Denis Beau: What policy framework to help building innovation and
growth into Europe's capital market?
Speech by Mr Denis Beau, First Deputy Governor of the Bank of France, at the AFME (The
Association for Financial Markets in Europe) Annual Capital Markets Technology and Innovation
Conference, Paris, 21 November 2019.
* * *
Ladies and Gentlemen,
The past decades have clearly shown how innovation - in particular technological innovation -
have brought new services, reduced barriers and contributed globally to progress and economic
growth.
However, innovation does not necessarily implies growth for everyone, everywhere. Innovation
can weaken some actors, create imbalances and its long-term benefits for society may be, in
some cases, uncertain. In addition, I would say that speaking solely about growth is not enough
today, in the context in particular of climate change and lowering social mobility. Growth should
be sustainable, inclusive and compatible with a necessary level of resilience.
Here Central Bankers and Supervisors, in charge of financial stability, have a contribution to
make. But what does that mean in the European context for the innovation and growth of our
capital markets? My perspective on this rather complex issue is simple: we have to identify
clearly the challenges raised by innovation and be ready to adapt our policy framework if
we want that innovation goes with sustainable, inclusive and resilient growth of the
European financial market. To support my point, I would like first to explain how we at the
Banque de France and the ACPR approach this twofold issue (identify the challenges and adapt
when necessary our policy framework) I will then illustrate our approach by addressing the
(1).
case of financial market infrastructures (2).
1. Identify the challenges and be ready to change our policy framework
Technological innovation has the power to create new services for consumers but also to
reshape financial market structures. I will not elaborate on a phenomenon that everybody can
see developing in the financial sector. The whole value chain is being impacted by Fintechs
as well as by Bigtechs, which are introducing almost every day new ways to pay, to provide
credit, to get insurance and, of course, to invest within capital markets. By doing so, they are
also modifying the financial ecosystem that we supervise and may contribute to an
increase or a shift of risks in the financial system.
Data and consumer protection issues raised by new technologies, anti-money laundering
challenges posed by new usages, operational risks specific to third party providers and
cloud outsourcing, including cyber-risks, competition impacts: the list of issues is quite
long! I should also mention the systemic threats that large actors can represent if they use
their huge consumer base and leverage on worldwide networks effects without
sufficient regard for financial stability consequences.
Facing these changes, Central Banks and Supervisors need to adopt the right mindset.
In my view, they should not take the current regulatory framework for granted and operate under
the assumption that this framework, which was mainly designed before the technological
« disruptions » we see currently spreading through the financial system, does not need to evolve.
On the contrary, to continue delivering well on their financial stability mandate, through their three
classical roles, namely as catalyst, supervisor and service provider, they should aim first at
promoting the necessary regulatory adjustments so that the ultimate goal of financial stability is
well preserved. In other words, we should contribute to providing the market with a sound,
adapted and updated regulatory framework, which is, in my opinion, needed to support
innovation, and even to foster it.
To deliver on such a contribution, an open-minded approach and an in-depth understanding
of innovation is required. To that end, we need to engage with innovators, observe the
ecosystem, test and learn. I think it is fair to say that the global central bank and supervisory
community is heading in that direction as testified by the recent launch of the BIS innovation Hub.
In any case, at the ACPR and the Banque de France, it has been our motto for a while,
according to our digitalization strategy. It is indeed in this spirit that we set up in 2016, within
the supervisory authority (the ACPR), a dedicated Fintech-Innovation Hub to have a direct
contact with innovators and anticipate the effects of innovation trends. In addition, Banque de
France has launched in June 2017 "Le Lab". Le Lab is a genuine Open Innovation laboratory: its
goal is to bring new practices and technologies into our activities, and to that end experiment
where necessary within short and flexible cycles. To do so, it works in close collaboration with
innovative firms. And, we launched this year our first "suptech" program to promote the use of
artificial intelligence in the performance of supervisory tasks.
To illustrate how we can leverage on the daily contact with innovators, to help changing
regulation or defining supervisory expectations, I will take the example of the on-going work on
by the ACPR Fintech team. When the ACPR published their report on AI
artificial intelligence
in 2018, we made it clear that the purpose was not to regulate ex ante, with a risk of hindering a
promising technology. However, it seemed to us important to raise at an early stage the key
issues of governance, ethics, auditability and explainability, in order to promote a sound
development of AI in the financial sector.
And the Fintech team did not stop there. They have been conducting experimentations with
voluntary financial institutions or providers to explore these issues further, on a few significant AI
use cases (AML-CT, internal models and consumer protection). Bilateral meetings were
complemented by tests in real conditions, where ACPR experts and data scientists from the
Banque de France were able to run algorithms, modulate parameters, test new population
samples or compare different models. This concrete type of approach will give our experts a
vision of the diversity of cases and thus the maturity necessary to provide the market with
relevant and operational guidance.
Obviously, all this work shall be considered as a contribution to the evolution of a more global
framework - at European and international level.
The European level is of course the most relevant one to promote innovation for financial
services in the single European market. The success of the two payment services directives
(PSD1 and PSD2) clearly illustrates how European legislation can identify new trends, trigger
innovation and create a true momentum in the Fintech ecosystem. More recently, the GDPR
provided the European Union with a clear framework for data protection and circulation: this
regulation is now a reference for many third countries, which identify the risk that unregulated
data exploitation can pose to consumers' confidence.
However, the European market cannot be considered in isolation and this will remain the case in
the post-Brexit era. Innovation - and growth - benefit from open ecosystems. Risks in a
digitalised world do not recognize borders. Ensuring a better coherence of national (or regional)
regulatory frameworks in the world is therefore a key element for their effectiveness.
Crosssector and cross border cooperation is necessary. Our initiative for a G7 cyber-attack
simulation exercise or our contribution to the G7 working group on global stable coins are two
recent examples of our commitment to this necessary worldwide cooperation.
2. Focus on financial market infrastructures
Let me now focus on the case of market infrastructures to illustrate how the mindset and tools I
have just described can also feed into the way we perform our roles, and in particular our role as
service provider.
From the first-generation of the Target system twenty years ago, the Eurosystem has
demonstrated a strong political will to foster innovation and support capital markets
integration and development, through the provision of clearing and settlement services in
central bank money for financial intermediaries. These services, namely T2 and T2S, have
established themselves as the backbone of the financial market infrastructures for the euro.
More recently, the Eurosystem has developed its Vision 2020 program comprising:
TIPS, an instant payment solution, launched in November 2018 to settle instant
payments ;
the T2-T2S consolidation to optimize and enhance liquidity management and cash and
securities services planned for 2021 ;
last but not least, the ECMS (European Collateral Management System) planned to be
launched in 2022, and designed to provide a unified platform for the management of
standard monetary policy operations and the associated collateral.
These are European successes and ambition. Nevertheless,
we have to address new
challenges.
In the recent years, there has been a strong demand for quick and safe cross-border payment
solutions, available 24/7, enabling smooth exchanges. In Europe, various domestic instant
payment solutions have emerged in a certain number of countries, available 24/7, settling retail
payment orders up to 15 000 euros in less than 15 seconds. However, cross-border payment
solutions are still costly for end users, slow and unsafe across the world, in particular in
emerging countries.
Regarding the wholesale infrastructures, they still present various shortcomings, as market
infrastructures are not interoperable around the world. The correspondent banking model is often
considered as the only solution to transfer money across borders, but it is also costly, and lacks
traceability and efficiency. The perimeter of the AML/CTF and KYC checks is in some cases
uncertain for the counterparties of a payment order.
The tokenisation of financial assets combined with the recourse to blockchain-based
solutions and more broadly Distributed Ledger Technologies to store and transfer those
At the same time, they could help remedy
assets could help answering market's demands.
the current limits of the existing wholesale market infrastructures by exploring new avenues. The
implementation of those innovations could have an important impact on the financial industry in
particular to facilitate gross and simultaneous Delivery-versus-Payment processes,
crosscurrency settlement, resilience, and recovery from operational incidents.
The risk there is that such developments lead to disorderly approaches and
heterogeneous adaptations of market infrastructures, in particular when it comes to the
Several initiatives or projects are in effect considered by the industry
modalities of settlement.
in the post-trade area, pointing to the role central banks could play in this regard, as they have
done in the past.
Therefore, the Eurosystem, as a major provider of critical wholesale clearing and
settlement services in euro, should be open to experimenting these innovations in
order to revisit and possibly improve the conditions under which we make available
central bank money as a settlement asset. We, at the Banque de France, have started
gaining exposure and experience with those innovations and in particular DLT. We were the first
central bank to develop, regarding the specific use of SEPA creditor credentials, a decentralised
register system based on a blockchain infrastructure, the "MADRE" register. Of course, this is
only a first step, which does not exhaust an extremely vast and diversified field of
experimentation. One possibility often mentioned would be for us to issue a central bank digital
currency to support wholesale clearing and settlement services on a decentralised basis using
DLT. We, at the Banque de France, are therefore quite open for experiments in that
direction, together with the ECB and other central banks of the Eurosystem, in particular
with regard to a wholesale Central Bank Digital Currency.
Another operational contribution, which could be worth considering - and experimenting - by
central banks, is related to one of the major failings of the current payment systems, which is
cross-border retail payments. One solution to the weaknesses of private initiatives in the field of
cross-border payments could be to interconnect these systems. It is technically and legally
feasible for a given area, for example, in the euro zone. However, at the global scale, between
systems of different areas, it is more complex, in particular when several currencies are
involved. Central banks through their operational role could look for ways to contribute to the
emergence of a solution to promote faster, more reliable and less costly payment solutions.
Conclusion
To conclude, let me underline that technological innovations create opportunities and risks, and
therefore challenges, not only for financial intermediares but also for public authorities. Central
Bankers and Supervisors can and should contribute to meet those challenges.
To that end, we
should have an open-minded approach and develop an in-depth understanding of
innovations currently spreading through the financial sector. This is critical for our
capacity to help delivering a sound, adapted and updated regulatory framework
supporting innovation, mitigating adequately their inherent risks. This is also critical for
our capacity to adapt the performance of the different roles we play to fulfil our financial
stability mandate.
This is the reason why we are, at the Banque de France and the ACPR, determined and
ready to further engage with innovators, be they financial sector incumbents or new
comers, observe the ecosystem, test and learn.
Thank you for your attention.