Governance of Financial Globalisation
Speech given by
Sir Jon Cunliffe, Deputy Governor Financial Stability, Member of the Monetary Policy Committee, Member of the Financial Policy Committee and Member of the Prudential Regulation Committee
German Economic Council Annual Finance Conference, Berlin 11 February 2020
Financial globalisation – an integrated global capital market and cross-border financial services – mean that our economies can benefit from better matching of saving and investment, from greater choice and from risk sharing and diversification.
But, of course, it also means that we import and export financial risk from across borders. We saw just over a decade ago the damage that can come from financial globalisation if we do not have appropriate governance at the international level.
This question of governance, and of the import and export of financial risk, is a subject of crucial importance to me, and not just because I am still scarred by the great financial crisis. I am Deputy Governor for Financial Stability at the Bank of England. We are responsible for the largest and I think most complex international financial centre in the world.
And I also want today to talk specifically, from the particular perspective of financial stability about how, in the light of the current governance of financial globalisation, we build the new arrangements for the governance of the financial sector connections between the EU and the UK.
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One example is artificial intelligence. Ten years ago, the potential impact of AI and machine learning on financial firms was discussed in niche conferences as one of those things on the horizon. Today, 80% of firms we regulate use machine learning. The increasing use of AI will pose big societal questions – what kind of decisions can AI be allowed to make, how to protect against AI creating and amplifying biases/discrimination. These are debates which go much wider than the international financial regulatory community, but to which we must contribute. And there are also specific financial-regulatory issues that have cross border implications. For example, whether AI systems could contribute to procyclicality and risk amplification, whether and how they should be used in regulatory capital models, and what should be the standards for the appropriate governance and oversight of decisions made by AI.
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Equivalence assessments are, in the words of the EU/UK Political Declaration, ‘autonomous’ matters for each side. But if we want the relationship to work, the following considerations matter.
First, and I think self-evidently, the UK cannot outsource regulation and supervision of the world’s leading complex financial system to another jurisdiction.
Second, future regulatory and supervisory arrangements between the EU and the UK need to be stable and built on good faith.
Third, we need on both sides to have deep supervisory cooperation in all areas of cross border financial activity – banking, insurance, markets and market infrastructure.
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My point today is that we have over the past ten years achieved a step change in the governance of financial globalisation and the way in which we manage cross border risks. As memories of the crisis fade, we need to work together to sustain and reinforce the progress we have made to deal with new cross border financial sector risks – challenges like the impact of climate change on the financial sector and the technologically- driven changes we are seeing in cross border payment systems.