vitas vasiliauskas : central banking in the age of financial innovation – what does it take? speech by mr vitas vasiliauskas, governor of the bank of lithuania, at the conference " living without globalization? ", session 8 " digital transformation and innovation ", organized by the hamburgisches weltwirtschaftsinstitut ( hwwi ) and the reinventing bretton woods committee, hamburg, 4 july 2017. * * * good afternoon, ladies and gentlemen, firstly let me thank the other panelists for their insights. i would like to add some thoughts on financial services and central banking – their new mission in the age of innovation. i guess, some of these thoughts may sound unusual or even controversial. especially for a representative of a central bank that also holds the role of financial system supervision. however, this is our goal for today – to have a productive discussion, frankly sharing our thoughts and offering outside - the - box views. needless to prove the obvious : financial markets are changing. and they are doing so swiftly and fundamentally. in this light, central banks – being the guardians of financial stability – must alter the way they operate. to respond to new challenges, they need to become more flexible. otherwise – you see the poor guy in the picture – central banks and supervisors will stand with their hands tied, while the financial sector is moving forward, fueled by technological advance. yet while saying “ a ” we must say “ b ”. despite a surge in innovations, there still exists a vast unused potential. in practice, private actors may be held back by unfavorable market structure and regulatory environment. what these actors often need is a gentle push – a supportive stance from the authorities. on the other hand, authorities – and consumers as well – also face challenges. firstly, fintech developments formulate the need to balance innovation on one side and – stability on the other. adding to this, certain sectors – such as payments – may be ready for innovation. but they are hampered by high entry barriers, preserving relatively inefficient and costly systems. what is more, technological advances – like automated trading and investment – alter market structures. this calls for upgrades in regulatory frameworks. conventional wisdom and tools are often insufficient. central bankers and supervisors are thus facing a choice. they must either opt for an unconventional path, which requires broader outlooks, or risk lagging behind the markets. now let us look past the

( tfps ) of 23 eu economies since 1998. countries in europe grow at different speeds. they also appear to belong to different convergence clubs2. even among central european economies, more than one convergence club could be discerned. 1 / 3 bis - central bankers'speeches for example, hungary and the czech republic appear to belong to one club, while poland, lithuania, and latvia belong to another ; the members of the two clubs are converging to different points of tfp if they continue their current trajectories. furthermore, lietuvos bankas, in its 2020 study on convergence, estimated that lithuania would have needed a tfp of more than 30 % higher over the past 20 years to catch up with the tfp levels of the original eu member states of germany, france, or belgium, who belong to a club of their own. this challenges the convergence measurement itself because convergence in terms of tfp is not straightforward. countries belonging to different convergence clubs appear to be experiencing convergence at the level of their club – a concept that is not equivalent to the overall convergence within the eu. what is puzzling is that when we focus solely on convergence in terms of gdp, we find evidence that such convergence is happening. for example, over the past decade lithuania's gdp per capita rose to 87 % of the eu average. the other two baltic states also boasted robust convergence rates in terms of gdp convergence. but when we look at productivity – and, in my view, productivity is the key driver of growth – the picture changes. data shows substantial productivity variation within europe. labour productivity growth is uneven, and we can see evidence that the central european region was growing considerably faster in the first decade of the 21st century than in the following decade. this is a gravely worrisome trend, especially when discussing convergence. the productivity debate usually ends with prescriptions like " increase investments " and " implement structural reforms ". today, however, i hope that panelists will share their thoughts on the economic model of central europe in general. have we reached the limit of what can be achieved without undergoing a fundamental transformation of how we do things? will automation and immigration provide the impetus for this region to grow and prosper? with all this in mind, i would like to move to the institutional side and its effects on convergence. institutions undoubtedly play a significant role in determining countries'overall economic success. the question remains as to which institutions have the greatest impact on convergence and through what