 Mae'r hawdd dweud yn rhaid i gyd anodd ddod hynny, ein newid ei chroesol i'n fynd yn ddi crawlingfynu mae'r ddillun o'r mewn dweud eich pwyntau sydd yn 2015, yn rhaid bynnag mae'r eu absolut fynd yn ymgyrch mae'n eich cyffredin arferrwydd yn meddwl sy'n cymryd yw'r hynbê jamn iawn a wo'r cyfan am rhaid o unrhyw i'r mewn enŵr a mae'n gwneud i'r hynny i mi hefyd ar gilydd i gael pwyntau ac oed. This theme is financial regulation it couldn't come at a more opportun time We've just been listening to Premier Lee's speech this morning in the opening plenary, I would also like to add a warm welcome to our audience watching us live on wyforum.org We will have time for questions from the audience We'll also curate and collect questions on social media Before we do that, I'm going to ask our two panellists to open up with a few remarks on this subject Randall I should say So, regulatio is very important, both public and private regulation, and I think of it in a way of having confidence in markets that markets are resilient, that markets will function in a certain way, and if there is a problem that there's a well-structured way to redress that problem, either through regulation or through legislation or through the court system. That's all part of the regulatory system. And when economies are in transition, it is particularly challenging because there are whole new areas that may be emerging. Many of the discussions that I've had here have been about fundamental disruptions in finance. So there are a lot of areas that we really don't have a lot of experience in, where they're in so-called shadow banking, where they're in cyber currencies, where P2P lending, that are whole new areas that we don't have a lot of experience in. So obviously that's something that's important for all countries around the world where we haven't settled those issues yet. I wanted to focus on two particular points in this. One is that there are always limited resources for regulation supervision. And so it's very easy to say, well, regulation needs to do this, regulation needs to do that, and it needs to do 40 or 50 different things. That's certainly true, but you have to set priorities for those because there are very limited resources that can be brought to the regulatory table. You have to rely to at least some extent on market forces for contract enforcement for the way markets will actually operate in practice. And you have to be very careful about what you try to do with respect to regulation. You can get distracted from the key issues, let's say, in financial regulation. By rather than focusing on risk, you can end up focusing on compliance. You can set a very large number of particular things that have to be complied with. There may be sense in many of them. But sometimes what happens is that given limited supervisory resources, what you end up doing is checking the boxes off, you focus on compliance, and the institutions focus on compliance rather than thinking about the bigger picture, thinking about the true issues of risk. An example of that in the US might be the so-called Volcker Rule, which takes commercial banks out of certain activities, in particular out of something called proprietary trading. That has not been very well defined, so there are a series of compliance measures to determine what is and what isn't proprietary trading, or what transactions would be considered proprietary trading. And you have to go through all of those. And so there's so many resources focused on that, the resources aren't being focused on. Well, what are actually the risks that are being taken? That's really where it should be focused. That's one issue. The second issue is unintended consequences. And so there can be many very well motivated regulations that have consequences that can actually undermine your goals. An extreme example of this is the regulatory response to the Titanic disaster in 1912, where more than 800 people lost their lives as the Titanic hit an iceberg and went down into the ocean. A response to that was an international convention of treaty life of the sea, and the view was that we needed to have lifeboats for all. Quite sensible. If there had only been more lifeboats, people's lives would have been saved. But the question was where do you apply that, and how do you apply that, and that there could be costs associated with this. And so actually very much like in response to the global financial crisis, there was the thought that what we would do is we would set the G20, an international convention, would come together to use the Financial Stability Board, Basel Committee, others to come up with a series of regulations. The question was should they apply to all and should they apply in the same way. In the US we apply this lifeboats to all issue to steamboats in the Great Lakes. I'm from Chicago, University of Chicago, and we're on one of the Great Lakes. It looks like a mini ocean. And one of the steamship owners and testifying before Congress said no, this shouldn't apply to us because they're always going to be ships nearby. And when you put lifeboats on to a ship, you put them up high, they're heavy, and potentially can make the ship unstable. In 1915, just 100 years ago, there was a ship that was in the Chicago River that capsized because they had just been retrofit with these, or one of the contributing factors, was that they had been retrofit with these additional lifeboats and actually more passengers lost their lives in what was called the Eastland disaster. It was the Eastland steamship then in the Titanic disaster. Now that's an extreme example of unintended consequences. So in order to save lives, we ended up losing more lives in the Titanic, but it's something that's very important to keep in mind when it's in financial regulation, health and safety regulation, and so many other areas that there can be unintended consequences, and it's very important to try to think through those beforehand. Or, as now, like with Dodd Frank in the US, after five years of the, after its passage, you should go back and do a cost-benefit analysis. Are we achieving what we want to achieve? Are we having unintended consequences? For example, making markets less liquid and making then markets more volatile, which obviously is not what anyone intended. Would you have that kind of unintended consequence? So after you've passed major regulation, you'd have a look back at some point, a review at some point, five years seems to be a reasonable time to see, is it achieving the goals that you would want it to achieve, and are there better ways to achieve those goals? Thanks. I should add, Randall is the Norman R. Bobbins Professor of Economics at the University of Chicago, and I'm proud to say a member of our Global Agenda Council on the Global Financial System. I'm working with the forum on this subject for a while. Randall, if I may just stay with you, because that's a very stark example you gave us. What in your view has the cost-benefit analysis been of the regulation in the US following the crisis, and what, if anything, needs to be done to get that balance just right? So we certainly need to do much more analysis of financial regulation. This is one of the things that I've been pushing for is that fifth anniversary of Dodd Frank, what we should be doing is doing cost-benefit analysis, and I say that with any major piece of legislation that should be part of it, or any regulation, it should simply be part of the legislation that you gather data, and then in five years you have a particular look back. And so for example, like I said with respect to this particular rule, the so-called Volcker rule, I think there could be some unintended consequences of that, drawing supervisory resources away from the big picture risks that are being taken, as well as some potential unintended consequences for liquidity of markets. But we don't know that for sure. We need to actually do the data analysis, and I think that's something that we should be thinking about. Another issue is liquidity regulation. It's crucial banks have much more liquidity they had from before, and so having more supervisory focus on that is important. But the key is you want to be able to draw on liquidity when a problem arises, and it's unclear the way that the regulations work in practice, whether the institutions will be able to draw on that, or whether, in practice, even if the regulators say yes, you can draw on it, will the market say, well, you should have been holding this much, you've now pierced through this regulatory requirement, even though the regulators say that they're not going to require it of you now, you don't have enough liquidity, and so you can get into trouble. So there could be all sorts of issues like that, and we just need to look at those much more carefully. Okay, so we haven't done the data, you know, run the data yet, but got feeling from you, we're in the right place, or? Well, I think it's so complex. I think in some areas we've moved in the right direction, so certainly having more capital at banks is crucial. We had very thin common equity cushions before. We needed to raise those, and we have raised those. Have we gotten at the exact right level? I'm not sure. That's something that we need to do more cost-benefit analysis on. So I think we've made significant progress in many areas, but we may have pushed some things off into the shadows. And to keep with the Titanic analogy, when there's an iceberg, it's what you can't see that is most dangerous, what's below the water. And so we may have pushed some things off and we can't see those connections yet. Let's move over to my colleague Anders Borg. Anders, you're the chair of our Global Financial Systems Initiative. One of nine global challenges the forum is currently focusing its public-private collaborative efforts on. Let's talk about that iceberg. What are the big threats underneath the water? Well, my perspective is based on the work that we are doing at the forum together with all the stakeholders in the financial sectors, the banks, also central banks and regulators from all the major financial centres. And I must say that I might also have a perspective from my period as a finance minister in Sweden and for eight years being a part of the regulatory reforms that we've done in Europe. So I think if we take stock at the regulatory reforms, it's quite clear that we've made a lot of progress. As Randall mentioned, there is much higher capital requirements. I think that the global strategically important institutions, the main big banks have something like seven-folder their capital. We have much tighter supervision in Europe. We have the European Central Bank being responsible for the global sci-fi fed and the US have done substantial reforms to have a better supervision. The transparency of many of the derivative markets are better than it was. So we've done quite a lot of progress. I think one of the key side effects of what we're now seeing is that the liquidity in the global markets are more vulnerable and it might also be lower. If you go back to the period before the crisis, all the global systemically important institutions were also providing liquidity in terms of their role as market makers and in terms of propriety trading. Many people thought that this excess of liquidity contributed to the crisis because there was a lot of interconnectedness and there was a lot of risk taking that might have been excessive and also some other problems. So the new regulatory framework has pushed the market makers backwards and at the same time the central banks given the very low inflation have been doing a quantity of easing. So you have in one respect a lot of liquidity because with liquidity we normally mean short-term interest rates papers that are easily to buy and sell. But at the same time the market for all of these assets seems to be thinner than they were and there is a clear risk that the combination of thinner liquidity and increased correlation between the different assets and markets can drive this into excessive volatility. At the same time the probably most important regulatory change that we are seeing on a global scale is what is now happening in China. The opening up of the capital accounts, the move from the government side to make the R&B more market based, that's a major shift. We know from history particularly as European that countries that has opened up their capital accounts have often seen some volatility and some boom bust periods. So the combination of the regulatory reforms that might have decreased liquidity and the fact that China now is taking this very reasonable and very important step could in the short term create some market turmoil. In the long run I think we are pretty certain that China is such a good large part of the world economy this reform is necessary to get financial markets in working in China and being efficient so it's necessary. But I think one should be very cautious moving forward in this environment because there is a lot of global tension, there is a shift downwards in liquidity. So I understand that this has also been the signal from the authorities in China that this is their perspective. If I should add an aspect from the work that we are doing in the World Economic Forum it's probably the fact that when we are looking at technological disruptions in the financial sector we are going to see a lot of transformation over the years to come. The work stream that we have been running together with the large global banks are basically indicating that all parts, all business units in a bank will be part of that transition whether we are talking of transfers, consumer credits or SME lending. All of this will now change with increased competition from digital alternatives. It's a clear risk in that environment that things will happen that we haven't foreseen. That's normally technological disruptions are very good. They improve productivity and make our resource allocation more efficient. But in the short run they normally also imply that there are regulatory structures that are not up to date and that it will happen things that we haven't foreseen in this environment. So I think that's a very, very important area to watch. At this stage we normally pause for questions. Any questions from the floor? Let's dive back into your statement there about regulatory structures not up to date. One of the questions we had over social media this morning was, is the regulators toolkit fit for purpose? Bearing in mind these huge transitions, you mentioned the capital account opening up in China, the double whammy if you would of technological disruption as well, adding further potential challenges to maintaining stability. Anders perhaps we'll start with you. Well I think there's been a big shift in the global financial community. If I go back here most people were discussing regulatory reforms and some of the bankers were quite agitated in this area. Now I would argue that they are more worried about the new competitors and the new environment where we are seeing some of the really big players like Alipay here in China and WeBank, but also Apple and Google and other giants going into this area. We are seeing an enormous transformation in terms of some of the very tech savvy startups. So it's very clear that the banks will be challenged and it's very difficult to assess what this will mean for the regulatory structures. We're talking about shadow banking where asset managers are playing a very different role and that is important. But I also think that this technological transformation for the next five or ten years will be a very important factor. Very much agree with Anders on that. There are a lot of areas that are incredibly innovative and have potentially enormous amount of value for the economy overall, for consumers, for business. But there are always risks when there is something new. Correlations change, new interconnections come up, some things are hidden under the sea of the iceberg. But that doesn't mean that we shouldn't allow for innovation. We should be trying these things because without the innovation we are not going to be able to move ahead. There is always going to be some volatility that comes with this. Exactly as Anders said, if you look at the history of emerging markets as they open up their capital accounts, there is often some volatility associated with that. But generally in the long run they are much better off for having opened those accounts up. Certainly as China has a goal of internationalizing the rent and be, that's a necessary condition. It simply won't happen without developing the domestic markets. I would agree that the key challenges going forward are in these new areas and in the transition from a closed capital market to an open capital market. Do you agree with Anders' observation that Bank of China is probably more worried about technological new competition than regulation? They are worried about both. Certainly I still hear enough complaints in the US about the way the regulatory system is operating that. I would want to say that that's behind them. But I think just as laws are implemented over time and Mnodd Frank set into train more than 280 different rulemaking processes, many of which still haven't been completed, part of it is just the uncertainty. The banks may not like the way that they have come out, but they now know how to deal with it. When you don't know how proprietary trading is going to be defined, you don't know how you're going to have to comply with it, that creates a lot of angst. Even if you don't like how it has been defined, you can at least see it and then deal with it. One of the great uncertainties going forward is the technological disruption. From my point of view, I actually think that many of the existing financial institutions are well poised to take advantage of this because banks and financial institutions naturally get an enormous amount of information and data in. The new entrants don't have that advantage. The advantage they have is they don't have the burdens of regulation and so they have a cheaper cost basis because they don't have to deal with the regulations. That obviously is something that regulators have to think about because there could be interconnections and there could be systemic risks that come up in these new areas. But the banks have all this data that come in and they have not been using it effectively. They really need to think of themselves as data analytics firms that happen to be involved in financial services rather than as banks that are gathering a lot of data here and there. It's really got to be about the data and then think about how that can be helpful in a whole variety of ways, including financial services. What's the data indeed? Another question that came up is perhaps about this one back to you because you've already mentioned China. Have there been any innovations in regulation that would help manage any of the turbulence you measured? One could naturally and normally expect to see when a capital account is opened up. Well, I actually think that there is a risk that the regulatory firms have created some problems here in terms of the liquidity in the global markets. I think paradoxically enough, both China and the US are probably better suited to deal with this. The dollar is a very, very deep market and normally functions well. The problem is that you have a huge number of smaller emerging economies with very thin currency markets. When they are seeing huge moves and they have a weakness of their own export sector, it's quite likely that the main impact will be slower growth because the main factor is increasing costs for consumers and lower living standards. I think that there is a risk that we're going to see a difficult period for some of the emerging markets. I'm actually more worried for the countries outside of the Asian, South-East Asian, Southern Asian region than here because many of the emerging countries here, like talking about Bangladesh, Indonesia or Vietnam, tend to be very good in the export sector. If you are looking at Latin America and maybe Russia and some others, they are very dependent on commodities and we've seen a fall in the commodity prices. So I think the regulatory changes, the strict regime, as I think it's necessary, it was necessary to reform the system, but there is a risk that the lower liquidity will increase the volatility in the markets in the next few months. I think one of the keys for China is to really focus on robustness and resilience of markets. Obviously we've seen that the market infrastructure wasn't as strong and as developed to be able to deal with volatility as one might have hoped. So there have been a lot of one-off responses and I think it's very important for the supervisors and regulators to explain how all of these pieces now fit together to make the market more robust and resilient going forward. There's got to be a broader explanation or broader plan because it's that kind of confidence that's necessary to make the markets work going forward. There will always be some sort of shock that comes in, whether it's domestic or international, and you have to have confidence that the markets have that infrastructure there. You also have to have confidence in how the regulators and supervisors are going to respond, and so that hasn't been very clear or transparent. An example also would be, let's say, with respect to the recent devaluation. So, of course, you can't explain a devaluation in advance because otherwise it will happen in advance. What you can do is when you have the devaluation, you immediately hold the press conference. There was a delay between the devaluation and then the press conference that the people's bank had. In that interim, a lot of rumors started, people interpreted the devaluation as being a response to much lower growth. One of the reasons that they were interpreting it that way is because there's not enough confidence in the statistics that are put out on GDP growth. If there were more confidence in that, people wouldn't have read as much into this. Also, if there had been the explanation right up front that this is market-oriented, this is here the motivations for why we're doing this, and this is not part of a broader devaluation strategy, I think that would have helped to reduce a lot of the uncertainty and a lot of the volatility. Waiting even just a day can allow a lot of different views to come into the market, a lot of volatility, and then it looks very defensive rather than saying, here is what we're doing, and then the discussions are based off of that, rather than people coming up with their own ideas, and then it seems like you're responding to that. Time is flying, and we all have busy agendas. Before we do finish, I want to monopolise your time for one or two more minutes. Very briefly, I'm going to look forward for a year and look forward to welcoming you back, and we're talking about a similar conversation. What would you like to have seen changed if you could prioritise one action area over the coming 12 months to stabilise the global financial system, or the world's major economies, either? I would probably shift the focus towards the broader need for structural reforms, particularly here in China. So, while the opening of the capital account can be managed in a gradual manner, it's very, very important to reinforce the structural reforms in other areas, and the Prime Minister Lee were arguing this strongly today, and I would be in agreement with him, particularly the state-owned enterprises, particularly what was said in the third planner of using the market price as an allocator of resources in the whole economy. There are an opportunity to improve the long-term growth in that respect, and if we would have, in the best of worlds, we will have a decent recovery in the US with limited inflation, and a good growth in China with a balanced development where you still grow, but are not so dependent on the investment. In that kind of world, we're seeing quite a lot of progress, maybe with not so much volatility. I think the risk is if you slow down on the reforms and rely too much on short-term demand management, there's much bigger risk for market volatility. I completely agree with that, and so rather than elaborate those points under the superb job of that, I'll just add the transparency issue, because I think that's another way to try to reduce volatility. If you can explain what you're doing, if you can explain why you have done what you've done and what the consequences are, you explain what you are going to do, and then respond very quickly when you do make a change, I think that is a key thing that can help to reduce volatility, and so improve the government statistics, improve the communication strategy. I think that will go a long way for reducing volatility in the short run, and then, exactly as Anders had said, it's the structural reforms to be able to focus on that as the driver of growth, but then short-run demand management policies, which inherently will be much more volatile. I look forward to welcoming you back next year, so we can look at the progress and debate that. Randall, Anders, thank you very much, both indeed. Thank you for our audience for joining us, and thank you to our audience for watching.