18 September 2019

BIS' Villeroy de Galhau: The role of banking in a sustainable global economy

Governor of the Bank of France François Villeroy de Galhau discusses threats that are contributing to global uncertainty, such as trade tensions coming from the US and Brexit, before addressing two of the shared challenges for the future: digital transformation and green finance.

The current context is one of increased uncertainty, which is already weighing on growth at the international level. Two threats are contributing to this: above all, trade tensions coming from the US, and second - of course - Brexit.

Brexit is and remains bad news, not only for the United Kingdom, but also for Europe. At this stage, both the British and Europeans are faced with great uncertainty surrounding the outcome. There is still hope for a deal, but there is need to be ready for a no-deal and all the risks it entails. Supervisors both at national and European levels have encouraged and monitored the implementation of contingency plans by the financial industry.

Regarding shared common challenges Mr Villeroy de Galhau says: “Digitalisation is shaking up the way we live and consume, opening up a world of possibilities for corporates and customers alike. Worldwide, it clearly represents both an opportunity and a challenge for banks, as well as for supervisors.”

New players are becoming increasingly important. Fintechs do not have the capital resources to disrupt incumbent banks and can even be acquired by them. By contrast, Bigtechs do have the potential to fundamentally redefine financial intermediation: they have strong brand recognition, a worldwide customer base and privileged access to cutting-edge technologies. This new situation is a major challenge for regulators and supervisors. Of course, financial regulation should remain technologically neutral: the basic principle "same activity, same rules" must apply. This is a good thing for the level playing field. However, beyond traditional financial regulation, international cooperation should be developed in four areas, four cornerstones of the regulation of digital finance:

• First, cybersecurity is a sine qua non for a reliable and sustainable digital future. It was a clear priority of the G7 French Presidency this year.
• Second, regarding data protection, financial supervisors and authorities in charge of privacy have to invent new ways of cooperation to address data issues that have become central to financial services.
• Third, regarding competition and anti-trust policies, situations where "the winner takes most" while staying outside the scope of financial regulation should be adequately anticipated and addressed.
• And fourth, fair taxation, thanks hopefully to OECD work.

"Stable coin" projects, including Facebook's Libra, are a case in point. "Stable coins" are quite different from speculative assets like Bitcoins. However, regulators will have to keep a very close eye at the global level.

He then turns to green finance. For him, it is "a new frontier for the 21st Century". There is growing awareness from central banks, supervisors and financial institutions about climate-related risks. Clearly, green finance and climate risks management have gone from the "nice to have" to the "must have", from emotion to reason.

In financial institutions, climate change is no longer confined to Corporate Social responsibility (CSR) policy. Concerning central banks and supervisors, the creation of the Network of Central Banks and Supervisors for Greening the Financial System (NGFS) in Paris in December 2017 has been a decisive step forward. In 18 months, this coalition of the willing has increased from 8 founding members to almost 50 members and observers from all 5 continents,

This momentum has an important meaning: supervisors and central bankers have collectively acknowledged that climate change-related risks are a source of long-term financial risk. In April 2019, the NGFS published its first comprehensive report issuing four recommendations for central banks and supervisors, and two additional recommendations for policy makers.

Looking down the road, Mr Villeroy de Galhau sees three priorities for the near future:

• “First, we will require enhanced disclosures that need to be built on sound taxonomies.
• Second, we have to better anticipate long-term climate-related risks, through what I call "the video of the risks". We must push for the development of comprehensive climate stress tests in order to build a forward-looking approach of the impacts of climate risks.
• Third, green finance needs to mature and upgrade its professional standards.”

Full speech on BIS

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