WEBVTT - Huw van Steenis On What Central Banks Will Do Next 0:00:11.200 --> 0:00:14.920 Hello, and welcome to another episode of the Odd Thoughts podcast. 0:00:15.120 --> 0:00:18.280 My co host Joe Wisenval is away this week. I've 0:00:18.320 --> 0:00:21.880 actually noticed a pattern to Joe's absences, which is that 0:00:21.960 --> 0:00:25.920 he suspiciously goes missing whenever we're scheduled to talk about 0:00:26.040 --> 0:00:30.040 negative rates on the show. In any case, we recently 0:00:30.080 --> 0:00:34.440 had the annual gathering of monetary policymakers in Jackson Hole, Wyoming, 0:00:34.840 --> 0:00:38.000 and as you can imagine, negative interest rates were a 0:00:38.080 --> 0:00:41.320 big feature of that meeting, and in fact, the title 0:00:41.440 --> 0:00:45.840 for this year's symposium was Challenges for Monetary Policy, which 0:00:45.920 --> 0:00:48.360 kind of gives you an idea of the headspace that 0:00:48.560 --> 0:00:51.440 a lot of central bankers are operating in at the moment. 0:00:52.000 --> 0:00:54.120 But one of the most interesting things to come out 0:00:54.160 --> 0:00:56.600 of Jackson Hole this year, certainly a thing that got 0:00:56.640 --> 0:00:59.160 a lot of attention, was a speech by Bank of 0:00:59.200 --> 0:01:02.480 England Governor Mark Karney, where he talked about the idea 0:01:02.520 --> 0:01:05.280 of getting rid of the dollar as a reserve currency 0:01:05.600 --> 0:01:09.200 and basically replacing it with a virtual currency that would 0:01:09.200 --> 0:01:12.520 look a lot like Facebook's Libra in the sense that 0:01:12.560 --> 0:01:15.760 it could be a sort of consortium of digital currencies 0:01:15.880 --> 0:01:20.920 maintained by central banks, a multipolar virtual currency. He actually 0:01:20.959 --> 0:01:25.760 called it a synthetic hegemonic currency, or s h C 0:01:26.240 --> 0:01:30.600 for short. Now, Carney's idea did raise a lot of eyebrows, 0:01:30.800 --> 0:01:34.479 not least because central banks have been critics of cryptocurrencies 0:01:34.480 --> 0:01:38.039 in general and of libra in particular. So I thought 0:01:38.080 --> 0:01:41.720 to myself, who better to help us gain more insight 0:01:41.800 --> 0:01:45.160 into Carney's thinking and to also talk to us about 0:01:45.280 --> 0:01:48.600 negative rates and the future of payments and the future 0:01:48.640 --> 0:01:52.440 of all of finance in fact, than Hugh van Stine's. 0:01:52.840 --> 0:01:55.280 Hugh charired a review of the future of finance for 0:01:55.360 --> 0:01:58.560 Mark Carney and was his senior advisor at the BOE. 0:01:59.000 --> 0:02:02.680 He'll also be shortly joining UBS as an advisor to 0:02:02.720 --> 0:02:06.160 their CEO, and he's taking a break from his gardening 0:02:06.240 --> 0:02:09.840 leave to come on odd lots Hugh. It's so good 0:02:09.840 --> 0:02:12.440 to have you, Tracy, Thanks very much for having me. 0:02:13.280 --> 0:02:16.560 So I guess we need to start with Carney's Jackson 0:02:16.639 --> 0:02:19.720 Hole speech. But we do know that Carney is due 0:02:19.840 --> 0:02:23.120 to leave the BOE in a few months, So I 0:02:23.120 --> 0:02:26.360 guess my question is, since you are someone who worked 0:02:26.440 --> 0:02:30.560 quite closely with him, how seriously should we take his 0:02:30.720 --> 0:02:37.920 proposal for this sort of multipolar virtual currency. Well, look, 0:02:37.960 --> 0:02:40.000 I mean I'm going to speak myself here rather than 0:02:40.040 --> 0:02:41.960 for for the mark. I mean, I thought it's a 0:02:42.000 --> 0:02:44.640 really great speech because it put its finger on a 0:02:44.720 --> 0:02:48.720 number of the dilemmas that policymakers are wrestling with. I mean, first, 0:02:48.800 --> 0:02:52.440 let's let's be clear. Technology is transforming the basis advantage 0:02:52.440 --> 0:02:56.000 and financial services, and big texts are entering, fin texts 0:02:56.000 --> 0:02:59.799 are playing scale is far more important, and the regulations 0:03:00.080 --> 0:03:01.720 to catch up. So I think first and foremost, it's 0:03:01.720 --> 0:03:05.280 about the way technology is transforming the system. I think 0:03:05.360 --> 0:03:10.080 second is that payments is the battleground between big tech 0:03:10.480 --> 0:03:13.880 payments firms and banks, and it's kind of existential. And 0:03:13.919 --> 0:03:16.840 as you've pointed out regularly, Tracy, the combination of negative 0:03:16.960 --> 0:03:20.560 rates and a disruptive environment is one which is an 0:03:20.600 --> 0:03:24.240 existential threat for for banks. And I think the challenge 0:03:24.400 --> 0:03:28.520 for firms entering payments liber Facebook is just the first 0:03:28.560 --> 0:03:31.919 of which most recent of which is pretty challenging. And 0:03:32.040 --> 0:03:34.480 I think that one pushback that some had is that, 0:03:34.639 --> 0:03:37.160 you know, this was a little bit right out there 0:03:37.240 --> 0:03:40.520 in terms of forward thinking. But one question I often 0:03:40.560 --> 0:03:42.720 got challenged is what can we learn from the Chinese 0:03:42.760 --> 0:03:46.080 financial system is it just the gallapagus of the financial world. 0:03:46.600 --> 0:03:48.360 And I think it's not science fiction. I mean, there 0:03:48.400 --> 0:03:53.720 you've got and Financial and we chat pay controlling of 0:03:53.840 --> 0:03:57.560 online payments, and Financial now has got the most customers 0:03:57.600 --> 0:03:59.800 of any financial services firm in the world. If you 0:04:00.040 --> 0:04:02.320 can combine what they've gone in China and India, it's 0:04:02.360 --> 0:04:05.120 over a billion five time city group. So I think 0:04:05.200 --> 0:04:08.080 that the payments, both in terms of currency and in 0:04:08.200 --> 0:04:11.320 terms of new entrants, being the battleground. I think he's 0:04:11.320 --> 0:04:14.440 put his finger on something really important right in China 0:04:14.520 --> 0:04:17.600 has actually announced that it is close to releasing its 0:04:17.680 --> 0:04:20.920 own cryptocurrency. Whether or not that's going to be an 0:04:21.000 --> 0:04:26.480 actual cryptocurrency or something that's more akin to digital cash, 0:04:27.040 --> 0:04:29.799 we don't know just yet, but but definitely there seems 0:04:29.800 --> 0:04:32.560 to be some interest from some central banks, at least 0:04:32.680 --> 0:04:37.040 in virtual currencies. So, just on the notion of payments, 0:04:37.760 --> 0:04:39.720 you know you've said before and you just said it 0:04:39.800 --> 0:04:43.720 then that payments are now the battleground. Can you expand 0:04:43.800 --> 0:04:45.680 on that a little bit? Why is there so much 0:04:45.760 --> 0:04:50.280 pressure around this particular space in financial services, particularly low rates. 0:04:50.320 --> 0:04:52.320 They're not that many areas which have got strong growth 0:04:52.720 --> 0:04:55.599 and payments clearly is one where people are moving offline 0:04:55.720 --> 0:04:58.280 to online. I mean, one thing that we on earthed 0:04:58.320 --> 0:05:00.520 in our port was that, let's take a sweet, we've 0:05:00.560 --> 0:05:04.000 had an eight reduction in cash transactions the last decade. 0:05:04.680 --> 0:05:06.480 The UK is probably four or five years behind that, 0:05:07.000 --> 0:05:09.240 the US is probably another four or five years behind that. 0:05:09.440 --> 0:05:13.240 There is a very long tailwind of shifting commerce online 0:05:13.760 --> 0:05:17.320 and everyone wants to be the gateway into the online 0:05:17.760 --> 0:05:20.640 commercial world. So I think that's one key aspect around payments. 0:05:21.120 --> 0:05:24.159 I think second is these are person to person apps, 0:05:24.320 --> 0:05:28.279 whether it's you know, Ali in Pay in China, whether 0:05:28.400 --> 0:05:32.520 it's Swish and Sweden, whether it's Ideal in Holland. These 0:05:32.560 --> 0:05:35.679 are sort of category killers. You know, they really munch 0:05:35.760 --> 0:05:40.440 through cash and are provide convenience and flexibility for customers, 0:05:40.480 --> 0:05:42.800 which you know customers are quite frankly lapping up. So 0:05:42.880 --> 0:05:45.440 I think there's that transformation. But I think the big 0:05:45.560 --> 0:05:48.440 thing for financial regulator and a particular central bank where 0:05:48.520 --> 0:05:51.240 you know money is what it's all about, is the 0:05:51.480 --> 0:05:55.360 role of big text either becoming a toll road that 0:05:55.440 --> 0:05:57.440 they just want to be the toll which people get 0:05:57.480 --> 0:06:00.799 into the commercial world, but potentially be coming much bigger 0:06:00.839 --> 0:06:04.440 and financial services, and that with their advantages of scale 0:06:04.640 --> 0:06:09.000 with other related businesses quite frankly a way of thinking 0:06:09.040 --> 0:06:12.040 which is very different from financial services. So if you 0:06:12.120 --> 0:06:15.000 take the Libra white paper plus all the other papers 0:06:15.040 --> 0:06:16.880 they put out on that day, you know, there's over 0:06:16.960 --> 0:06:19.440 eighty pages on the tech and there's just under a 0:06:19.480 --> 0:06:22.520 dozen pages on the way the syndicate work. There's not 0:06:22.640 --> 0:06:26.640 a single page on regulation. And I think that's really atypical, 0:06:27.360 --> 0:06:29.960 and I think that's something which that means it's really 0:06:30.000 --> 0:06:32.760 difficult for a traditional policymaker regulator to get their heads 0:06:32.800 --> 0:06:35.400 around because there's just nothing there. Well, I was going 0:06:35.440 --> 0:06:37.560 to ask you the fact that a lot of these 0:06:37.640 --> 0:06:42.679 tech companies have made such massive inroads into payments so quickly, 0:06:43.279 --> 0:06:45.560 is that actually down to the tech or is it 0:06:45.680 --> 0:06:48.520 down to regulatory arbitrage in the sense that they are 0:06:48.600 --> 0:06:52.520 not hindered in the same way that banks are. I 0:06:52.640 --> 0:06:55.320 think there's an element of an un leveled playing field 0:06:56.000 --> 0:07:00.240 where they are coming in on a different basis. But 0:07:00.320 --> 0:07:02.240 it doesn't have to be that the big text win. 0:07:02.320 --> 0:07:04.520 I mean, just go back to Sweden. Swishes a bank 0:07:04.720 --> 0:07:08.080 consortium app which allows anyone to pay one at anyone, 0:07:08.600 --> 0:07:10.920 So you need to get over the hurdle of antitrust 0:07:11.000 --> 0:07:14.760 about how banks collaborate with each other. But there's a 0:07:14.880 --> 0:07:18.080 country where actually it wasn't the big text who drove 0:07:18.160 --> 0:07:20.280 the innovation. So I think this is much more about 0:07:20.720 --> 0:07:23.400 do the banks have the budget, do they have the 0:07:23.640 --> 0:07:26.800 ability to respond? And of course, going back to one 0:07:26.800 --> 0:07:29.160 of your favorite topics, in a world of negative rates, 0:07:29.600 --> 0:07:32.400 bank profitability is pinched and as a result of that, 0:07:32.520 --> 0:07:34.640 they just don't have the tech budgets that some of 0:07:34.680 --> 0:07:36.880 these other firms have. And I think the other bit 0:07:37.800 --> 0:07:39.920 is that you know, I mean I met with over 0:07:40.920 --> 0:07:43.560 entrepreneurs and fintech companies for the review I did for 0:07:43.600 --> 0:07:46.880 the governor. They have a very different profit motivation. They 0:07:46.920 --> 0:07:50.000 can withstand losses for three five more years. There's not 0:07:50.080 --> 0:07:53.000 a single bank which can really do that art for 0:07:53.160 --> 0:07:54.720 for a five year basis, so they just start with 0:07:54.760 --> 0:07:57.600 a very different basis of competition. I do want to 0:07:57.640 --> 0:08:01.080 ask you about regulating payments come panies, but before I do, 0:08:01.600 --> 0:08:05.280 you've mentioned China several times as being very ahead in 0:08:05.320 --> 0:08:08.560 the payment space. Um, we have things like Ali pay, 0:08:08.680 --> 0:08:11.880 and we chat over here. How did they get to 0:08:12.000 --> 0:08:14.640 that place? Because a lot of people would call them 0:08:14.920 --> 0:08:19.200 a sort of special case in the wider evolution of 0:08:19.320 --> 0:08:23.360 technology and financial technology in particular. I think it's a 0:08:23.400 --> 0:08:25.560 really important exam question to think about what we can 0:08:25.680 --> 0:08:28.800 understand and what may be borrowed from other markets, and 0:08:28.880 --> 0:08:33.480 what's what's different. So first is the payment firms are 0:08:33.600 --> 0:08:37.360 really pump primed by a big tech firm. So whether 0:08:37.480 --> 0:08:40.400 it's Ali with U and Financial or we Chat with 0:08:40.440 --> 0:08:44.079 we Chat pay, they use their existing cleon tell and 0:08:44.240 --> 0:08:47.720 network effects to the hugely sair advantage. I think second 0:08:47.800 --> 0:08:52.960 is that they really did offer phenomenal promotions to get acceptances. 0:08:53.400 --> 0:08:56.679 So in one case they offer taxi drivers in ebaging 0:08:56.960 --> 0:09:00.640 a premium if clients paid with Ali pay, and also 0:09:00.720 --> 0:09:02.800 gave the clients a discount if they're paid, So they 0:09:02.840 --> 0:09:07.719 were really smart about discounting and generating client interest. And 0:09:07.800 --> 0:09:10.160 then and the third of course is maybe what is 0:09:10.200 --> 0:09:13.520 different is they've got a whole financial supermarket. Now in 0:09:13.679 --> 0:09:19.360 most Western regulatory structures, different regulators have have have purchased 0:09:19.400 --> 0:09:21.760 on different parts of the financial system, and you've got 0:09:21.960 --> 0:09:25.480 one financial supermarket which is a bit different. The other 0:09:25.679 --> 0:09:28.679 error which is is different to China is identification. There 0:09:28.800 --> 0:09:30.800 is an element that everyone is identified, and one of 0:09:30.840 --> 0:09:33.439 the big issues that everyone's wrestling with in the West 0:09:33.600 --> 0:09:36.199 is how you can make how you reduce fraud, and 0:09:36.240 --> 0:09:38.040 how you make sure you know who your client is. 0:09:38.520 --> 0:09:41.000 And actually some of the emerging markets probably have leapfrogged 0:09:41.520 --> 0:09:44.640 the West on on this and maybe and obviously quite frankly, 0:09:44.679 --> 0:09:48.320 have a different sense of um, you know, libertarian values 0:09:48.320 --> 0:09:52.439 about what the States should or shouldn't know about you. Right, So, 0:09:52.600 --> 0:09:56.000 how much of the China example would be replicable in 0:09:56.559 --> 0:10:00.480 for instance, at the UK or the US. Well, I 0:10:00.520 --> 0:10:03.319 think so, First, you've already got some pretty strong capacitors. 0:10:03.520 --> 0:10:06.120 And I love Alex ram pull at A sixteen Z 0:10:06.320 --> 0:10:11.080 has got a great line that the quintessential debate between 0:10:11.080 --> 0:10:13.520 an incumbent and a new entrant is does the new 0:10:13.640 --> 0:10:17.760 entrant get distribution before the incumbent gets innovation? And I 0:10:17.840 --> 0:10:20.840 think that battle is really about you know, what China 0:10:21.679 --> 0:10:26.560 shows us is that the new entrant got distribution incredibly quickly. 0:10:27.000 --> 0:10:29.280 And I think as you look into the States, you've 0:10:29.320 --> 0:10:33.800 got some pretty serious payment firms Visa, MasterCard, MX, PayPal, 0:10:34.160 --> 0:10:36.520 as well as some of the key banks, JP, organ 0:10:36.559 --> 0:10:39.199 and so forth, which have got really big positions in 0:10:39.280 --> 0:10:43.160 payments already, I think two very few big texts want 0:10:43.200 --> 0:10:47.040 to have the hassle of bank and payments regulation and 0:10:47.080 --> 0:10:49.599 all the capital that goes with that. So most of 0:10:49.679 --> 0:10:51.320 the firms so far I've tried to be a wallet 0:10:51.800 --> 0:10:54.439 or or or a toll road on the back of 0:10:54.520 --> 0:10:57.679 the existing banking system. But you know, what I think 0:10:57.800 --> 0:11:00.240 we could see is that over a period of time 0:11:00.920 --> 0:11:05.120 these firms could grow broader and deeper. And many of 0:11:05.160 --> 0:11:08.360 the financial FinTechs that I met have ambitions for, you know, 0:11:08.440 --> 0:11:11.000 quite frankly, world domination. And I think therefore it's about 0:11:11.080 --> 0:11:13.280 making sure that the banks and the payment firms respond, 0:11:13.920 --> 0:11:18.360 you know, and really understand that existential challenges pretty real, right, 0:11:18.920 --> 0:11:23.520 So as these tech firms potentially grow bigger and encroach 0:11:23.679 --> 0:11:28.880 ever more on the financial space, and to your earlier point, 0:11:29.480 --> 0:11:33.760 what are the challenges posed by that for central bankers? 0:11:33.840 --> 0:11:38.120 How are they exactly supposed to respond to this new 0:11:38.240 --> 0:11:43.480 group of financial intermediaries. So there's a couple of things, 0:11:43.600 --> 0:11:46.160 and it does vary country by countries. So first is 0:11:46.200 --> 0:11:51.240 around innovation. Most geographies want to encourage innovation of new firms, 0:11:51.679 --> 0:11:54.120 but in many jurisdictions you've got a concept of a 0:11:54.480 --> 0:11:58.160 startup or you've got a systemic financial payments firm, and 0:11:58.320 --> 0:12:00.760 very little in between. And so I was struck that 0:12:00.880 --> 0:12:04.400 the Singaporeans in the last year injected a new third 0:12:04.480 --> 0:12:06.719 category saying, actually, if you've got half a million and 0:12:06.760 --> 0:12:09.000 billion customers, we need to deal with you in a 0:12:09.120 --> 0:12:12.760 different way. And so payment regulation has to probably be 0:12:13.000 --> 0:12:16.160 updated to reflect that these are now very large firms 0:12:16.240 --> 0:12:19.120 which may not yet be systemic, but whose failure would 0:12:19.160 --> 0:12:23.439 be pretty brutal for the system. I think second is 0:12:24.080 --> 0:12:27.040 around what it means for the banking system. I use 0:12:27.200 --> 0:12:29.800 skimming off the cream of profits for banks and leaving 0:12:29.880 --> 0:12:32.319 them just simply as dumb pipes, in the words of 0:12:32.440 --> 0:12:35.880 one of my colleagues who who looks at this space, 0:12:36.440 --> 0:12:38.920 or maybe even maybe not done pipes. That's undfair, high 0:12:38.960 --> 0:12:42.719 cost due diligence machines, but nonetheless not very profitable. I 0:12:42.760 --> 0:12:44.839 think that's worth well, yeah, I think that is, and 0:12:44.880 --> 0:12:46.719 I think that but that that it is interesting that 0:12:46.800 --> 0:12:48.400 quite a few of the payments firms are trying to 0:12:48.480 --> 0:12:51.880 rely on the know your customer checks that the banks do, 0:12:52.280 --> 0:12:53.800 and then they don't get rewarded for it, and so 0:12:53.880 --> 0:12:56.480 there is to be honest, a slight unleveled playing field 0:12:56.760 --> 0:13:00.400 between payment firms and banks in most but to be honest, 0:13:00.440 --> 0:13:03.480 not all jurisdictions. But the third thing tracy there is 0:13:03.559 --> 0:13:06.280 coming back to actually who's being left behind? And I 0:13:06.360 --> 0:13:09.160 know that that I was struck by a huge interest 0:13:09.240 --> 0:13:12.320 in what does the decline of cash mean for those 0:13:12.360 --> 0:13:16.640 who potentially may be getting left behind, whether it be elderly, 0:13:17.280 --> 0:13:20.280 disadvantaged or potentially disabled. And if you look at Sweden, 0:13:20.320 --> 0:13:23.560 where cash has fallen by eight percent of the last decade, 0:13:23.960 --> 0:13:27.120 they start to hit some crunch points. And one thing 0:13:27.200 --> 0:13:29.400 that I spent some time looking at in the review 0:13:29.520 --> 0:13:31.679 is how close are we to those crunch points in 0:13:31.679 --> 0:13:33.839 the UK or other markets? And what would you do 0:13:33.960 --> 0:13:36.360 to make sure that there is a minimum or even 0:13:36.440 --> 0:13:40.720 a viable infrastructure to at least maintain that cash system. 0:13:41.040 --> 0:13:43.320 And so you end up with some quite out there 0:13:43.360 --> 0:13:45.760 discussions of should in the long term it be the 0:13:45.800 --> 0:13:48.520 responsibility of the state or the central bank to keep 0:13:48.559 --> 0:13:50.880 the cash economy viable. But I think you know, for 0:13:51.000 --> 0:13:52.960 many listeners in the States that sounds like a bit 0:13:52.960 --> 0:13:55.760 of site sci fi, but it's something which in Norway 0:13:55.800 --> 0:13:58.440 and Sweden, where less than ten per cent of transactions 0:13:58.559 --> 0:14:01.680 are now done with cash, is something which is pretty important. 0:14:02.520 --> 0:14:05.599 So why exactly do we need cash? So there's a 0:14:05.640 --> 0:14:08.520 big debate as always about what is the right mandate 0:14:08.559 --> 0:14:11.559 for the central bank. At the moment, it's society's decision 0:14:12.280 --> 0:14:15.240 how we pay, not the central banks. And so I 0:14:15.360 --> 0:14:18.800 think that the Bank having like other central banks, takes 0:14:18.840 --> 0:14:22.520 it as a political decision what the future of cash 0:14:22.520 --> 0:14:24.560 should be. And if you look at the sort of 0:14:25.040 --> 0:14:28.400 a debate in history, I mean in the nineteenth century 0:14:28.400 --> 0:14:30.640 there were some pretty big debates about who had the 0:14:30.680 --> 0:14:33.560 responsibility to print money, should you have private sector money 0:14:33.640 --> 0:14:37.360 or not. Today we're gonna be debating who how much 0:14:37.640 --> 0:14:39.480 should there still be cash in the system. I think 0:14:39.560 --> 0:14:41.760 over the next ten years what we're talking about is 0:14:41.800 --> 0:14:45.040 not cash less, but just increasingly cash light as a 0:14:45.160 --> 0:14:47.800 year by year more payments are done online. But I 0:14:47.840 --> 0:14:51.120 think it's really a political discussion, and if you look 0:14:51.160 --> 0:14:53.680 in Sweden, it's getting more intense about you know, where 0:14:53.680 --> 0:14:55.720 the politics lie. And I think at the moment, the 0:14:55.760 --> 0:14:59.200 assumption is there should be some cash to allow people 0:14:59.240 --> 0:15:00.920 to transact. But you know, you and I can debate, 0:15:00.960 --> 0:15:22.560 you know, twenty years out what that should be just 0:15:22.680 --> 0:15:25.840 when it comes to the sort of value of cash 0:15:26.120 --> 0:15:29.000 in a society. If we go back to the negative 0:15:29.120 --> 0:15:34.560 rates idea, I mean, negative rates basically make cash uncompetitive, 0:15:34.640 --> 0:15:37.240 whether it's physical and you're stuffing it under your mattress, 0:15:37.400 --> 0:15:39.840 or whether you know you're putting it in a bank 0:15:39.960 --> 0:15:42.760 and it's a sort of digital number. What does that 0:15:43.040 --> 0:15:47.000 mean for central bankers who whose purview is you know, 0:15:47.200 --> 0:15:50.320 of course monetary policy. It's all about the money and 0:15:50.760 --> 0:15:55.400 cash is uncompetitive. So look on this I should really 0:15:55.440 --> 0:15:57.720 say this is my personal view than the banks view. 0:15:57.720 --> 0:15:59.440 But obviously we don't have negative rates in the UK. 0:16:00.520 --> 0:16:04.040 When I was Morgan Stanley, I argued vociferously that negative 0:16:04.120 --> 0:16:07.800 rates were a high risk experiment, and in particular that 0:16:07.960 --> 0:16:12.200 you know, most of modern macroeconomics takes the financial system 0:16:12.360 --> 0:16:15.560 and then assumes it away just basically ignores banks and 0:16:15.680 --> 0:16:19.080 intermediaries and their own actions. And I think ignoring that 0:16:19.240 --> 0:16:22.080 friction comes at a cost. And you can see that 0:16:22.760 --> 0:16:24.840 the way that negative rates are played out, As you 0:16:24.880 --> 0:16:27.000 know you were discussing a few weeks ago, Japanese bank 0:16:27.080 --> 0:16:30.240 regional banks are the least profitable in the world and 0:16:30.280 --> 0:16:33.920 actually have really been sort of supported by clipping coupons 0:16:33.960 --> 0:16:38.000 as government bonds get get revalued. I think that the 0:16:38.280 --> 0:16:42.080 corrosive impact of negative rates on bank profitability is very strong, 0:16:42.840 --> 0:16:45.200 and I think there's been two great new papers, one 0:16:45.280 --> 0:16:48.560 by Professor Charles Goodheart or the lsc in another and 0:16:48.600 --> 0:16:52.000 norgious nor justis Bank Working paper, both of which you 0:16:52.120 --> 0:16:54.800 challenge the orthodoxy and say, actually, if you ignore banks 0:16:55.240 --> 0:16:57.240 and insurers, you do it at your peril because as 0:16:57.280 --> 0:17:00.120 you get towards low rates and move into the les 0:17:00.200 --> 0:17:03.640 in Wonderland rule world of negative rates, the credit transmission 0:17:03.680 --> 0:17:08.280 simply becomes much less effective. And I think that's really 0:17:08.400 --> 0:17:11.360 something which policymakers need to weigh up as we think 0:17:11.400 --> 0:17:16.080 about confronting the global slowdown. I certainly, for my vote 0:17:16.119 --> 0:17:20.240 would be hardly against any further moves more negative. And 0:17:20.359 --> 0:17:22.879 I think also what really struck me doing the review is, 0:17:23.320 --> 0:17:26.600 you know, tech is really important, but also cyber defense. 0:17:27.280 --> 0:17:31.159 European banks, particularly Urozone banks, are spending almost half the 0:17:31.240 --> 0:17:34.840 proportion of their tech budgets on digital transmation then their 0:17:34.960 --> 0:17:37.639 US colleagues. Now some of that is being subscale, and 0:17:37.800 --> 0:17:39.199 ye know, we can debate whether there should be more 0:17:39.359 --> 0:17:41.080 M and A in Europe. But some of it is 0:17:41.160 --> 0:17:44.400 just the lack of profitability, and of which negative rates 0:17:44.440 --> 0:17:47.840 is a key component. So I think it's a it's 0:17:47.880 --> 0:17:50.560 a tough experiment, and that's before we go onto you know, 0:17:50.680 --> 0:17:54.639 people storing cash in deposits and and being disincentivized. So 0:17:54.760 --> 0:17:57.399 I think it's a remains a high risk experiment here 0:17:57.440 --> 0:18:00.200 three or four years on. But just on this point, 0:18:00.280 --> 0:18:02.920 this is one thing that I don't understand, because central 0:18:02.960 --> 0:18:09.400 banks must know that banks are important transmitters of monetary policy. 0:18:09.560 --> 0:18:14.680 So if banks are structurally unprofitable, doesn't that worry the 0:18:14.800 --> 0:18:18.080 central bank? I think it does. But I think that 0:18:18.240 --> 0:18:19.960 what you've put your finger on is a as a 0:18:20.080 --> 0:18:22.840 key difference between probably the Anglo Saxon world and else 0:18:23.160 --> 0:18:25.800 and some of the other systems, where I think the 0:18:25.800 --> 0:18:29.040 Anglo Saxon world firmly believes in a positive interest rate, 0:18:29.040 --> 0:18:31.480 even if it may be low. I think a second is, 0:18:31.520 --> 0:18:35.359 you know, because macroeconomics have just assumed this way, there 0:18:35.520 --> 0:18:39.880 is very very little in the literature that central bankers 0:18:39.960 --> 0:18:43.240 are relying on to understand how this works. And I 0:18:43.280 --> 0:18:46.080 think it's fair to say negative rates work in in 0:18:46.240 --> 0:18:50.080 quote a myriad of ways you know, they obviously impact 0:18:50.720 --> 0:18:53.560 net interest income margin further banks like the top line, 0:18:54.160 --> 0:18:57.159 but in some cases as your markets get revalued up 0:18:57.200 --> 0:18:59.639 commission income, the sale of asset amount of wealth mantial 0:18:59.680 --> 0:19:03.040 products can increase low rates. Clearly a suppressed bad debts, 0:19:03.160 --> 0:19:05.880 and that's been a key defense of you know, ECB 0:19:06.160 --> 0:19:09.320 and and and others in support of the policy. But 0:19:09.400 --> 0:19:11.479 when you really dig deep, it's probably more QUEI than 0:19:11.520 --> 0:19:13.399 negative rates who have done that, because there's more about 0:19:13.440 --> 0:19:16.919 tackling the bad debt problems in Spain, Portugal, Greece. Itally 0:19:17.400 --> 0:19:20.720 and arguably QUI would have been more effective than negative 0:19:20.800 --> 0:19:22.960 rates and suppressing it. But you know, as you and 0:19:23.040 --> 0:19:25.760 I and your listener though, that's already priced in. So 0:19:25.880 --> 0:19:28.639 at this point, you know, lower lower bad debts is 0:19:28.680 --> 0:19:30.680 priced in. It's much more about what the next step 0:19:30.800 --> 0:19:35.480 is from here, and a very unprofitable system is one 0:19:35.560 --> 0:19:38.200 which is more brittle, and so I think that's a 0:19:38.400 --> 0:19:42.359 that's definitely concern one. You know, Larry, someone's recently came 0:19:42.440 --> 0:19:46.000 up with the great um analogy about black hole economics. 0:19:46.359 --> 0:19:48.320 The one that I've debated more with a bunch of 0:19:48.359 --> 0:19:51.600 academics I've been working with is it's more like steroids. 0:19:52.040 --> 0:19:54.920 Storids and short blasts can be very effective in repair, 0:19:55.560 --> 0:19:58.480 but long term dependency on steroids starts to dissolve your 0:19:58.840 --> 0:20:01.359 bones and makes the pay more brittle. And maybe negative 0:20:01.440 --> 0:20:06.240 rates are more like steroids than other analogies. So just 0:20:06.359 --> 0:20:08.679 to continue that analogy, if you have banks that are 0:20:08.760 --> 0:20:12.600 sort of reliant on the steroids of easy monetary policy, 0:20:12.760 --> 0:20:16.440 and we're reaching the limits of that potential monetary policy. 0:20:16.560 --> 0:20:19.880 And at the same time, payments is a space where 0:20:20.080 --> 0:20:23.240 you can still make money as a financial intermediary, but 0:20:23.320 --> 0:20:26.080 you're getting a lot of tech firms encroaching on it, 0:20:26.600 --> 0:20:29.520 and in the meantime, lending out money doesn't actually earn 0:20:29.600 --> 0:20:33.520 you any interest. What does that mean for the banking 0:20:34.040 --> 0:20:37.240 business model? Is there a future for banks in their 0:20:37.320 --> 0:20:41.040 current form? I think that no. I I firmly think 0:20:41.080 --> 0:20:42.399 there is, And I think we go back to this 0:20:42.520 --> 0:20:46.720 that it's first technology at one level allows many new entrants, 0:20:47.080 --> 0:20:49.760 but also provides real scale economies. And in a world 0:20:49.840 --> 0:20:54.480 where let's say large corporates are obsessed, rightly obsessed about 0:20:54.480 --> 0:20:57.280 their security and money, the firms who've got the single 0:20:57.359 --> 0:21:01.960 best cybersecurity should win out. So number one there's a 0:21:02.119 --> 0:21:05.520 I think tech is becoming an arms race for the 0:21:05.640 --> 0:21:09.680 winning financials and back sorry, winning banks. So I think 0:21:09.760 --> 0:21:12.000 that's one aspect which is really important. I think to 0:21:12.320 --> 0:21:15.159 what flows from that is scale is more important. And 0:21:15.280 --> 0:21:18.280 so it may well be that actually the combination of 0:21:18.359 --> 0:21:22.399 low rates and tech actually accelerates more M and A, 0:21:22.920 --> 0:21:24.680 which is you know, let's be not let's be honest, 0:21:24.720 --> 0:21:27.960 has been somewhat on hold in recent times, and you 0:21:28.000 --> 0:21:30.800 can see that with a couple of recent US transactions 0:21:30.840 --> 0:21:33.119 which have really been around payments and the tech space. 0:21:33.840 --> 0:21:36.720 And I think third is it really will be about 0:21:37.040 --> 0:21:39.959 becoming a low cost manufacturer. And so I think there 0:21:40.080 --> 0:21:43.000 is going to be relentless hard work for bankers and 0:21:43.080 --> 0:21:45.960 making sure they've got a lean and a very effective platform. 0:21:46.359 --> 0:21:49.320 Because you know, throughout my professional care career, let's take 0:21:49.359 --> 0:21:51.080 sort of um, when I used to sit on and 0:21:51.160 --> 0:21:53.840 exutary trading for many many years ago before we got 0:21:53.880 --> 0:21:56.680 moved into the research box. The you know, commissions have 0:21:56.800 --> 0:22:00.320 gone down through thick and thin, double digit year by year. 0:22:00.480 --> 0:22:03.000 And I think that banks have been able to confront 0:22:03.080 --> 0:22:05.840 that through becoming more efficient and more scaled. So I 0:22:05.880 --> 0:22:09.520 think there's a lot of industrial logic which needs to 0:22:09.560 --> 0:22:11.280 flow from this, but they'll probably need a bit of 0:22:11.359 --> 0:22:15.680 luck as well. Is there space for regulation to play 0:22:15.840 --> 0:22:19.760 a role in this? Could payments companies big tech companies 0:22:19.920 --> 0:22:23.480 entering the payment space? Could they be regulated like banks? 0:22:24.040 --> 0:22:26.240 And one of the reasons I asked this is because 0:22:26.520 --> 0:22:29.719 one of the outcomes of your review was the BOE 0:22:29.920 --> 0:22:34.760 starting a consultation on opening access to its balance sheet 0:22:34.840 --> 0:22:38.840