Comments from speech by Pablo Hernandez de Cos, governor of Spain’s central bank.
To successfully address the transformation imposed by the new competitive environment resulting from technological changes will probably require harnessing the opportunities of scale and specialization that the integration of European financial markets offers. But to enable this process of integration it will be necessary first to remove the obstacles that continue today to block the way to the creation of Banking Union and the full Capital Markets Union.
Following thoughts on the recent development of and future prospects for Banking Union, and its consequences for the financial system and financial stability, I shall devote the last part of my address to highlighting a number of regulatory challenges emerging in the financial sector’s new technology environment, in which new players, technologies and services have appeared.
The digital transformation process is characterized by its high technology component, with applications that are accessible to society at large, and by the speed at which innovations are introduced. In this setting, it is no surprise that banking intermediation, which largely depends on exploiting information asymmetries, has viewed this revolution with a mixture of concern and interest.
Concern because of the difficulties involved in adapting to the new environment and competing with the new market players. Interest, because of the possibilities it offers to achieve synergies, improve the range of services on offer and secure efficiency gains in numerous internal processes.
First, digital transformation offers significant potential advantages to companies, be it thanks to efficiency gains, progress in financial inclusion levels or the possibility for different intermediaries to better meet each customer’s needs.
However, as in any other transformation process, there are also new and important challenges to be addressed. Accordingly, the regulator should review and adapt the rules already in place; the aim must be to remove obstacles limiting the advantages to be had and, at the same time, to mitigate any risks that the new environment may generate.
From the regulator’s standpoint, it is important, first, to maintain a level playing field, which basically entails putting into practice the well-known maxim: “same risks, same requirements”. However, this has not proved easy, as a great many of the regulations in place have a sectorial approach.
In addition, certain activities are subject to special regulations, because of the possible implications, for instance, for financial stability. This is the case of deposit taking, which leads to banks being subject to strict criteria that shape their activity overall, while other intermediaries that offer similar services, but not deposit-taking, are free from such requirements.
Turning to the promotion of innovation, in such a global, competitive and dynamic environment some flexibility in the stages at which ideas are tried out is required. Here, the proportionate application of regulations, within the permitted margins, or the creation of controlled test spaces, known as sandboxes, appear to be suitable measures for promoting innovative projects that seek to harness the potential of new technologies in the financial sector.
Further, it is worth paying attention to how this transition process unfolds. As I stated earlier, our starting point in Spain – and largely in the rest of Europe – is that of a heavily banked society. But, further to digital transformation, significant changes are afoot in the business models of traditional institutions, and in the role that other agents from different sectors play, in relation to the provision of financial services.
As regulators, we should seek to ensure this transition is orderly, maintaining at least the existing levels of stability and the safeguards set in place following the financial crisis. In this respect, if anything characterises the new scenario, it is the growing importance of data as the source of a competitive edge.
Technological development has given rise to an unprecedented transformation in the capacity to capture, store, process and analyze information. Unquestionably, this is one of the basic reasons it was decided to liberalize the exchange of certain pieces of financial information in Europe. And it is also why other jurisdictions (Australia, for example) appear to be following the example.
It is in this new competitive context, where data on payment transactions circulate more readily, that it is important for banks to take the necessary steps to ensure the security and privacy of the information that is shared. Also, aspects such as data governance, differentiated treatment in terms of their nature and defining where individual data end and where those processed by banks begin are all issues that need to be resolved.
Indeed, a far-reaching debate looks likely. In any event, in the European Union this debate should not be tackled in a fragmented fashion, with national-based differences. It should be one of the issues at the heart of the agenda for the forthcoming European Commission meeting.
It would be remiss of me not to discuss, albeit briefly, the importance of cybersecurity in this new digital environment. Ultimate responsibility for managing this increasingly significant risk should fall on financial sector participants themselves, including central banks, who play a key role in the management of many market infrastructures.
Yet in such an interconnected and interdependent sector, the authorities must develop an appropriate framework geared both to reducing the incidence of cybernetic attacks and to increasing resilience in the face of such attacks. Here, moreover, the principles of proportionality and graduality applied when managing other types of risks do not prevail; any link in the chain, no matter how small it is, may act as a gateway for a cybernetic attack that compromises the security of the entire system.
Lastly, I should like to discuss an aspect which, I believe, will be pivotal in future discussions among financial authorities: coordination among the different regulators. As I mentioned, one of the strategic elements of digital transformation is the management of information. But the discussion goes beyond financial data and may also affect other sectors.
Moreover, digital transformation enables the supply of financial services to be extended, accommodating them to the individual needs of consumers, who see their choices and decision-making capacity increase. This means that aspects such as the privacy or protection of information, transparency towards consumers (so they may take informed decisions) and the effective level of competition between providers of specific technological services (take, for example, the use of the cloud) all gain in importance.
However, these matters lie outside the typical remit of financial supervisors and thus make it necessary to promote a collaborative climate and more intense cross-disciplinary dialogue.