 Okay, hello everybody and good afternoon and welcome to this session called the Transformation of Finance. It promises to be in a very interesting discussion. In fact so interesting that there's almost a riot outside the door right now of people queuing up to listen to the bankers, which is great, great start. But we are indeed at a very, very interesting moment in finance. I've been coming to Davos since 2007 and I think there have been three phases in terms of the Davos debate about finance. Back in 2007, the first time I came, bankers were on top of the world. Everyone was in love with credit derivatives, financial innovation, were celebrated, bankers threw great parties and held their heads high and it was certainly a time when finance was booming. Then of course we had the crash and for the past few years most of the panels at Davos have been dominated by endless discussions about regulation, what went wrong, essentially bankers saying sorry or not saying sorry and lots of discussion about what could be done in the future to make things safer. A very backward looking, very inward looking debate. What's interesting about this year's Agenda and Davos, if you haven't poured to the programme yet, is that there is barely a discussion about regulation at all. Thankfully we don't have to worry about those wretched acronyms anymore. Instead it's a much more forward looking discussion about fintech, about the big changes that are sweeping through finance and potentially transforming finance in ways that are both positive and negative. Now as someone who's a journalist and paid to be cynical, my day job is I oversee the Financial Times in North America. There's part of me that thinks well maybe this is just a new way to distract people from some of the underlying problems that still haven't been solved in the core of banking. Certainly if you talk to bankers their intros are still bulging with regulatory issues. Or you can say actually this is the real story and while we've all been worrying about the backward looking crisis in the last two years we've been fighting the last war. In fact the biggest challenge to incumbent bankers today is not the crisis in regulation but the new players. Or you could say actually this is going to be what revitalises banking and allows the bankers to suddenly become beloved by everybody and maybe just maybe makes the bankers suddenly very fond of the regulators because guess what? Maybe they're going to protect them from the new disruptive forces. Lots of change, lots of very interesting issues and we have a terrific panel here to discuss it. We have three incumbent financial, two incumbent bankers, one incumbent insurance sector representative. At the very end known to most of you as Tom DeSwan who runs Zurich Insurance Group. We have in the middle you can see John Kryan from Deutsche Bank, co-CEO and next to me in my immediate left, your right is James Gorman from Morgan Stanley. But we also have an incumbent or a semi-incumbent who may disrupt a semi-disruptor. I'm glad you didn't flounce of the panel in a fit of yes well compared to some of the real startups they may think of you as an incumbent now but anyway. A disruptor, Dan Shulman from PayPal and of course we have Christine Lagarde who runs the IMF who takes an overview of what's going on. So I'd like to start with a quick overview from Madame Lagarde. The IMF has spent a lot of time in the last few years looking at the financial crisis and what's wrong with banking. But today you have something slightly different to unveil, don't you? Because the IMF has taken a slightly different role as a slightly different direction in terms of looking at finance. Can you tell us a bit about that and tell us briefly where you see finance going in the next few years? Thank you Gillian for setting the agenda and a tough question. First of all I think that your point about regulations is well taken yet the entire regulatory environment is not completely settled yet and there is still work to be done in various areas. I think the cross-border resolution is one of them which has not yet been completely settled and I think there are issues to be resolved between the US and Europe in terms of over-the-counter derivatives and clearing systems which are not really exchanging information at the stage, at the level and in the speed where they should. So in those two areas at least more regulation is still to be defined and agreed upon. Two points. There are new ways of doing the regular traditional business and for those of us who have kids or young adults in the family you know that they don't go to a bank. They probably many of them have not stepped into the branch of any particular bank yet they do banking but they do it in a different way using different channels using different modus operandi which has nothing to do with interfacing with a person or with an account manager and that's for the sort of retail basic banking which is certainly disrupting the business of many traditional institutions including some possibly in the room. There is a second point that I wanted to make which is one where we have done a little bit of homework and I'm saying on purpose a little bit of homework because it's the beginning of a process and that touches on virtual currencies and the ways in which blockchains technology ledgers can actually disrupt the business in a much deeper way than another way of doing the same business and frankly I'm saying that this is the beginning because we know relatively little about the virtual currencies. What we know is that they're not yet a major component. I want to give you the numbers because I think they matter. The current total market value of virtual currencies is about 7 billion US dollars at the moment and if you compare that with US currencies in circulations I mean you know banknotes coins it's about 1.4 trillion dollars and if you include US money supply otherwise known as M2 you are talking about 12 trillion dollars. So what we are talking about these VCs is really a very small compartment of the total currencies around the world and the total creation of money using different means so it's still a small component small item maybe nothing to worry about but just like so many things you know it's a bit like the tale of two cities it was the best of time it was the worst of times well virtual currencies you could argue is extremely beneficial beneficial for the customers it brings better value it reduces costs it provides financial inclusion it provides versatility it reaches out to places where people were not bankable in in some very far and remote places where technology is beginning to make huge entries that's the best of time worst of time it's a great instrument for crime because a lot of it has nothing to do with central control with the central banks with supervision with regulatory environment and it's a very nice way and people who look into how terrorism is financed will tell you a lot more than I would but I've heard them but it's certainly a potential instrument for illicit transactions for money laundering for terrorist financing equally if it was to develop significantly it would be also a potential threat to financial stability because it's completely outside the the the realm of regulator regulated activity and there are some tail risk scenario that you could actually think of third and we don't see that as a risk going forward for the moment it could disrupt monetary policy too small to really be a be a concern at the moment our bottom line and that's very preliminary because we believe that this scene is going to change massively going forward but bottom line just as we heard in 2008 the investment bankers who were just coming into the net of supervision and regulation didn't like it very much but had to resort to it saying to all of us please look at the funds and see what the hedge funds are doing and why they shouldn't be included in the net it might very well be the case that going forward a lot of those that are regulated and supervised by virtue of what is defined as the banking activity whatever form it takes retail investment or more innovative might very well say please include them as well and these go beyond the shadow banking which is you know a bit more into into the net of regulators and supervisors you've asked me to be short so I'll stop here okay well thank you well for those of you would like to read the entire report I'm sure the IMF has got plenty of copies to hand out and available on the net as well exactly or you can download it on your cell phones right now but so from Basel 3 to to the blockchain that's quite a big thing to span but I'm curious James and John when you look at your inbox about what you are actually dealing with day in day out in running big banks today do you care about any of this electronic stuff virtual currencies or are you still fighting the last war and dealing with the regulatory onslaught from the last last crisis and what do you think are going to be the big forces shaping finance going forward James would you like to go first because you're nearest to me I can jump on you easiest thank you Julie yeah we care a lot we're in an industry that is driven by technology and whether it was the advent of the ATM machine or the advent of the credit card or any of the evolutions and innovations of the last 50 years in finance it's it's part and parcel of what we do in fact we we had our earnings core yesterday we focused a lot on what we're doing with our core businesses the first email I got from one of our board of directors was about an article relating to fintech in the paper that day and and it was a healthy reminder that while we're talking to investors about what is in front of us we have to have enough of a share of our mind looking forward to what might challenge us in the future or what might be opportunities but you know if you if you go back to the simple inbox I'd love to say that the banking sector is kind of done with regulation we we know what the regulatory world looks like we have a fully integrated global regulatory system as Madame Lagarde just said we clearly don't that all of the rule changes that have been put in place over the last several years have finished and and I don't think anybody could say that that's actually the case so in terms of inbox we spent a lot of time worrying about regulation the GCB buffer as an example for the for the globally systemically important banks is a major new step that's coming down the track TLAC one of those acronyms that we're trying to avoid has been something all of the banks have been adjusting to so if you're if you're not focused on how the regulatory environment can shape the kinds of businesses that you're in and dictate the kinds of returns you can expect from them you're not doing your job at the same time if you're not focused on how some of these innovations are disrupting different parts of the financial system and how you can embrace them and use them to win business not just defensively then you're not doing your job in our space I mean I think into the world of disruption we've got obviously Dan from the payment sector there's the credit sector and then there's investment sector we'll come back to this I'm sure in the discussion but I think there are very distinct challenges for each of those sectors and at very different stages of maturation and that's largely driven by what the economic proposition is to the client by going entirely digital through payments through credit or through wealth management right John how do you see it I mean when you look forward to say five years how do you think the banking sector will look do you think you'll have different set of rivals well I think we've always had to cope with with new entrants into the various aspects of finance which we as a bank at least prosecute we've essentially three businesses we've a traditional banking business where we take deposits it's it's the reason why banks are regulated it's the taking of deposits and people sometimes forget that we have a stock broken business which which is born the brunt of much of the regulation oddly because the source of the crisis was actually just the extension of poor credit and then we've a fiduciary business which so far has been the business that has benefited interestingly from most of the legislation and rules that have been introduced since the financial crisis they've they've generally benefited fund funds under management and fund managers which is an unusual beneficiary when you think about what went wrong in banking there is clearly some risk that we would be disintermediated or made irrelevant because we've been slow to move in technology terms there is a degree though to which we are still protected by for example clearing rules although PayPal can move a lot of money around ultimately clearing particularly in US dollars is tightly controlled and very often the payments are made from one bank to another bank by means of something other than a bank so the bank's still involved I think on the stock breaking side we're really just trading electrons anyway everything's been dematerialized and I think we cope with that relatively well on the question of whether cash will exist in future I think we do actually spend quite a bit of time on that and whether because cash I think in 10 years time probably won't there's no need for it it's terribly inefficient and expensive but it if you think about money in the cell there is actually a lexicon today so I'm not but I'm not plagiarizing it if you think there are really three functions of cash to read out the FT to the audience there are three functions of cash and if you look at that blockchain technology itself is quite interesting Bitcoin I don't think is blockchain I'm much more interesting when come later I'm I'm much more interested in data than I'm in process I think where we're really struggling is with data and the rules around data and the new regulations on data and the obligations on banks to report on data much more so than process but if you look at blockchain technology I think it can be used for digital identity purposes if that's acceptable to the G20 because that's going to mean this is going to be a supranational initiative and the US is going to take have to take a leading role in this but if we look at money it's used as a medium of exchange but we barter in lots of things that aren't money at the moment including Bitcoin it's just another medium of barter right it's a bit opaque so it's used for buying pornography and and potentially for illicit other illicit purposes I mean it hasn't gained too much traction it's a bit complicated so I think people will be put off by that complication money's used as a store of value and Bitcoin hasn't proven to be a very good one I think it's gone from about 200 dollars a Bitcoin to 200 to 300 to a thousand or something and it hasn't been reliable at the moment it's not very liquid there are only 21 million of them so you divide them up into very very small chunks if you need to use them so as a store of value it hasn't been terribly reliable and there are better stores of value there are better stores of value sometimes than cash yes and it's interesting whether you know if the oil price has fallen has the dollar just gone up or has the oil fallen and everything's relative the other measure that the other aspect of cash that's important is is a unit of measure and we account in cash terms we we we express our accounts in dollars or euros or how we we account and I don't think there's much threat there because it's just convenient it's decimal it's easy to easy to use but we do worry about cash because I think that should be dematerialized I think the world has enough robust technology and I think governments would be interested in that because I mean I see old adage that the the money launderer's greatest friend is the 500 euro note because it's it's anonymous and it's a relatively large nomination it would be better if everything were traceable so can I just jump in there quickly and say I mean is either Morgan Stanley or Deutsche Bank are you developing a block blockchain technology right now well the technology is developed it's the use of that technology and we wouldn't presume to do it ourselves so we're working with lots of other companies and we're planning on useful ways of using it and one of the issues I have is it's it's people are too prone to get excited by a technology rather than its useful application and we have to be practical we're never going to develop technologies of that nature they're thoroughly they're very complicated but there could be uses way beyond bitcoin because they're quite they they they they essentially are a protected unique identifier right and that could be useful James are you about to launch a blockchain blockchain function in Morgan Stanley and I'm going to ask Tom that no but others are and we'll access the technology we partner with a lot of people I've you know I'm I'm more focused honestly on things that take away human interaction our business is built around service business we're built around people people making intelligent decisions guiding clients whether it's allocating assets whether it's trading in different currencies and and what what parts of our business model are susceptible to being disintermitted in that way and whether it's through robo advice can you build an expert advice model for all people they're only for people with very simple portfolios whether it's through electronic trading do you really need traders sitting on desks and to what extent do you need them whether it's through developing expert systems to model m&a transactions and do diligence on those there are lots of ways where we have historically added value we obviously believe we'll continue to have value in those but where are the pieces that we can adopt embrace technology that give our clients more certainty with what they're doing so we're at we're adding value of the higher end the true advisory end of the spectrum so that you know this is a and by the way there's sort of a little bit of I think near hysteria about fintech it's it's real it's here it's it's disruptive but it's not going to change everybody's life tomorrow you know this is going to unfold over many many years in different ways so as as large corporations you can't nobody's got the wisdom to see how every product is going to unfold perfectly so you have to make bets you have to form partnerships you have to have alliances you have to high talent who come from outside of the banking system a lot of things that we're doing is basically building optionality right right what is that a curiosity before we come to tom looking at you and the audience how many of you in the audience use online banking so almost everybody does how many of you have ever used a robo advisor okay three of you four of you interesting and how many of you have faith that blockchain is a viable product or or process that will actually form part of financing in the next say four five years someone's got put two hands up that's actually an enthusiast exactly well okay well that I must say okay bad news that's only about a third the other other other two thirds of the audience are looking a bit suspicious about this but um anyway tom how is this playing out insurance because I mean I can't imagine you're about to jump on the blockchain no no no but I let me start by saying that we the insurance industry especially in Europe is just gaining um some breath after the introduction of solvency too so when we talk about regulatory impact on the way we we do business has been phenomenal and some some of my my my colleagues are still trying to stand up after the implementation of solvency too as far as fintech is concerned I think I think McKinsey report showed that the insurance industry will be the most affected one of the most affected parts of the of the economy as far as technology and financial services industry is concerned and and one of the main reasons being obviously that the risk pools are being affected the possibility to use big data to make risk more granular a granular is is is enormous and and you can even have a debate on the basis of insurance which is based on solidarity that somebody wants to ensure something something what might happen if he knows that it's going to happen we don't want to ensure it anymore and he won't take out insurance unless it actually the house is on fire so that that is a major fundamental discussion that takes place in the insurance industry the only problem is and I think that is a point that was made by John as well is is the timing of of the thing I mean we know that that cars become more intelligent and we know that accidents will decrease tremendously when we all have sensors in our cars that avoid head-on collisions unfortunately at this point of time given the level of oil prices people have more cars use more cars drive more and we have more accidents so it's very difficult in a presence environment to and we can have a theoretical debate about risk pools you can have a theoretical debate about the solidarity element in insurance but the day-to-day management of the company is to put it bluntly much and much more important so I think I think that you have to I mean I mean life on the top of a financial institution was not easy is not easy and will not become easier because this unpredictability of how fast technology will influence our work is very difficult you know that it's coming on the other hand we still have to manage to come the the business we have at this point of time so you have to to find the right right balance you have to find alliances with disruptors I I'm a firm firm believer that disruptors need us the incumbents I have not spoken to one disruptor who actually wants to take insurance risk on his balance sheet he wants to sell the products he wants to sell us products but he doesn't want to take the insurance risk on the balance sheet and in that respect I think that the incumbents at least insurance side of the incumbents have a strong argument to create alliances with disruptors take them in and use them and they use us to the benefit of both in order to create new products create new distribution systems and hence enhance the value of both the disruptor and the incumbent right well thank you well Dan as somebody who is a non incumbent on the panel I mean when you hear the incumbents saying that they think the disruptors are dying to do alliances with them and they need the incumbents and I mean when you hear this talk about you know the incumbents embracing technology and things do you think that this is simply a case of the incumbents becoming you know a bit savvier a bit sexier with their electronic stuff or do you think actually what we're going to see is disruptors outside has come into finance and changed it in a much more radical way in the years ahead I don't think it's either or and I think partnerships are going to be important for everybody but I will say when I was at American Express what I used to say all the time is that the biggest impediment to our future success was our past success and I really think a lot of big companies extrapolate from what was and don't sort of reimagine what could be and they and that's a danger for a lot of big companies I think there are five key trends in my view that are going on right now that I think we all need to keep in mind first of all money is absolutely digitizing in front of us right now checks are disappearing cash we talked about all over the world money is digitizing however let's not forget 85 percent of the world's transactions are still in cash right now so we've got a long way to go on that but it is just inexorable it is going to happen money is digitizing and will continue to do so going forward second thing is mobile is exploding across the world right now and it's not just mobile everyone knows that but the bill of materials for a smartphone is now under $30 so everybody is going to have a smartphone it's as simple as that when you have a smartphone you've got all the power of a bank branch in the palm of your hand and to me this combination of money digitizing and the explosion of smartphones enables us to think about basic consumer transactions in a fundamentally different way imagine thinking about banking and and starting it in a world of software and mobile it would be fundamentally different for basic consumer financial services not for mortgages or some of the other wealth management but for that and I believe that affords an opportunity to bring in the billions of people across the world that are outside the system right now and that is a thing that we're very focused on third the amount of data is exploding everywhere um and it's not going to stop I mean it's sort of like you know people like let's hold it back you know we're worried about it it's exploding and algorithms are sort of the weapon of the digital company and if they're the weapon then the ammunition is data and the more data you have and the better quality the better you can create value propositions that allow you to target various segments of the market and serve them in better ways of course there's the flip side you got security and privacy issues that you need to think about you've got discrimination that you have to worry about but data is exploding and it is going to fundamentally change value propositions out there in lending in numerous areas fourth thing industry lines are blurring right now and product lines are blurring so you have got circling around digital payments right now you've got technology companies whether it be google or facebook or amazon microsoft so you got tech companies you've got carriers mobile carriers circling around it you've got oems right uh handset manufacturers you have merchants circling around it because merchants fundamentally see mobile and digital payments as a redefinition of commerce right how do they create new value propositions to use mobile and software to get closer to their customers that's going to happen and we're not going to get in the way of it and it's already starting and so how do we create platforms uh and api sets and software to enable merchants to get closer to their consumers and then finally the fifth trend is security uh something i think about literally every single day we have a tremendous amount of data and information authentication uh is very very tough these days i mean everybody's password has been compromised that is the truth of the matter so it isn't you know protecting somebody from logging in they're going to log in with real identification uh into account real ones it's yours we know exactly which ones you have we know what your username is we know your password we know stuff about you and the bad guys have it so you've got to have a huge amount of data and i think scale really matters here because what you have to do is take that data and information create walls as best you can but then make sure you have information and data that spots abnormal behavior and prevents it from leaving the system and so i think those five things are are happening and fintech is in the middle of that but you know this is going to be a combination of regulators incumbents new people pushing in uh to this market and i think it will fundamentally redefine basic financial services more in the next five years that's occurred in the last 30 wow well that puts the 2008 crisis in perspective um can i quickly ask i mean how many people in the room agree with john's prediction that cash will no longer exist in 10 years time okay that's a pretty striking pretty striking statement given the 85 percent of the world's transactions done in cash right now but not in volume in number it's 85 percent in volume right that's right that's right i mean there is a big difference between that and while i'm on that question how many of you think that the current big lineup of big name banks some of which represent on the panel will continue to dominate banking in the next 10 years in 10 years time do you think we'll still have the same big name banks dominating banking okay one okay one person has stuck his neck out and said the future belongs to the big name banks um oh it's quite i guess the key question i wonder about this is to what degree are the regulators prepared for this because it strikes me right now is it i know i firmly believe the 2008 um crisis was partly caused by tremendous levels of fragmentation in the regulatory community in central banking world which prevented them from seeing what was going on but once again we have a lot of fragmentation we have people looking at tech in one regulatory department and people looking at finance as another who wants to jump in on the regulators tom i think that the regulators first have to question what what what are we going to regulate before they actually start regulating i i think um you were then was was referring to the incredible amount of data that is being generated and that the financial industry will use to um service their customers develop products analyze the the risk perspective of their customers etc etc um one of the the biggest issue there is that the financial world is still rebuilding trust we know we know they're rebuilding trust and the question is how can we while we're rebuilding trust also convince our customers that we should be allowed to use their data in order to service them better and create create new products and i think one of the the problems from the regulatory side but i'm i'm not i used to be a regulator i'm not a regulator anymore is that that they have to define what they are going to regulate uh are they going to regulate privacy further or are they going to regulate the transfer of data across borders uh and and how do you then um see to that you have a regulatory environment that is global globally applicable otherwise you can't use it at all at all so i think that is a much bigger problem that before you start regulating that you have to know what you regulate dan and then i know john's got something you want to say on this as well but dan person yeah so i'd start off by saying i think that most of us in this panel would agree that in general what regulators want and what we want is very very similar we want protection for consumers we want it to be a transparent type of system we want security uh for that i i don't think anybody can argue with that it's hard to argue with it you could but you get out of the system immediately um but i think the issue really is um what are we trying to regulate and how are we trying to go do that for instance again when i was at mx and we were doing stress testing you know and we were stress testing what if the housing market collapses much and what would happen etc i'm like you know what honestly that's not the next stress that's going to happen the big next stress is the financial system is going to be hacked for one or two days and there's going to be a pandemonium that's going to happen and that's going to be the stress thing that's going to it's not what happened it is probably what is likely to happen going forward and that wasn't part of the stress test for instance i think it's a big oversight because i think uh you know to be pessimistic i think it's likely that something like that could happen uh in our in our system i hope it doesn't but uh we face pretty serious opponents out there right number two is i think we need to be able to innovate responsibly there needs to be some sort of sandbox where you can try things and not you know run the risk of running a foul of regulation because there are so many cool things that we could do that are very different today in terms of using data and information to increase lending to to think about financial health and inclusion in different ways but you know you want to be careful you don't run a foul of regulation but there needs to be some sort of sandbox uh to go and do that and so i think um as i think about you know we're we're moving into a new world i believe that i'm not saying it's going to happen tomorrow whatsoever i'm i'm a pragmatic person uh around this um but we are moving into a new world that's going to happen and new worlds demand new ways of thinking about our regulatory environment as well right john i know it's something that's close to your heart the issue of regulation and data well i'd just like to go on the record saying i like regulators very much are there any regulators in the audience just take notes one there's one regulator and sometimes we refer to regulators and what we really mean is policymakers and regulators jobs really are to ensure they supervise in a normally a constructive way and they enforce policy and rules but the but the rules are set by generally other people with feedback from the industry but also from regulators and i think some people my observation is that much of the debate in finance that's focused on regulation has focused on quite a numeric aspect of regulation we've looked at prudential regulation looked at adequacy of capital and liquidity and there's been a lot of debate about that and banks have generally gone from being under capitalized 10 years ago to being now relatively safe and still a lot of tinkering going on um because the rules have become complicated and when rules become complicated they get arbitrage by people who are cleverer than the people who set the rules in the first place or think they are and that's been the case since regulation was invented the much more complex regulation is almost a stealth regulation and that's when for example banks but other institutions within the finance world are asked to take on roles that are societal roles they're utility roles and one and this is not specifically a Deutsche Bank point but I think we've been slow to recognize that we are an extension of law enforcement and the obligation goes beyond clients because it reaches potential clients and our obligations for example to report to crime agencies suspicious activity where the the demand on the determination of what constitutes suspicious activity is is very very onerous and is not single transaction related or single client related it's pattern related starting to develop pattern recognition systems to help ourselves where conductive sale for financial institutions sets hurtles that are much higher than for many other industries and many other industries are presumed to be effectively competitive and financial services presumed not to be so if you want to sell a kilo of sugar at an egregiously high price as part of your business model you probably won't sell very much and so the market will put you out of business and that's fine if you want to sell the insurance product for a better margin than the market you can actually be prosecuted for not treating customers fairly right and a lot of that goes to management of data and that's my point about hardware these days if you buy some new hardware you normally save costs because the old hardware just cost you more to run even in electricity terms software doesn't cost that much these days to develop and you can partner with people who can do it very effectively cleaning data managing data organizing data storing data maintaining data reporting on data it's incredibly complex and those are the standards to which I feel we are the highest we are held and we've we've not got a good legacy we haven't done well we've had fragmented systems we've never had standardized data even when we've had standardized processes and our inheritance as an industry is pretty lousy right now if you talk to Tom he'll say well wait a minute I've got I've got presumably I've got pension policies that were written in the 1940s or 50s but potentially still in force you know the world has changed a hundred times since then how am I meant to manage that sort of information we're in the odd position of having to go back to people who have been clients for 20 30 years saying can you now prove to us you are who you say you are and they say well surely by now you know and of course we do but that's we're held to a different standard right and I'm finding personally that we're thinking too much about data we should have thought more about it and we need to get smarter and I think that's where we need to get really smart on new technologies well that's a fascinating point I'm conscious I wanted to try and bring the audience in for questions in a few moments but I quickly want to ask James or Christine do you have any strong views to add to this about yes I'm sure you do I'll give you a chance to thank you thank you children I'd like to make three points one is the point made by Dan about having a sandbox where you can experiment where you can test without running too high risks I think is a really interesting proposition and I think it's important to keep it as a sandbox and not to make it the courtyard where everybody is actually playing because essentially what you're doing I mean all of all of you many of us is is actually dealing with public good and when you deal with public good when you deal with trust to do it in a sandbox to make sure that you limit the damage that you do when you experiment I think is exactly the right thing to do and part of the regulations that we've put in place since 2008 has been about precisely protecting the public good and making sure that taxpayers money is actually not on the line when too many mistakes have been made or when the tools that have been experimented in the sandbox have been elevated to up to a higher level so that's point number one point number two I was I was actually a little bit challenged by the point that I think you made John which when you said that regulations in the in the banking and finance business is actually decided by policymakers as if sort of governments were in charge or parliaments were in charge and I have my slight doubt about it because when I when you are inside the system and when you see how regulations get negotiated yes governments participate but most of the hard work which eventually defines the capital adequacy ratios the liquidity ratios the leverage ratio TLAC as debated as it was it's very much in the Basel committee it's very much in the in the FSB that all of that is worked out and eventually channeled into the regulatory system as as as defined by virtue of it being decided by parliament so I would say for bad or for good and and I'm not taking a view here because there is a lot of good about it but the profession itself has a lot to do with how supervision is defined and how regulations are determined and there is a lot of negotiations to be had in that respect I mean we saw we have seen it since 2008 I would add that on the accounting front it has been very much delegated to professionals and when you look at the international accounting standards many of them are actually decided by the profession itself rightly or wrongly but I would I would contend that parliaments and and you know sovereign representatives are part of the process but they're a small part of the process relative to other industries final point that I would like to make I was fascinated by what you said about data and the abundance of data and the fact that cleaning up of data and management of data is going to be the thing of the future and critically important and I was wondering and that's a question Jillian if I may ask whether the whole issue of de-risking which is big for some countries around the world and many more than we think which consists for those who are not you know in in in the know on that which consists of some banks deciding to cut off links ties with correspondent banks in those countries that are not capable to provide the data know your clients know your clients clients that is expected from some authorities particularly in the US whether that de-risking which is bad news really for some countries which otherwise can operate legitimate businesses and legitimate households banking whether that abundance of data and the improvement of managing those data can actually help limit this de-risking or avoid it all together do you want to ask that briefly and then I'm going to ask James or you can chuck it to James if you want to I think the answer today is no no because the issue with correspondent banking and we just we just stopped onboarding clients in 109 countries which we agreed with our regulators were highest risk countries and the the ask in correspondent banking is to know your correspondent banks clients and data protection rules prevent you from knowing your correspondent banks clients so the question is which lord you want to break and instead of breaking either we exit correspondent banking and all that leads to is marginalization and social exclusion for the 109 in our case riskiest and therefore least developed countries in the world wow that's a sobering point James there's a lot of ground to cover okay you have two minutes then we'll bring the audience in or you can take a pause I'll ask the audience no I'll give you two minutes with two topics one is regulation one is how are we on regulation the regulators will and should get involved in the shadow banking sector which is obviously involved in the core regulator banking sector already in the shadow banking sector to the extent that there are cyber issues because I agree with the point that is the big enchilada to the extent that there are systemic issues created through concentration of risk and risk of contagion and to the extent that there are issues that affect consumer confidence because at the heart of the banking system is trust and you know it's the Jimmy Stewart movie about it's a wonderful life when trust goes people want their money back banks don't have their money they've given it to somebody else and that is sitting in somebody else's house and that's actually what started the financial crisis was a lack of trust when individuals and corporations saw banks taking credit hits as a result they pulled their money out thinking those hits would wipe out the equity when they pulled their money out to create a liquidity run and with the liquidity run eventually everybody dies unless the all-time great steps in which is the government's and bail it out which is what happened so on the sort of whole fintech shadow system regulators can and should get involved where it's cyber where it's systemic on credit risk of contagion and where there's consumer real consumer issues I think just broadly two quick broad comments one we can't talk about banks or financial institutions that your correspondent banking is a project finance is a consumer lending is it student card lending is a credit card lending is it use of debit cards is it wealth management is it trust services there are too many things going on under this so we'd need many hours to do that but that's that's for another day the important issue is the core banking industry pre-crisis had an ROE of about 25 percent and that was because it was running balance sheets on capital with a ratio of about 40 times as a result of regulatory action sensibly the banking industry has a capital ratio of about 11 times and an ROE unfortunately of less than 10 percent so in terms of sort of scale of change you've taken up one of the most important industries in the world and taken the ROE from 25 percent to call it 5 percent fintech and these changes that are happening in and around that they're not rounding errors but they're not transformative at that scale yet within certain products certain parts of payment system peer-to-peer lending they're becoming much more than that but it's system-wide regulation remains the number one game at least they're here and now right right well thank you that's a very very good point indeed I'd like to bring the audience in for questions we've only got about 10 minutes there are a lot of you I can see a lot of you have strong feelings about these issues I should say I was in a session earlier discussing fintech and there was a very strong division and people's views about what they thought was good or bad but I think there are some microphones please keep your comments or questions extremely short or I will cut you off and it would be courteous but not compulsory to identify yourself so who would like to ask a question okay I can see Mr Blockchain at the front George Pacheashvili Georgian Co-investment Fund so basically your bread and butter is storing other people's money making transactions with other people's money doing the same for the stocks right and issuing credit all of that is done much more efficiently by blockchain even today in a decentralized way why are you so ignorant I may say so because it's a big train coming right towards your direction and I don't see much concerns from your side I'm very glad that Ms Lagarde is much more positive about the blockchain so James and John are you the rabbits and the headlines of the train coming down the track I don't think so not in the next four or five years I can't see I can't see it blockchain being adopted that rapidly well at the moment we're regulated to take a dematerialized form of cash that's what we do so we borrow money from people A at one rate we lend it to people group B at a high rate and try not to lose it and we can be attacked you could argue that deposits the deposit product is no longer relevant in today's society and James's business is geared around much more around not specifically wanting to take so much deposits he's got a much more developed wealth management business and he's his client base presumably is better served by offering a broader range of potential investment opportunities than a simple deposit rate of return banks have been regulated to take deposits and a good use of those deposits was to lend them to other people for a positive margin and that's traditionally how banking is built up it's no compulsory reason but banks had a competitive advantage conferred on them because they also dealt in people's money and when you deal in people's money you generally have a direct indicator of the health and therefore credit worthiness of the person to whom you're lending money and so if you can bank i.e. manage the cash flow of your debt of your debt then you can manage that arguably over a cycle better than someone who's blind to the cash flow performance of a borrower and lots of income i'm old enough and probably cynical enough and you can you can suggest that i'm complacent enough to know that there have been various cycles of disruptors in credit who've come along and they've grown incredibly quickly and they've worried banks i'm old enough to remember the the centralized mortgage lenders in the uk i'm a brit in the late 1980s early 1990s they took market share from building societies by lending to people who either in the end couldn't pay back didn't have a house of the value that was sufficient to cover the debt or didn't want to pay back right and they did disrupt for a while but on the credit side i wouldn't be complacent but i would not be so worried about crowdfunding for example right where the ultimate aim is to lend to people where the lending banks i think just have a competitive advantage because they have insight into cash flows okay so banks have a competitive advantage james do you agree i don't think anybody on the panel said that blockchain was not relevant and i don't think anybody suggested that it's not something that we're looking at in fact it is so uh i would take your characterization of ignorance and turn it around as pragmatism if you look at how we actually make money you have to look at what the blockchain technology would do would do to disrupt that source of revenue is blockchain going to stop us from bringing alibaba to market so you have to look at how we make money before you make the assertion that our business is in a state of uh inexorable demise there are parts of the financial sector and the payment system and the storage of data and the use of that data which are clearly affected by but there are large parts that are not they're affected actually by other forms of financial technology dan as the disruptor on the panel um do you think blockchain is overhyped uh well we just brought on a board member who is one of the experts in cryptocurrency um in the world so we're obviously thinking about it quite a bit um i think people have rightly disaggregated you know bitcoin the currency versus the underlying technology part of the promise of the underlying technology is a reduction in transaction costs um which christine rightfully mentioned you know helps with perhaps financial inclusion etc the problem is you have a currency that's bouncing around so much that you have to immediately translate it into fiat currency and there's a one percent fee to go do that so you take away some of that efficiency right now because of the volatility of the currency associated with it i do think that's very possible um that the rails in which we move money evolve into more of internet-based sort of rails as opposed to proprietary rails that are run now by some of the networks um but um but i i feel and this is gonna be weird for a disruptor but i feel the same way i think there's a lot to think about yet with cryptocurrencies not the least of which is what what is the regulatory uh final say going to be on that you have multiple governments with multiple different views on it uh right now um but you know we allow bitcoin into into paypal as a payment mechanism right now through coinbase um because there are some people who want to do that um but there's oh no i'm not gonna repeat the host of issues with it but it's uh it's very interesting well sadly very sadly um and we could talk about this for another couple of hours i think and we are pretty much out of time i do apologize um it's been a fascinating discussion i mean i've taken away several key points you know one is that clearly there are some extraordinary changes going on right now which probably haven't had the attention they deserve until recently because the media investing public and the public have been focused so much on the financial crisis um secondly there's clearly an urgent need for regulators to think about this policy makers too and certainly papers like the ims paper are going to help spur that debate and thirdly to me it's still very unclear about who's actually going to be the winner here or not i mean clearly the incumbents are still dealing with the legacy of regulation and distracted by that and yet they do still have a pretty incumbent position in many areas so it's going to be a very interesting fight going on the one thing i am pretty clear about is that whatever banknotes you've got in your wallet right now frame them because eventually there'll be an investor's item collectible item so thank you all very much indeed