jose de gregorio : what does society expect from the financial sector? panel discussion remarks by mr jose de gregorio, universidad de chile and former governor of the central bank of chile following the per jacobsson lecture by dr yv reddy, 24 june 2012, basel, switzerland. * * * i would like to thank the bis for the invitation to participate in this panel, which makes us look at financial markets from a new perspective. as policymakers, we are used to talking about how the financial system must operate in order to fulfill its goals without threatening financial stability or imposing costs at the aggregate level. in recent years, the discussion has focused on how to avoid excessive procyclicality, contagion, moral hazard, and other important policy concerns. as economists, we have been trying to explain the misbehavior of financial systems, and we are still searching for answers. although we may have some ideas, the policy implications are not straightforward, but the answers cannot wait. policy design needs answers as soon as possible, and delays may cause well intentioned policies to be poorly implemented. but what society really demands from financial systems is quite difficult to define. society is a collection of actors, with different interests and different needs. people want access to the financial system at fair conditions. therefore it is useful to think of society as everyone who is not related directly to the financial industry or policymaking. starting from here, we can say that society is demanding safer and fairer financial systems. the view that financial markets were big casinos, where the betting was done with other people ’ s money and gamblers walked away unpunished, is quite common around the world. public opinion has been dominated by that sentiment, which has also affected policymaking. on financial development let me start by stressing that financial intermediation is good, and with the backlash from the crisis it should be repeated that a well functioning financial system is key to prosperity. it promotes economic growth by channeling investment funds from savers to borrowers ( levine, 2006 ). it is central to promoting entrepreneurship and to facilitating investment, including human capital accumulation. it provides financing to households in order to smooth consumption, and provides insurance. it provides safe and cheap means of payment. the difficulties faced by households and firms in many emerging market economies due to underdeveloped financial institutions and markets should be a clear reminder of this positive role. but financial depth may also be a source of great problems. as in

will be asking employees to change not only their skillsets, but also their mind - sets. while the focus is often on the word “ digital ”, the truly challenging part, budgets notwithstanding, is the “ transformation ”. we can purchase and deploy the latest technology, but if we simply automate existing processes, we will accomplish nothing. i am sure that many of us are guilty of typing a letter, printing it so we can sign it, then scanning and emailing it. how many steps could we save simply by using an electronic signature? what i just described might seem like a harmless quirk, but let me give you another example. about 15 years ago, our bank purchased a banknote processing machine that could count and authenticate hundreds of banknotes per minute, separate the clean notes from mutilated ones and package or destroy them accordingly. previously, the process was done manually, with our currency staff hand - counting the banknotes, but this machine automated the process and produced reports that our internal audit team vetted and approved. having that machine should have drastically improved both efficiency and productivity, but initially, it did not. why? because one member of staff was not comfortable signing the reports until she had verified, by hand - counting, that the stacks of clean notes were the same number the machine had recorded. that was clearly an example of parallel testing! that might sound like an extreme case, but the two examples reveal the same thing : we, often to our detriment, hold on to outmoded thinking because “ that ’ s the way we ’ ve always done it. ” this means that our employees will need to be coached into moving away from traditional modes of thinking as more efficient methods become available. both examples i cited were focused on processes, but there is another area where changing mind - sets is critical, and more challenging. culture. here ’ s a quote from roland berger ’ s report, “ central banking hr of the future : driving strategic change, ” that describes central banks. “ central banks are often traditional companies with a rather hierarchical, historically grown organisational structure. they are often divided into “ suborganisations ” or divisions, each performing a specific function. targets are then defined on the level of the separate departments – often without considering the organisation as a whole. ” i think we can agree that much of this sounds familiar. the central bank of the future the report details the changes that are essential for central banks to survive and