Paris Europlace International Financial Forum - Paris, 9 July 2019
New Frontiers in Finance
Speech by François Villeroy de Galhau,
Governor of the Banque de France
Press contact: Mark Deen (mark.deen@banque-france.fr; +33 6 88 56 54 03).
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Ladies and Gentlemen,
It is a pleasure to be with you today: this Paris - Europlace International
Financial Forum is more and more "the place to be", as France and Paris are
increasingly stimulating first-movers in Europe. The theme of this Forum -
"New Frontiers in Finance" - prompts us to look towards new territories that
we have to explore and conquer. Regarding finance, I will focus on two of
them: digitalisation and green finance. But before looking at the future, let me
stress two prerequisites for the present.
**
I. Two prerequisites for the present
My first message is to welcome the new European team, nominated in
Brussels last week, starting with Christine Lagarde and Ursula von der Leyen.
Once again, albeit at the last minute, albeit under the threat of a crisis, Europe
has proved itself to be decisive and innovative. Now, it is time to begin the
fundamental work on a true financial Eurosystem. Let us look beyond Brexit,
and beyond the somewhat disappointing debates on the euro area budget.
The top priority on the European agenda should be a Financing Union for
Investment and Innovation, which will channel our abundant private savings
through a combined Banking Union and Capital Markets Union. Firms need
this in order to raise equity and find European venture capital; keeping a
European capacity in investment banking is a strategic imperative. Financial
players need this in order to conduct cross-border mergers: European banking
consolidation is overdue, and it is indispensable, not to reduce competition -
quite the opposite - but to reach the critical mass necessary to make digital
investments and allow savings to circulate. And, lastly, the euro area needs it
in order to finally have an effective economic stabilisation tool to weather the
shocks affecting some countries: "private risk sharing" is effective between
states in the United States. If one doesn't want a fiscal union - duly noted -,
one must make even more resolute progress on the Capital Markets Union.
We have talked enough about this, and it is now time to take concrete
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measures: this must be the ambition of the new Commission. The ECB will
support it, and France will be a committed player.
My second prerequisite is the successful implementation of Basel III. It is vital
that we do not forget the lessons from the financial crisis, nor break the
promise we made in 2017. But this transposition must be fair - naturally
involving the United States - and reasonable. The first estimates of capital
requirements are premature and do not give the horizon: Basel III will be
finalised only in 2027. But our objective and our assessment are crystal clear:
Basel III is for all French banks compatible with normal allocations of profits to
reserves in the coming years, after distribution; in no case will it require a
dedicated capital increase.
II. Taking the digital turn with lucidity
We obviously all need to make the digital leap. 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. The ACPR is working
actively on these issues. Last year, it published a discussion paper on the
implications of AI in the financial sector. And this year, we are working with
financial industry participants on the implications of AI algorithms in three
topics: AML/CTF, internal models and customer protection.
Beyond incumbents, new players are now becoming increasingly important.
Fintechs are competing on niche markets. Yet they do not have the capital
resources to disrupt incumbent banks and can even be acquired by them. On
the contrary, 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" still applies. This is a good thing for the level playing field.
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However, beyond traditional financial regulation, international cooperation
should be developed in three areas, three cornerstones of the regulation of
digital finance. First, cybersecurity is a sine qua non for a reliable and
sustainable digital future. It is a clear priority of the G7 French Presidency next
week in Chantilly. 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.
"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, and
believe me, we will do it. France, as Chair of the G7 this year, has created a
dedicated task force. Our aim is to formulate a response that is common to all
jurisdictions, and holistic on all the issues. And to quote only two of many
requirements: it is imperative that the projects comply with anti-money
laundering regulations; the anonymity of the users creates heightened risks.
In addition, if issuers of stable coins also want to offer banking services such
as deposits, financial investments and loans, then they will have to obtain a
banking license in all countries where they operate. Otherwise it would be
illegal. We are quite far from the creation of a global private currency. But
stable coin projects reveal gaps in existing cross-border payment systems.
Hence, at the European level, we should aim at promoting a genuine
European strategy for retail payments. Payments are no longer a mere
boring back-office technicality. They are innovative, and they provide two
strategic assets: data, and daily customer relations. The raw truth however is
that the European payments market is already dominated by non-European
stakeholders. Furthermore, the growing role of non-European digital firms - be
they American or Chinese - offering payments solutions should be taken
seriously. Despite the creativity of the European ecosystem of payments, our
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market remains too fragmented. Against this background, I call for the creation
of pan-European payment solutions, building on a common brand and on the
technical success of the Target Instant Payment Settlement infrastructure
(TIPS) managed by the Eurosystem. We don't have much time left, but
regulators - starting with the Banque de France - and market players should
work hand in hand to create a momentum.
III. Green finance, "a new frontier for the 21st Century"
Let me now conclude with some words on green finance. As I once said, it is
"a new frontier for the 21st Century". Much has already been undertaken over
the past few months.
We are currently witnessing a 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. From the point of view of your
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 over 40 members and observers from all 5 continents,
with the Banque de France acting as its permanent Secretariat. 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.
Let me now say a few words on the road ahead for us. I will mention three
priorities for the near future. First, we must rely on enhanced disclosures that
need to be built on sound taxonomies. The taxonomy published by the
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Technical Expert Group (TEG) on Sustainable Finance of the European
Commission three weeks ago [on 18 June] is a welcome step. Second, we
have to better anticipate long-term climate-related risks, through what I call
"the video of the risks". We must push for building a forward-looking approach
of the impacts of climate risks through the development of comprehensive
climate stress tests. Third, green finance should mature and upgrade its
professional standards. Financing needs for energy transition are huge; in
Europe alone, it is estimated that an additional EUR 177 billion per year will be
necessary over the period 2021-2030 to reach the EU's energy and climate
The European Green Bond Standard proposed by the
objectives for 2030.i
TEG should ultimately help to further develop the green bond market and
channel more investments towards green projects. Let me add that France has
strengthened its role as leader in green finance. Last week, Paris Financial
Centre players have committed themselves to adopt a carbon exit strategy by
mid-2020.
**
To conclude, let me quote John F. Kennedy: "the New Frontier of which I
speak is not a set of promises - it is a set of challenges. [...] I believe the
times demand new invention, innovation, imagination, decision. I am asking
each of you to be pioneers on that New Frontier.ii" Today, almost 60 years
later, we face other challenges. But let us keep the same energy. Let us not
think that the battles have already been lost. Let us break limits and invent
new practices taking into account both digitalisation and climate change.
Thank you for your attention.
References
i
Source: European Commission
ii
John F. Kennedy, Democratic National Convention Nomination Acceptance Address, "The New Frontier",
delivered 15 July 1960, Memorial Coliseum, Los Angeles