
Speaker 1: think it's fair to say negative rates work in in
Speaker 1: quote a myriad of ways you know, they obviously impact
Speaker 1: net interest income margin further banks like the top line,
Speaker 1: but in some cases as your markets get revalued up
Speaker 1: commission income, the sale of asset amount of wealth mantial
Speaker 1: products can increase low rates. Clearly a suppressed bad debts,
Speaker 1: and that's been a key defense of you know, ECB
Speaker 1: and and and others in support of the policy. But
Speaker 1: when you really dig deep, it's probably more QUEI than
Speaker 1: negative rates who have done that, because there's more about
Speaker 1: tackling the bad debt problems in Spain, Portugal, Greece. Itally
Speaker 1: and arguably QUI would have been more effective than negative
Speaker 1: rates and suppressing it. But you know, as you and
Speaker 1: I and your listener though, that's already priced in. So
Speaker 1: at this point, you know, lower lower bad debts is
Speaker 1: priced in. It's much more about what the next step
Speaker 1: is from here, and a very unprofitable system is one
Speaker 1: which is more brittle, and so I think that's a
Speaker 1: that's definitely concern one. You know, Larry, someone's recently came
Speaker 1: up with the great um analogy about black hole economics.
Speaker 1: The one that I've debated more with a bunch of
Speaker 1: academics I've been working with is it's more like steroids.
Speaker 1: Storids and short blasts can be very effective in repair,
Speaker 1: but long term dependency on steroids starts to dissolve your
Speaker 1: bones and makes the pay more brittle. And maybe negative
Speaker 1: rates are more like steroids than other analogies. So just
Speaker 1: to continue that analogy, if you have banks that are
Speaker 1: sort of reliant on the steroids of easy monetary policy,
Speaker 1: and we're reaching the limits of that potential monetary policy.
Speaker 1: And at the same time, payments is a space where
Speaker 1: you can still make money as a financial intermediary, but
Speaker 1: you're getting a lot of tech firms encroaching on it,
Speaker 1: and in the meantime, lending out money doesn't actually earn
Speaker 1: you any interest. What does that mean for the banking
Speaker 1: business model? Is there a future for banks in their
Speaker 1: current form? I think that no. I I firmly think
Speaker 1: there is, And I think we go back to this
Speaker 1: that it's first technology at one level allows many new entrants,
Speaker 1: but also provides real scale economies. And in a world
Speaker 1: where let's say large corporates are obsessed, rightly obsessed about
Speaker 1: their security and money, the firms who've got the single
Speaker 1: best cybersecurity should win out. So number one there's a
Speaker 1: I think tech is becoming an arms race for the
Speaker 1: winning financials and back sorry, winning banks. So I think
Speaker 1: that's one aspect which is really important. I think to
Speaker 1: what flows from that is scale is more important. And
Speaker 1: so it may well be that actually the combination of
Speaker 1: low rates and tech actually accelerates more M and A,
Speaker 1: which is you know, let's be not let's be honest,
Speaker 1: has been somewhat on hold in recent times, and you
Speaker 1: can see that with a couple of recent US transactions
Speaker 1: which have really been around payments and the tech space.
Speaker 1: And I think third is it really will be about
Speaker 1: becoming a low cost manufacturer. And so I think there
Speaker 1: is going to be relentless hard work for bankers and
Speaker 1: making sure they've got a lean and a very effective platform.
Speaker 1: Because you know, throughout my professional care career, let's take
Speaker 1: sort of um, when I used to sit on and
Speaker 1: exutary trading for many many years ago before we got
Speaker 1: moved into the research box. The you know, commissions have
Speaker 1: gone down through thick and thin, double digit year by year.
Speaker 1: And I think that banks have been able to confront
Speaker 1: that through becoming more efficient and more scaled. So I
Speaker 1: think there's a lot of industrial logic which needs to
Speaker 1: flow from this, but they'll probably need a bit of
Speaker 1: luck as well. Is there space for regulation to play
Speaker 1: a role in this? Could payments companies big tech companies
Speaker 1: entering the payment space? Could they be regulated like banks?
Speaker 1: And one of the reasons I asked this is because
Speaker 1: one of the outcomes of your review was the BOE
Speaker 1: starting a consultation on opening access to its balance sheet
Speaker 1: to payment providers, which you know it's kind of uh
Speaker 1: controversial in many ways. Yeah, I mean so, I think
Speaker 1: the way that the President I see this through is
Speaker 1: having a level playing field. It is not the job
Speaker 1: of the bank to pick winners or losers, but provider
Speaker 1: the the infrastructure and set of rules and standards to
Speaker 1: ensure that there is just a great suite of financial
Speaker 1: services which are safe and secure for society. So I
Speaker 1: view this much more about the level of the playing fields.
Speaker 1: On one hand, if there are some really high quality
Speaker 1: payment firms who pass some pretty high hurdles of security,
Speaker 1: cybersecurity and resilience, then why shouldn't they potentially have access
Speaker 1: to part money at the Central Bank overnight and help
Speaker 1: a foster competition. But the other aspect of a level
Speaker 1: playing field is the payment firms or the Big Text
Speaker 1: have to be held to the same standards as banks,
Speaker 1: So whether that be with knowing your customer and antimony
Speaker 1: laundering controls, whether be cybersecurity, whether it be resilience. And
Speaker 1: that's why the other part of my report was to
Speaker 1: argue for updating payments regulation. Now within the UK, that's
Speaker 1: obviously a role for the government and they're kind of
Speaker 1: busy at the moment with other things and I can't
Speaker 1: imagine what, but the former Chancellor, you know, did commit
Speaker 1: the Treasury to looking at a updated payments regulation. As
Speaker 1: I said, I think what the singer Porens of Dana.
Speaker 1: Introducing a third category or you know, large important payment
Speaker 1: firms which are held high standards is at least an
Speaker 1: intriguing idea which you know, many jurisdictions I'm sure must
Speaker 1: be looking at. And the other bit about reciprocity of data.
Speaker 1: So one of the big challenges is if the banks
Speaker 1: are asked to share their data with Big Text, what
Speaker 1: do they get in return, or at least how do
Speaker 1: they get compensated for that? And so a level playing
Speaker 1: fielding information is probably just as important as having really
Speaker 1: high standards. So I'm going to ask you a very
Speaker 1: broad question now for which I ask your forgiveness in advance.
Speaker 1: But when you look a decade into the future, what
Speaker 1: exactly does the financial system look like to you? Who
Speaker 1: is dominating and how are central bankers responding? Well, look,
Speaker 1: I have the humility to know that I thought about
Speaker 1: to try and think about scenarios because none of us
Speaker 1: are clever enough to to be able to forecast the future.
Speaker 1: But so let me let me turn it around saying
Speaker 1: that the scenarios that I think policymakers really must think through.
Speaker 1: So one would be that if we have a two
Speaker 1: by two of the rate environment and have the degree
Speaker 1: of disruption, the one where we have negative or low
Speaker 1: rates and high disruption is very challenging for the banking system.
Speaker 1: So thinking through what does that mean then for scale
Speaker 1: their budgets to respond. What can they be allowed to
Speaker 1: do in response to these competitive challenges potentially changing you know,
Speaker 1: what market shares they can have to try and have
Speaker 1: more scale. That's something I think is really important to
Speaker 1: weigh up. A second is if big tech, in the
Speaker 1: scenario where big texts become really important, or at least
Speaker 1: even fin techs are a much broader range of players
Speaker 1: are skimming the cream. What standards do we hold them to,
Speaker 1: particularly knowing that the network effects are so powerful that
Speaker 1: when a firm is large, like let's say the Chinese
Speaker 1: payment firms, it's very difficult to row them back. And
Speaker 1: so you know, one reason why I think the bank
Speaker 1: talked about you're making sure they want to get ahead
Speaker 1: of Libra of than just respond when it's out, is
Speaker 1: to try and think through firms which could become systemic
Speaker 1: and get further ahead. I think the other aspect of tracy,
Speaker 1: which is slightly more you know, basic, but I think
Speaker 1: it's really important, which is the central bank needs to
Speaker 1: have the capabilities and the kind of know how of
Speaker 1: the tech world. You know, most central banks around the
Speaker 1: world are dominated by outstanding public servants who have got
Speaker 1: PhDs in economics, and I think that's an important skill set,
Speaker 1: but we need to make sure that they also have
Speaker 1: much richer understanding of cyber of technology and you know,
Speaker 1: the tools and so you know, one scenarios that the
Speaker 1: regulator of the future is more like on the Star
Speaker 1: Trek enterprise, you know, with the data coming in automatically
Speaker 1: to you know, screens and understanding so they can get
Speaker 1: their finger on the pulse much more quickly. And what
Speaker 1: is quite frankly a complex and challenging world, right, So
Speaker 1: was the technology aspect of your research? Was that difficult
Speaker 1: when you were at the b o E. Did you,
Speaker 1: you know, for instance, have to I guess, tap specific
Speaker 1: expertise or ask specific people to help you on technological issues. Yes,
Speaker 1: I mean I was blessed that everyone was very happy
Speaker 1: to help out, and so I met with over three
Speaker 1: hundred entrepreneurs, techy CEOs, cyber experts. Many other policy makers
Speaker 1: around the world lent they had too, so I was
Speaker 1: able to dig deep. I mean, obviously I have the
Speaker 1: humility that even in a year, I can only scratch
Speaker 1: the surface of some of these important questions. I think
Speaker 1: that you know, one thing that I put my finger
Speaker 1: on is that it's still quite a paper based world.
Speaker 1: And so if you're sitting there as a regulator, I
Speaker 1: calculated that the average bank regulator is receiving the complete
Speaker 1: works of Shakespeare twice a week in terms of data. Now,
Speaker 1: you simply can't comprehend that without modern technology. And if
Speaker 1: you know, going back to my life as a research anaist,
Speaker 1: you needed to automate feeds, you need to create alert screens,
Speaker 1: you need to complete you rethink the way you you
Speaker 1: run with hypotheses and make sure you get the appropriate data.
Speaker 1: And the other thing is regulation is blooming complex. So
Speaker 1: the UK rule book is longer than the complete works
Speaker 1: of the Old Testament and unfortunately gets updated regularly, and
Speaker 1: so you know this is no one individual can keep
Speaker 1: on top of that data. So it's not just the regulator,
Speaker 1: it's the people at the banks themselves who are trying
Speaker 1: to keep on top of a god gangin amount of data.
Speaker 1: So without embracing technology and quite frankly embracing cloud technology,
Speaker 1: so banks and regulators communicate their data more cheaply, more effectively.
Speaker 1: I think it's going to be part of the secret
Speaker 1: source of of an effective central banker in the future.
Speaker 1: What was the most interesting part of working at the
Speaker 1: BOE on this project? Did you Did you go searching
Speaker 1: for the BOES gold reserves for instance? Well, I think
Speaker 1: I mentioned that, you know, Bill Winters, who had previously
Speaker 1: done a review, so that I should get access to
Speaker 1: the gold vaults on my security pass. But I realized
Speaker 1: that was a joke and I when I tried to
Speaker 1: get in there were people with guns, so I'm afraid
Speaker 1: I never found out how much of the gold Gordon
Speaker 1: Brown sold off, But no, I think it's um. It
Speaker 1: was two things. One was we hosted a large and
Speaker 1: round tables and to try and keep them you know,
Speaker 1: bouncy a bit, you know, we we had typically you know,
Speaker 1: four or five people from the incumbents. Four or five
Speaker 1: attack has done a few clients to ground the conversation,
Speaker 1: so it just didn't become sort of finance babble. And
Speaker 1: it became really crystal clear to me that some of
Speaker 1: the fin techs not only are challenging the status quo,
Speaker 1: they don't even know where some of the rules are.
Speaker 1: And I think that's a very odd environment for regulators
Speaker 1: to comprehend. And therefore, you know the natural Pavlovian reaction
Speaker 1: that is to sort of close up. And yet you
Speaker 1: know the world is developing and is moving at a pace,
Speaker 1: and so you do need to keep very open, alert
Speaker 1: and engaged. And I think that was one aspect. I
Speaker 1: think second was this sort of international comparisons um and
Speaker 1: understanding what we can learn, whether it's from China, from Sweden,
Speaker 1: from other other industries about how to respond and certainly
Speaker 1: was I thought about what the bank regulator of the
Speaker 1: future should look like. I was probably spending more time
Speaker 1: to thinking about data analytics, digitization of data, taxonomy is
Speaker 1: quite frankly data science than I was thinking about, you know,
Speaker 1: PhD s and economics. All Right, Hugh, I think we'll
Speaker 1: have to leave it there, but thank you so much
Speaker 1: for coming on Odd Thoughts. As you know, I've been
Speaker 1: following your work for so very long, including when you
Speaker 1: were a star analyst really over at Morgan Stanley, and
Speaker 1: it's been great to chat with you again. Thanks so much. Well,
Speaker 1: this has been another episode of the All Thoughts podcast.
Speaker 1: I'm Tracy Alloway. You can follow me on Twitter at
Speaker 1: Tracy Alloway, and you can follow Joe Wisenthal on Twitter
Speaker 1: at The Stalwart. You can also follow our producer Laura
Speaker 1: Carlson at Laura M. Carlson and finally, make sure you're
Speaker 1: following Bloomberg Podcasts on Twitter at Podcasts. Thanks for listening,
Speaker 1: Ye