the promise of fintech – something new under the sun? speech given by mark carney governor of the bank of england chair of the financial stability board deutsche bundesbank g20 conference on “ digitising finance, financial inclusion and financial literacy ”, wiesbaden 25 january 2017 all speeches are available online at www. bankofengland. co. uk / speeches ecclesiastes 1 : 9 what has been will be again, what has been done will be done again ; there is nothing new under the sun. 1. fintech ’ s shining future it is a pleasure to be at schloss biebrich as part of this bundesbank conference on “ digitising finance, financial inclusion and financial literacy. ” just a few hours ago, i was in the world ’ s leading fintech centre. one which generated £6. 5 billion in revenue, attracted just over £500 million in investment and employed around 61, 000 people in 2015. from start - ups in london ’ s silicon roundabout to established players in the valley, entrepreneurs are applying their creativity and technical ingenuity along the financial services value chain. to its advocates, this wave of innovation promises a fintech revolution that will democratise financial services. consumers will get more choice, better - targeted services and keener pricing. small and medium sized businesses will get access to new credit. banks will become more productive, with lower transaction costs, greater capital efficiency and stronger operational resilience. the financial system itself will become more resilient with greater diversity, redundancy and depth. and most fundamentally, financial services will be more inclusive ; with people better connected, more informed and increasingly empowered. with hundreds of millions now entering the digital financial system every year, could higher economic growth and a quantum leap in social equity be on the horizon? or will the range of new financial technologies primarily make existing institutions and markets more efficient and effective? no small prize but hardly a transformation. see ernst and young, ( 2016 ), “ fintech on the cutting edge ” : http : / / www. ey. com / uk / en / industries / financial - services / banking - - capitalmarkets / ey - uk - fintech - on - the - cutting - edge all speeches are available online at www. bankofengland. co. uk / speeches of course, technological innovation has long been twinned with finance. today ’ s system is the product of past advances, beginning with the

of the counterparties who struck the contract. this can arise either because in states of the world in which a particular contract is designed to have value there is high correlation with other events or where, in that state of the world, full adherence to the legal structure would cause large unintended consequences in terms of signalling or reputational damage. tail risks with counterparty risk correlation the first category of contracts falls under the broad headline of “ wrong - way ” risk in tail events, and is purely statistical in nature. the particular issue is focussed on contracts that can be perceived of as providing insurance yet, in a stress scenario, when the contract is sufficiently in the money to be worth calling, there is a significant conditional probability that the insurance provider is no longer in business to pay out. in what follows, we look how such problems arise using practical examples and consider what lessons should be drawn. for example, the squam lake working group on financial regulation, july 2009, “ credit default swaps, clearinghouses, and exchanges ”. bis central bankers ’ speeches when investor “ a ” decides to buy protection from bank “ b ” on exposure to a third company “ x, ” she may or may not explicitly take into account that in the event of default by x, b may in fact also be in trouble. whether or not she does so would depend on the reason for the trade. if a wants default protection then that default correlation certainly should be taken into account2. but if, for example, the goal is just to reduce the price volatility of holdings of a certain corporate bond issued by x, this default correlation may not be seen as that relevant. as a practical example, take the case of a pension fund managing its corporate bond portfolio. suppose the pension fund owns a large amount of a particular corporate bond and wants to reduce this holding, but the liquidity for outright sales is limited. the fund may take a view that it will have less price impact by gradually selling the bond in the cash market over a period of a few months but, at the same time, it would prefer to take off the market risk immediately. if that is the case, the fund may take out a standardised cds ( credit default swap ) contract with a bank, probably written on a basket of corporate bonds issued by the same corporate. there would be basis risk from any mismatch in the bonds, so the cds is not an exact hedge, but in most scenarios, holding the