norman t l chan : when markets fail speech by mr norman t l chan, chief executive of the hong kong monetary authority, at the 6th caixin summit 2015, hong kong, 6 november 2015. * * * 1. the topic of my speech today ( “ when markets fail ” ) is a little controversial as there are some who do not accept the premise that markets can fail. they believe that markets are capable of self - correcting and will eventually achieve the most efficient price discovery and resource allocation. however, i have some reservations about this notion because our experience tells a slightly different story. markets do sometimes fail to perform their price discovery and resource allocation functions. in some more serious cases, market failures have even led to destabilising financial shocks and crises. 2. indeed, the 2007 – 08 global financial crisis, which ravaged the us and europe, clearly repudiates the general belief that market failures and financial crises will only occur in third world countries or underdeveloped economies. on the face of it, the bursting of the us property bubble triggered the collapse of the subprime mortgage market, which in turn led to the financial crisis in the us. however, if we look more deeply, we find that prior to the crisis, the banking and financial systems had been churning out a great number of subprime mortgage - backed securities. in addition, various derivative instruments using subprime mortgage - backed securities as underlying assets, like cdo2 and cdo3, added layers of risks like snowpack. the subprime mortgage crisis precipitated an avalanche that nearly buried many financial institutions with tremendous losses. obviously, human greed was at play. but this was not a sufficient explanation. human greed has always existed. why then had the us financial market sleepwalked toward the brink of collapse? whenever an asset or credit bubble forms, many bewildered market participants are often of the view that it will be different to previous bubbles, and that the market boom is well supported by fundamentals. “ this time is different, ” so they say. in my view, the main cause of the market failure and near meltdown of the market was the collective failure of the various “ safety valves ” that maintain the orderly operation of the market. they include the internal risk control functions of financial institutions, the external discipline imposed by regulators and the ratings assigned by international credit rating agencies ( cras ), etc. in fact, it ’ s worth noting that many of the

. beyond tech 26. my third reflection is that the key to success is “ beyond tech ”. ( not “ biontech ” the vaccine! ) here i am referring to the need to go well beyond technology to create network effects. 27. projects that fill a glaring gap in available services, as was the case with fps for example, may achieve quick adoption more easily. but for other projects that seek to replace current products or practices, adoption could be an issue even if the new product or experience is far superior to what we have currently. 28. let me illustrate this using our cdi initiative. the technology to construct this infrastructure and connect all parties is relatively simple. creating a conducive environment to attract all stakeholders to join is far more challenging. 29. the project team spent most time not on technology, but in creating a commerciallyviable arrangement to ensure that there ’ s something for everyone : banks can use data to manage credit risks ; data providers can earn fees ; and data owners can borrow more easily and cheaply. so, the key to success for cdi clearly lies beyond technology. we need to find the right commercial incentive for all to benefit and create the network effect. 30. similarly, for the mbridge project, technical interoperability is key but relatively straight forward. the platform now has the flexibility to allow central banks to easily connect through cbdcs or traditional payment systems. but that won ’ t attract more jurisdictions to join by itself. to do that, the platform needs to account for policy and business challenges. how to build - in different regulatory requirements like anti - money laundering, how to ensure sufficient on - chain foreign exchange liquidity, or how to develop a shared legal framework are all challenging but necessary tasks. the project team will focus on these issues, which are well beyond technology, in taking the project to its next stage. closing 31. the hkma began its fintech journey six years ago. we have come a long way, reached some important milestones, kept pace with our peers, and are now pressing on into uncharted territory. but like everyone else, we are still exploring, experimenting and learning. and as we continue our journey, we will stay radically open - minded, learn from our failures and keep trying, and go well beyond technology to achieve network effects. 32. as i said at the beginning, hong kong will continue on the road of fintech adoption. many exciting developments are taking place, and