29. 04. 2022 presentation of the action plan against financial fraud * ministry of economic affairs and digital transformation pablo hernandez de cos governor * ienglish translation of the original speech in spanish. first deputy prime minister, state secretary for security, chair of the national securities market commission, authorities, ladies and gentlemen, good morning. the protocol we sign here today stands as a milestone in our efforts to enhance and reinforce action against potentially fraudulent offers of financial products and services. it comes at a particularly opportune time, with several factors giving rise to an increase in financial fraud, most notably growing digitalisation. moreover, it is an excellent example of how a problem for citizens can be addressed far more effectively through collaboration between different stakeholders, be they public or private. in the case of the banco de espana, apart from the evident microprudential and macroprudential concern for the security and resilience of the supervised entities ’ it systems, the impact that fraudulent use of technology may have on the citizens and firms that use banking or credit services has been a concern of ours for some time. such fraud can also come at a high reputational cost to the financial system, the proper functioning of which depends on mutual trust between supply and demand. there are many examples of fraud that undermines said trust, such as identity theft when opening payment accounts, in “ know your customer ” procedures or to arrange and draw loans and credit ; payment fraud, mainly in card transactions, transfers and remittances ; and fraudulent offers of financial operations or services by unauthorised or unregistered operators, which are typically a prelude to actual fraud. more recently, though, new technologies and business models have paved the way for platforms and operators that, engaging in regulatory arbitrage, offer payment, credit or investment services without sufficient safeguards and transparency. here i would specifically mention operators in the crypto - asset arena, which promise handsome rewards via apps, websites and apparently innocuous advertising, and sometimes even embed such offers in traditional payment service chains, making them harder to identify. unfortunately, these practices do not distinguish between social groups, levels of financial literacy or risk profiles, and ultimately take a far greater toll on the more vulnerable groups, in particular young people and even teenagers, which is of particular concern. against this background, and notwithstanding any action that might be taken by the public prosecution service, the courts or law enforcement authorities in relation to criminal offences, our role

how we are harnessing the advances made by the leading institutions within the industry. furthermore, to encourage those institutions which are not at the leading edge in this field to make enhancements in their internal controls and risk management processes, the new accord will offer explicit economic incentives to adopt - over time - more accurate measures of risk and more sophisticated means for controlling their exposures to such risks. however, the basel committee recognised that relying on uniform rules alone would have introduced certain drawbacks. rules tend to be inflexible and therefore might preclude or ignore innovation. applying uniform rules may also fail to account for a bank ’ s unusual businesses or risk profiles. consequently, our second pillar, supervisory review, addresses some of those drawbacks. it introduces judgement into the policy mix. banks and supervisors will exercise discretion in determining capital needs relevant to their particular businesses and risk profiles. that degree of discretion makes the supervisory framework more flexible and better able to adapt to change and innovation. finally, the third pillar, market discipline, adds greater transparency to the process. when a bank discloses information that offers meaningful insight into its risk positions and exposures, marketplace participants are better able to assess its financial health. counterparties, investors, rating agencies, and even customers can reward banks that manage their risks properly and penalise those that hold unrealistically low amounts of capital for their risk. their reactions provide economic incentives for banks to strengthen their management of risk and hold at least adequate levels of capital against their risks. one might say that basel ii seeks an “ efficient frontier ” of policy objectives through the three pillars. each pillar provides something that the other two cannot. each is essential to achieving our overall objective of financial stability. i realise that this analogy of the three pillars as a portfolio of policy options is an oversimplification. but it helps us to visualise why we think that the most “ efficient frontier ” involves a mixture of minimum rules, tempered by supervisory discretion, and supplemented by market - based incentives. iv. consistency of accounting standards and a three - pillar system of course, our three - pillar supervisory system is highly dependent on a firm ’ s internal measures of risk exposures. “ basel ii, ” for example, looks at a bank ’ s own measures of risk in pillar 1. supervisors then engage bank managers in a dialogue on their interpretations of those measures - and the steps managers take in response - in pillar 2. finally, pillar 3 is intended to give the market greater