josef bonnici : lessons from the recent past and the road ahead address by professor josef bonnici, governor of the central bank of malta, at kpmg ’ s biennial financial services conference “ maintaining the vision – driving value from change ”, st. julian ’ s, 1 november 2011. * * * the euro area is currently addressing the challenge of a number of interacting problems : the economic slowdown, the sovereign debt crisis and financial sector instability. the sovereign debt crisis has been aggravated by the impact on fiscal balances of slower economic growth and, in many countries, government support for distressed banks. in turn, sovereign debt problems have damaged the balance sheets of euro area banks and impaired the supply of credit to the economy. the fact that this monetary union is made up of sovereign and autonomous member states shows up at various levels. looking at national fiscal and structural policies in the recent past, one notices sharp differences in the extent to which different countries have exercised budgetary caution and preserved their international competitiveness. other national differences can also be observed. in the case of greece, for example, the country ’ s problems were compounded by the statistical understatement of the budget deficit and debt. in the case of ireland, as another example, it was imprudent bank lending policies, particularly to the real estate sector, which led to a massive rise in the debt burden of the state. of course, determined efforts are required on the part of eu governments to reach a consensus on improvements in governance – particularly on the rules governing budgetary policy in the monetary union – and on the provision of bail - out funds. while the discussion and decision process surrounding these matters are often regarded as a weakness in the governance structure, it must also be recognised that the changes involved represent significant levels of assistance to programme countries and also touch directly on issues related to sovereignty. it is perhaps ironic that current problems are in part a side effect of the success of the monetary union, and the benefits it brought about. more precisely the crisis has also been triggered by the misuse of the benefits of monetary integration. the new currency reduced the cost of borrowing in several countries, as credit spreads narrowed and exchange rate risk on intra - euro area borrowing was eliminated. 1 the reduced cost of financing public as well as private debt was reflected in higher government debt and private sector leverage. in the wake of risk repricing by the financial markets, there is now the strong tendency for market operators to unwind their holdings of

penalise certain players or to give them special privileges. the main purpose of financial regulation is still to ensure financial stability by avoiding risks to a stable and trustworthy financial sector. in the case of both fintechs and banks, new risks stemming from intelligent technologies cannot be ruled out. big data is a good example : on the one hand, it may definitely prove helpful in terms of keeping a proper and timely overview of risks and processes in a complex banking world. but big data technologies may also give rise to whole new categories of risk. for example, big data could entice banks and also unregulated players to let algorithms become even greater decision - makers – think of decisions regarding credit assessment or trading, for example. but we have to ensure that humans, or, more precisely, well - informed risk takers ultimately take responsibility for their decisions. the same applies to risk management via intelligent data processing methods : the approaches i have witnessed so far sound very promising. but we have to bear in mind that computer algorithms may not always be right. cyber security is another issue that needs to be dealt with in an industry that is becoming increasingly reliant on it. bis central bankers ’ speeches all in all, regulators will have to remain alert with regard to new technologies. there are many new businesses and technologies out there, and we cannot foresee for the time being all of their possible risks, nor can we limit the scope of potential risks. the objective is therefore more a matter of ensuring a risk - adequate prudential approach and the necessary degree of intervention. thank you. bis central bankers ’ speeches