 Gwfner o'r Bank o Englund Mark Carney, a'r gweithio, yn gweithio, oherwydd o'r gweithio'r dysgu o'r gweithio'n gweithio'n gyfrannu'r cyflawni, y Chyrsio Ffynanciol Sgwylwyr. Hugo Shong, a pethau ynw wedi gweithio'r Cymru, Christine Lagarde, y CEO Fynaeth yng nghyrch. Yrchyn cychydig, y gwaith yng Nghymru, yng Nghymru a'r ddechu'r Minister yng Nghymru, a wnaeth i ddweud o'r ffaith, a'r panel yng Nghymru, yng Nghymru, yng Nghymru, yng Nghymru, yng Nghymru. Yn ddod, yn ddod, rydw i'n meddwl yma'r gweithio. Mary Callahan-Uddos, yng nghymru yn JPMorgan, ac yn ddweud yng nghymru, ac Sergio Amotti, ynghymru ynghymru, ynghymru, ynghymru. Yn y gweithio'n gweithio'n gwybod. Mae'r prieambol sy'n cychwyn i fy mod i ddweud i ddefnyddio'r FFWD o ddim i gweithio ffianfanaeth o gweithio. A gydag oedd y Chinoedd economaeth, sy'n dweud cyfrifwyr yn gweithio'r gweithio, ond gydag 6.6% o'r ddwylliant mae'r ddweud yn gweithio'r gweithio ffianfaniaeth yn gweithio'r gweithio'r gweithio'r gweithio'r gweithio'r gweithio'r gweithio. Mae'r llyni, wrth gwrs, yr ardalod y maeddem i'r gael o'r ffordd, y ffaith yna wedi ddim yn fawr o'r ddaf yn gweithio o'r ddaf yn cydweithio. Mae'n gweithio'r ddaf a'r wath, a'r wath o'r ddaf yn gweithio'r ddaf yn gweithio. Ond yn cael ei wneud y gallan, ac mae'n ddaf yn gweithio'r ddaf yn gweithio'r ddaf yn gweithio'r ddaf. As I came off set this morning, I also heard PMI data from France, the weakest in four years, manufacturing data out of Germany, the weakest in four years. You also heard from the IMF, of course, concerns about public and private debt, protectionism, Brexit, trade tensions and tightening financial conditions, all raising worries. And creating headwinds for the global economy. So how resilient do we actually think our current financial system is to deal with some of these challenges? What I'd like to do as we've listened to the feedback over the last week is just sharpen our focus somewhat on some of the vulnerabilities that may lay ahead through 2019 and beyond for the financial system. And Madam Ligard, if I could start with you, maybe, and then we'll run along the panel, just to single out one or two things that we should be very sharply focused on. First of all, thank you very much for summarising the views that we're taking at this moment. I would like to qualify a teeny tiny bit what you said. We did revise modestly the forecast for 2019. It's only a 0.2% revision, so it's modest. What we are essentially saying is, number one, it is coming from the advanced economies so we don't have a synchronised movement as we had observed before. There is a synchronicity in the making. And second, we have revised downwards modestly because we are seeing those risks that we had identified pretty far away on the horizon, which prompted me to say, sun is still shining, fix the roof, please, have resilient economies. But we're seeing those clouds coming much closer. And if I may, I'd like to just identify two of those, one which I think is particularly relevant and yet is not affecting the two major players in that risk. And I mean by that US and China. And clearly what we see as the major risk at the moment is the development of tensions, notably in trade, but not only in trade, unfortunately, I think, between these two, the two largest economies on the planet. And we have not revised down our forecast for these two because the US still has the benefit of the stimulus package that it had launched about a year ago. The corporate tax reform that it took a year ago. And on the other hand, China has taken some modest successive stimulus measures that have helped it sustain a growth that, as you said, European finance ministers would not be surprised about, but would dream off. And I was one of them, so that's true. So those are the, this is the major risks that we are seeing that could precipitate even more market recognition of what has finally been recognized at the end of 2018. Number one, number two, it could, if it was aggravated and accelerated, precipitate a slower slowdown of the Chinese economy. And by that, I mean that the Chinese economy is slowing down is fine, it's legitimate, it's right. And I think it's very much designed to be under control by the Chinese authorities, that the slowdown be excessively fast would constitute a real issue, both domestically and probably on a more systemic basis. Those are the two points that I wanted to make. Thank you. Minister Cwcius. So for us, of course, as an economy that is very exposed to the global cycles through our integration in the global value chain and the supply chain, obviously the question of trades functioning smoothly is a predominant issue. And if you look at our numbers, the vast majority of the growth slowdown has been driven by one-off issues which are weather related and related to some elements of the new rules around the automotive industry. But of course, the overriding concern to us is on the one side, the exposure to slowdown and growth to the global economy, but also the less smooth functioning of world trade. Be it through the threat of increased tariffs, be it through all of the potential disruptions that we're facing related to Brexit and its effects on the supply chain. So those are the things that we are very worried about and are looking at most carefully. On the other side, of course, the question is how do we deal with these issues? And for us, the key element there is sending signals of increased unity for us, of course, predominantly in the EU, and we've achieved some progress in that sense with some implementations of the global financial reforms with respect to your questions on strengthening the robustness of the banking system in December. Europe agreed on quite far reaching implementations and deepening of the European Monetary Union, but of course we need to go much, much further than that because the European market, as opposed to the Chinese and US financial markets, is still very fragmented and a lot still needs to be done both on the risk sharing within the banking union, the capital markets union and the fiscal cooperation. Since you've taken me down this path and I hate to interrupt the flow, but why doesn't Europe yet have a targeted fiscal instrument for supporting individual countries in the euro zone that may be suffering fiscal or financial problems? We're 10 years after the crisis and we still do not have that specific instrument for helping those countries and because they're all in the euro block they cannot print their way out of the problem by going back to the sector or the Frank. What are we doing? Why are we dithering? Why has it taken 10 years? So France and Germany made quite concrete proposals along those lines and Europe has embraced some but not all of those proposals, but we have the mandate from the heads of government and heads of state to work further on exactly these instruments, but there are very fundamental differences within Europe on the question of the need for that. But you know Germany and France agreed on the need for tools that further convergence, further competitiveness, we are of the view that also stabilization needs to be an element, but around that there is there is pretty wide disagreement within Europe on the need for further integration along those lines. But if I may interrupt for a second, you should also mention the European stability mechanism, because that is one of the instruments whose mandate has been enlarged most recently in order to act as a backstop in case of bank major issue. So at least on that side there's a better. That one, I mean the fact that we agreed on making the European stability mechanism the common backstop for the single resolution fund of the banking union, I think is massive progress already towards further integration, as I said, and we agree with the IMF assessment in that Europe is way too fragmented and we need further steps forward. But Europe unfortunately moves a bit slower, but we are going in the right direction. I mean, I love the United Front, but what about the question of sovereign risk, I mean, which we see in countries in the south of Europe? So to that, we think that addressing the issue of zero risk weights of sovereign risk on financial institutions balance sheet has to be part of a compromise. We couldn't achieve that this December, but it is part of the further risk reduction. But that being said, you have to acknowledge that very substantial steps have been taken to reduce risks on bank balance sheets. We've achieved a very broad agreement on a very significant series of steps towards reducing non-performing loans on European bank balance sheets, and that is also supported by a fact that these risks are going down. But we've also empowered the European supervisory authorities to work further on that reduction. So I think that is also a very important element of risk reduction, and of course we need to make the next step. But on the other side, we also have to be willing to make the next steps towards further integration, because what won't work is the northern European states always saying reduce risk, reduce risk, but not being willing to go the next step in terms of European integration. I think that is also, those are two sides of the same metal that we have to tackle now with the new commission coming in and Germany, France and many other states really have the commitment to go further on that. Minister, thank you. Mary. When you look at the challenges that are sitting here in Europe and that are faced by the policy makers and the regulators that have to deal with it, it makes the US look easy to have to navigate that. And the strength of the US really is the thing that obviously everyone's focused on because it's such a driver of global growth. It has been a very, very long expansionary period, but it's really important to remember that in the nine years of our expansionary period in the US, we are only about where you would be in a regular recovery four years in. So it's just that it's very slow in the way that it's gone. So it doesn't mean that a recovery has to end just because it's gone through a certain amount of time. The question is, you know, how, how continuous can you make it without having a high volatility? The high volatility comes from shocks in the world, which we have talked about ad nauseam here in Davos. And we know those very well. The issue for us as asset allocators and putting money out to work around the world is where can you take advantage of the pockets of opportunity that exist? You saw great opportunities at the end of December to be able to make moves into emerging markets. If you think about the Fed possibly being on hold and not aggressively tightening as people had thought in the past, emerging markets equity and emerging markets debt, they start to look very attractive. Other valuations went from top quartile down to bottom quartile on the matter of days. Unfortunately, you had to be there within the first 17 days to catch that. So you have to be quick and you can't take holiday vacation in the month of December anymore. So that it just leads us to where these pockets of illiquidity. That's what we all worry about. We all worry about is the system going to provide enough liquidity, right? We put $11 trillion of assets into post great financial crisis around the world. We all tried to do that in a coordinated way. We had great demand for yield everywhere in the world. So what happened? You had great supply of fixed income instruments and those doubled and tripled depending on the markets that you looked at. You have very strange anomalies that come out of that, right? You have 85% of the Italian high yield market trades below US treasuries in 2017. That's down to 50% today. There's just anomalies that are out there that have to be cured. How do those get cured? It's not going to stay that way forever where it comes out and gets redeployed to and whether there are gaps in the liquidity that's provided at the time. That's when people get in trouble. It's not going to be the financial system like we knew it before, right? That has been very heavily cured. You talked about risk weighted assets or double what they were in the great financial crisis. Short term liquid assets as a percentage of short term liabilities are much stronger. You have short term liabilities being totally financed. So loan to deposit ratios are 100% in Europe and are 75% in the US. So much, much stronger. You have money market fund issues that have been solved. You have sec lending issues that have been solved. You don't have the uniform net capital rule that had broker dealers be able to go from leverage of 12 to 1 up to 34, 35 to 1. That's been cured. You've got the housing issues in the US that also found themselves in other pockets of the world where you had government policy that said instead of affordable housing be about 10% on the market. It zoomed up to 40% and now you've got loan to value of 97% on a bunch and said that's not there. The civs aren't there. There's a bunch of stuff that's not there. So we're all looking for where else it is. The financial system itself is there. The Volcker rules may have caused us not to be able to provide the liquidity that we used to. It doesn't mean liquidity won't be provided. And so you then go looking into the shadow banking system and the assets that are there. You look at the private equity markets. Many of them are of the managers of those are here in the audience. They have a lot of capital, a lot of capital that hasn't been deployed. And every time they see these pockets of opportunity, they're also going in. But they're not going to go in to make markets in the way that banks used to make markets. They're going in as a fiduciary. They're not supposed to make markets. They're supposed to make money for their investors. And so those are the dynamics that everyone's struggling with. And our job is to take advantage of those when they occur. I might come back on some of those issues around the structural shifts and where the liquidity will come from. But I can't let you get away with your opening remark because I put the German. Minister under pressure. Let me come to you. How easy in the United States, given that you've got a government that's been shut down for the last 33 days, you have a federal reserve that says it's data dependent, but it's not going to get any data because it's provided by government agencies. Is our problem, partly our problem, one of confidence now that we have a president in the White House who is making life very difficult for people who want to put risk assets to work? OK, so government shutdowns are not new. There's been 15 of them since 1982 when the rules changed about how you would fund your financing. It's happened to almost every major president. President Clinton had one that was 21 days because of Medicare. There are all sorts of things that happen. The issue is if it goes longer, there are certain expenditures that just don't re-happen. A lot of these just get delayed. Some won't happen after a series of time and for sure confidence and the CEO confidence of, so am I going to build that new plant? Am I going to think about that, you know, CAPEX expenditure? Those are going to start to weigh heavily on their mind. I think that governments will come together and try and solve this. There are lots of things that can sort of handle themselves until March 31st, really. And so the most people know that and hopefully all the officials are working towards that. By JPMorgan Chase, we have lots of data that we correlate to the data that we usually see in the government so we know exactly what's happening in the underlying economy. And certainly there are pockets of it that are slowing. If you can see things in the retail sales market and the like, but nothing that significantly worries us. But it certainly will have an effect on GDP. It's about a billion and a half every week that we go through this. And those numbers may change. They're very hard to calibrate when you go through time because you don't have past measures that you can hold them up against. Thank you for the answer. Sergio, let me come to you. Vulnerabilities, what are you focused on? Well, I would say complacency. Complacency, although if you go around Davos nowadays, you would find that maybe there is not such a high level of complacency. But investors, corporates, or entrepreneurs have been used in the last few years to live without a lot of macroeconomic, geopolitical, geo-economic challenges. And if you look at financial markets and investments, the tendency was we can take care of that. This is not a big problem. What I think was a warning signal is the four quarter of last year, in particularly December, when you started to have a convergence of those fears and those dynamics coming into one moment and triggering unease by investors, you know, you don't have many months, actually December, in terms of equity market performance, was the worst month since the Great Depression. If you look at 2018, it doesn't feel that way, but 90% of full financial asset classes had negative returns. Now, the implied assumptions that we hear about liquidity being there, being able to step in and function as a mechanism of levelling at those tensions, it's the wrong assumption. Liquidity can freeze very quickly, like water, in Davos, out there. And, as exactly for the reason, many of those investors with a lot of liquidity have a fiduciary duty, so they will not easily step in when they see this continuity. And issues like the current debates on Brexit, the unknown, the shutdown, fully agree that is not the first time, but people may start to ask ourselves, so what's next, what's the next acceleration? And there are facts that seems to indicate, if we look at our clients and the broader investor base in the US, for example, at the end of Q4, they reached a declared 24% of cash asset allocation. That's a very, this is an unprecedented record high of declared cash for US investors. We have been seeing that for a while in Europe. So, and this is not liquidity that is there to be reinvested if things get a little bit better short term. Is there because people fear that something may go wrong? So, in a nutshell, what is the solution? The solution is that, first of all, I hope that we don't rely once again on central banks to resolve the issues. I think some of them are very limited ammunition. I'm going to let Mark discuss on that. Some others have a little bit more flexibility. And this is the time also to take the bitter medicine and also think about how to bring through some reforms at least that are necessary to create again a better environment. We need to address the fears of people out there feeling not happy about their developments of their life, their purchasing power, where they stand. We need to address some of those issues. We need to address some of the fears, that people have about their futures and their jobs. So, it's a complex environment, but complacency could potentially be an issue. We can touch on what the banking sector and the financial sector could do, but it's for living. Look, I hate to twist the knife, given that your chairman's within distance that he could throw something and hit you from the audience. But we can swap seats in case. But I mean, you've had quite a week of it. I know, what was it? $7.9 billion exited in the fourth quarter. So, I mean, it was a tough quarter. But if markets are a discounting mechanism, is that money moving because people are worried that they're going to be exposed to a recession or potentially a financial crisis by 2020? No, Geoff, I wouldn't extrapolate 7 billion quarter outflows on 2.3 trillions of assets we manage. And after we increased our asset base with clients by 25 billion in wealth management and around 30 billion in asset management, I think that, of course, there is an element of outflows that is driven by deleveraging. Because new money in the wealth management industry is also a function of leverage. And, of course, we see deleveraging coming from investors. And that's a sign of unease. And it's explainable in the fourth quarter with what happened. I mentioned it before. I do think that those are the signals that we mean. You know, we need to put things into the right perspective. And those are signals, one by one, that indicates unease. All right. We'll not over extrapolate. You mentioned Brexit as one of your risk factors. It is a bit of a tradition in this particular panel, or it has been since George Osborne was here in 2016, I think, to ask the audience actually to vote on Brexit. I think there's no point in asking you whether the bridge should be in or out because I think we've done that one. But maybe I could ask you a slightly different question. There is a clamour here, I hear, for there to be a second referendum in the UK. Could I just maybe put this to an audience vote? Do you think there should be a second referendum in the UK now that the Brits have had a chance to see what this now means? Put your hand up if you think there should be. You're not voting on this one, Mark? Get it sure, you. OK. Put your hand up if you don't think there should be a second referendum. OK. So I think it's pretty clear that the room as a whole feels that the bridge should have another chance to vote on this. Obviously this process is winding forward and we'll see what happens over the course of next week. Which brings me to Mark Carney, the governor of the Bank of England. Mark, I'm not going to ask you a political question because that's not your job. But what I will ask you is a question about the data and about the preparedness for the outcome. I think you won't be surprised if I suggest that maybe some of the forecasts from the bank and the previous Chancellor were rather pessimistic compared to the data that's coming through at the moment. So was something misunderstood about the confidence issue and to the preparedness? How robust do you think the systems are in the UK and Europe to deal with whatever comes if that's a hard Brexit or not? OK. Thanks for having me. Maybe just put a marker down that if we could come back and we have time to the types of issues that Mary and Sergio and Christine raised around the other half of the global financial system, the market-based system, the liquidity, the dynamics. Because when you think about vulnerability and opportunity, it bears greater explanation. Look, actually, I think the data is broadly borne out what certainly we at the bank said prior to the referendum. We said we felt if the vote was to leave that sterling would go down sharply. It did. We felt inflation would go above target for a period of time. It did. We thought the economy would slow driven by investment, business investment in the UK since the referendum has been absolutely flat. It's about 20 percentage points lower than we had forecast prior to the referendum. And that's 20 percentage points lower than we thought as a level at a time when the global economy actually accelerated. Financial conditions were very, very easy. Corporate balance sheets were in good shape. But, and the reason I mentioned that, aside from the fact you asked me the question, but the reason I mentioned that is that when one talks about trade tensions and looks a bit at what's potentially happening in the manufacturing sector, what's globally, what's potentially happening in terms of corporate confidence and corporate investment, you have a, obviously a reduced, you have the same effect potentially happening in a number of advanced economies, obviously not to the same degree, because ongoing discussions with the United States and not as a major potential structural change underway within the global economy. But if you're going to have an element for a period of time of deintegration, you start to see it through the corporate sector, less on the household side. We've seen it in the UK. We're potentially seen some of that globally now and that's the question of degree. It's important we get it right. Level of preparedness. Where we do have direct responsibilities the financial sector. And from the day after the referendum we've been preparing for Brexit, whatever form it takes. If you're a central bank, the easiest thing and the most important thing is to prepare for a hard Brexit with no transition. So that's what we've been preparing the sector for. We've ran stress tests, which are not forecasts of what would happen, but GDP down by 8%, commercial real estate down by 50%, house prices down by a third, interest rates have to go up, unemployment goes up to almost 9% and on and on and on and to make sure that the banks have spent the last few years putting themselves in a position with enough capital to absorb those losses that would come with that situation and of course risk premium go up in the UK, other factors and still be able to lend to the real economy so they come out the other side. To give you an idea of how much capital has been put into the system rightly and necessarily so, after all of that happens, the UK banking system has about three times as much capital as it had prior to the financial crisis. After all the losses that would be absorbed there. Second point, we talked about liquidity in the core of the system. UK banks, core banks have a trillion pounds of liquidity. That's four times as much on an apples to apples basis as they had prior to the crisis. That's on balance sheet, high quality liquid assets. Their short term funding as a proportion of their balance sheet has gone down from 20% to 5%. Mary, I think it was Mary referenced the deposit funding, their deposit funded effectively for their domestic lending. They can borrow another 300 trillion plus from us, 300 billion plus, sorry, 300 billion plus from us because they have collateral preposition in all major currencies, so capital equities there. Sergio raised policy room. We have policy room both in terms of conventional, potentially unconventional policy. We can cut something called the counter cyclical capital buffer which releases lending capacity equivalent to 200 billion plus of the banks. Last year in the UK, banks lend 60 billion. So that gives you a sense of the order of magnitude of the flexibility there. Now one of the things we caution in terms of preparedness is it's not, and I'll try and finish with his hand back, it's not automatic which way policy would go in the event of a hard Brexit. And remembering, we're not predicting that but we've got to prepare for that. And the reason, and this is an important point when thinking about the global economy and trade tensions is that when you go through a period of, if we go through a period of deintegration, de-globalisation, reduction in trade openness, that's akin to a supply shock to the economy. So demand, it's not just the demands going down, we're all familiar with that and then you try to bring up demand but supply is going down at the same time. On top of that you have an exchange rate effect on inflation and you have tariffs effect on inflation and so the central bank in that circumstance has to make the right judgment about the right path of bringing inflation back to target while doing what it can to support but it is not an automatic approach and particularly at times when there are big changes, you have to have some constants and for a central bank there are two constants, have a financial system that functions which we would have if that were to happen and keep your focus on your democratically given mandate which is to achieve the inflation target. Governor, you have said that you didn't feel that British business is necessarily prepared. Clearly you feel the bank is prepared but you've said British business isn't prepared for a hard Brexit outcome. Do you still believe that? Well look, I don't think I used exactly those words in terms of pointing to UK business. There are a series of logistical issues that need to be solved and it's quite transparent that in many cases they're not so poor infrastructure is not there, border infrastructure is not there to the extent that it would need to be for jumping from an absolutely seamless trading environment to one with frictions that aren't just tariffs but are rules of origin of products, safety standards, other inspections that would need to be done and I think George mentioned earlier about supply chains and just in time number of people in this audience run businesses that rely on that. Look, minutes matter in that world and it is, I think the point I would make is that there is a limited amount that many businesses can do to prepare for if there are going to be substantial delays on the logistical side. Now obviously these would eventually be worked out over time but you can't build up the inventories in order to when, if you're a car plant that relies on and there are ones in the UK that rely on 40, 18-wheelers coming through Dover a day and they have to show up within minutes of each other in order to meet the just-in-time requirements of the plant. Look, you can't stack things up all over Wales in order to ensure that you can continue to run it for months. That's just reality. So some element, if there were to be a sharper break some element of that would be there and businesses doing what they can but in many cases they can't do it. Did you want to just specifically make any other point about the vulnerabilities? I think you partially addressed them. Well, the thing I wanted to flag, which is both the vulnerability and it's a strength and weakness of the system and it's tested a bit in December and be tested going forward which is that now half of the assets in the global financial system are so-called market-based finance and a big chunk of that is asset management and in many cases in fact 30 trillion of those assets under management are daily liquidity so people have the right to take their money out of their mutual fund or use it or whatever whatever it's called but they're investing in assets which are varying degrees of liquidity and I think very importantly the private sector here is saying and you can have jumps to illiquidity in certain market segments so a corporate bond, a leveraged loan, a emerging market debt that is liquid in good times is not liquid in tough times and the question is how robust that system is going to be if there is, if and when there is a bigger shock to the global economy, a real shock to the global economy. The good news is that that exposure does not jump to the core of the financial system. That's what's changed so the core of the financial system will be there if there are challenges over here but there could be some surprises in terms of pricing. It could lead to bigger overshoots and I would add this which is that all of the net capital flows since the crisis to emerging economies have been through market-based finance. So it's pretty important how well this functions. Okay, Hugo, let's move to you. The question was vulnerabilities. I think you're probably uniquely positioned on the panel to give us a Chinese perspective on this. I don't know whether that bears on what you're going to say but the floor is yours. Okay, for me first of all I'd like to say IDG Capital is actually an American company and we are the first one to start the first venture capital firm in China in 1992. Terrific. We make a lot of investment in China over the past 25 years. We invested over 750 companies in China. Well, lucky that we have been able to take 180 companies, 5PO, or exit through M&A. If you'll forgive me that your bio is in the documents that all of our audience can read. Yeah, but then look at us here, talk about Australia issues, et cetera because I want to just a little bit of history in our business, particularly with China when I remember started this time, talking about the most of the favourite nation status then of course, that retail and et cetera but now it's really we want to see the trade tension really resolve the come with good effect because as an investor we like to have more certainty rather than uncertainty. Do you think there is a case to answer though? The 301 investigation was very clear in its findings. Other countries around the world also have frustrations about market access, about subsidies for select industries, about challenges in dealing with the administration and the process. Is actually what the Trump administration is doing at this point, trying to set a standard for the rest of the world, not just for American companies? And there is a case to answer. For us, we actually invest in the country, we invest in the industry, the government policy allowed. So particularly we invest a lot of consumer internet companies in the past, we really invested the technology driven companies in China. But for the, I think it's really the, now it's the thing, it's like the fintech area because there'll be data driven, data intensive but then the compliance should be very key and then for both the investors and the industry to stick with, that's what I feel. And we had a growth number at the beginning of the week that caused some alarming capital markets. Is that your sense as you do your business that we are only going to see lower numbers printed from here? That the government itself is managing a process of slower growth as it looks to transition the nature of the economy? I think that's, you mean the 6.6%? Well, that's the official numbers. You don't believe the official numbers? Well, I can, I do not. Everybody in the room believes the official number? I'm sure. What? You don't believe the official number? No, no, no, I believe what they said but then I don't know, it's really for me to question whether it's true or not, rather than I believe those are the numbers. But your experience is that growth is slowing? What? Your experience is growth is slowing? Yeah, the growth, of course, of China in the past is always talking about like 8% of the GDP growth, et cetera, but then of course now 6.6%. I think it's given the size of the economy is a pretty good number and that's what I feel good about rather than I don't have much of the concern of this. I don't want to make you the spokesman for Chinese economic policy, so we'll just move on, but feel inclined to jump into some of the other conversations. So what I want to do is just circle back now and focus on some of the issues. One of the key ones, it seems to me, is whether the institutions involved in the financial system have actually been healed at this point. Governments were given a very clear set of guidelines by the FSB and other organisations, the IMF, about what needed to be done. Is the system now healed sufficiently that we are, if we see slow down, slip into recession, we don't slip from recession into financial crisis? Are we robust enough to protect against that? Minister, if I could just bring you back in on this and you're going to hate the question, but people look at commerce bank and they look at Deutsche Bank and they see potentially one bank from here on in, or at least they look at Deutsche Bank and they see a bank that hasn't quite been healed since the global financial crisis. They look to the south and they see other banks in the south, in other countries, that still have not dealt with their non-performing loan issue. Does Europe have a case to answer here and should Deutsche Bank get on with a merger to make sure it's got capital buffers to survive a crisis? So, very obviously, that's actually the most easy answer question because I very obviously will not give any answer to it. We've said many times that we strongly urge the German banking sector, and by that we don't only mean the private banking sector, but also the public and the mutual banking sector in our country to do its homework and to think hard about cost efficiency because globally oriented economy like Germany needs a strong banking sector and we strongly support the strength of that banking sector. On institutions, the one element that you do have to remember is the key issue or one of the key issues that eroded confidence of our populations in the stability and the viability of our systems is the nexus between sovereign and banks. We did a very large study on the impact on the fiscal position of Germany of the banking crisis and it turns out the German taxpayers paid 60 billion euros at current mark to mark at the best estimate that we have to repair the damage of the financial crisis. That is the really systemic fundamental issue and I had the privilege of serving on the financial stability board under Mark representing my country and the reforms that Mark and the FSB have really worked on deeply have now been implemented. I mean, we just are putting into legislation a requirement for every European bank to hold 8% of its balance sheet as bail-in capital, i.e. immediately available for the orderly resolution of a bank if and when it comes into a systemic event of potential need for resolution before depositors are touched, before the taxpayers touched. I think that is a very, very central element to illustrate to you as I don't want to repeat for Germany or for Europe the numbers that Mark, but they are very, very similar in terms of resilience and the liquidity buffers, the capital buffers that have been built. So I think a lot of work really has been done and that work has been done in all regions of the world, including Europe, and as I said in December we implemented in the banking package that is now going through the legislative process, all of these specifics that also make the European banking system a lot more robust. Mary. Can I just chime in here? I think over the years that I've been coming to Davos, there's a lot of conversations about the banks. I don't, what the policymakers have done to get the right regulations in to make sure that the leverage is not in the banking system and to have the banks there when you need them, all of that has been, we have beaten that as much as we can and I would tell you that banks around the world are completely different. That's not actually the issue. It may be difficult if you're a global bank and you have to sort of live to the highest common denominator because there's different parts of the world that have different capital regulations. So I don't think that's the issue. I think the issue is today it is really hard to imagine not being a bank at scale. I can't imagine having to figure out how to protect yourself from a cyber perspective or a technology perspective. We spend $10 billion a year on technology. We have 50,000 technologists. That's the size of most firms in total. We spend three quarters of a billion dollars just on cyber protection. So to keep up with that is really, really hard and to be able to deliver to the consumer, so we're all here from the banking side, but when you flip it on its head that our day job is to deliver to the consumer. You had to be there to be smarter for the consumer. You got to be able to help them to know, oh, you had a raise. Let's see if you can save some more money. Oh, I'm looking at your financial picture and you could pay off that debt a little sooner. So all the AI we have, all the big data, all the ability to help the consumer to make a smarter decision to be better, to be able to save money so that they can retire in a hopefully better manner than they would with otherwise not attended to. That's the goal that we're all seeking to do here and if you don't have scale and you don't have the ability to do that, it's just gonna be a really, really hard slog. So then fragmentation in the European banking sector is a real problem. If we need scale, Sergio, you've said we need cross border deals, we need consolidation, we need Deutsche Bank to merge with someone, don't we? No, no, I have everything right other than the last one. I've been saying for a while that in Europe the topic will be one day or the other too small to survive, not too big to fail and in that sense I guess we're gonna get there sometime maybe another angle. First of all, I would echo what has been said about the resilience of the banking sector and I think that before the taxpayer comes in right now, I would say if the taxpayer comes in it's likely to do a good deal because the amount of losses that shareholders and bond holders would have to take are quite big. Second, fundamentally, a bank, if a bank operates in a negative rates environment is the fact of taking away a big chunk of its natural profitability. Number two, for Europe, if you don't have growth, economic growth, you are not, you are losing the asset side of your... So the reason also fundamentally is somethings to be done and tweekled about banking regulation. I think that I would say that fragmentation in Europe is one but I also say that the aftermath of the financial crisis seems to indicate that on a global basis we still see a lot of parochial fragmented approach to regulation even within the same countries where between prudential and conduct and or in countries where you have four or five agencies or regulators regulating the same matter, creating potential confusion in a crisis. Can I tempt you to name a couple of those countries? No, no, you know, you know, it's a... Give us a continent. Italy, maybe. I stay very diplomatic. So when... Now, the second issue, which I want to also point because it's too easy to look at what banks can do at each bank, focus on what you're good at and where you can add value to clients and shareholders, and last but not least, is shareholders themselves. How many, you know, if there is a responsibility for many institutional shareholders not to let banks who have no sustainable business model to continue to be funded and recapitalized forever? So how you take out overcapacity is a function of some mergers because there are a lot of mergers that make sense, right? If you look at strategic sense, you tick the box. Financial, you tick the box, and then there are feasibility. And feasibility means shareholder, management, regulators, politicians. How many times do you hear people still talking about national champions? National champions. At the same time, they want to have one Europe. I mean, it's a little... a huge contradiction. But in essence, shareholders should also really put pressure on management, on boards to basically restructure and do the right thing. OK. Mark. Just pick up on these points in Sergio's theme of no complacency. And I think what's quite important here is planning for failure. So assume failure. And that's one thing bondholders in banks now have to think about because they are going to be bailed in. And the ESM and other mechanisms being put in place in Europe will make that much more credible. Other countries have different mechanisms to do it, but the capital is there. And I'd say a little plug for the UK banks. They have bail-in-able debt. They're 20-20. They've already meeting their 20-20 targets already, so they don't have to issue more. The second bit of complacency goes to what Mary's talking about in terms of operational risk in cyber. So one of the things, and it's one of the things we started working with the IMF and then down through the FSB is assume a successful cyber attack. Obviously, tons of work needs to be done to prevent successful cyber attack, but assume success. So how quickly can you get back up and running? How will you get back up and running? What are the mechanisms? Think that through. So planning for failure is hugely important. Then this last point on scale and competition in the sector. I'm not in the too small to survive. I think there is elements, and I'm not just going to wave a ffintech wand and say they're going to solve all things, but elements, we've been thinking about Christine's leadership on the IMF and others in terms of where there's going to be competition coming in for small, medium-sized enterprise lending, how institutions can use the cloud to narrow some of these gaps, in terms of resilience gaps, how we can be nimble and what we need to do at a global level for direction, but then it's going to have to be tailored on a local level to make it actually happen. I think that's a big element of the reform agenda on a go-forward basis that, as I say, the fund is leading. Any conversation about shaping the financial future cannot leave interest rates in the Federal Reserve out of the discussion. I think everybody's probably got a view on this, but Madam Lagarde, I might start you off on this. Last time I had you on a panel was, I think, in Bali just after President Trump had been critical of Jay Powell. We subsequently had an interest rate hike. Jay Powell very clearly declared to the world that he's an independent banker who will not be pushed around by the head of government. We are in a position now, though, where the nuance from the Fed seems to have shifted, and the capital markets seem to be urging the Fed now to be in a restrainful mode, not to hike rates again, and perhaps even to think about cutting rates if we see growth slowing down too quickly. I'd just appreciate your thoughts on whether that's a very good place to be given the $11 trillion that Mary mentioned still sits on central bank balance sheets and the debt that we have been encouraged to take on board since the global financial crisis. We need normalisation debt. We're not fed or any other central bank that shirks its responsibility to normalise rates. You know, I'm not going to comment on the interest rates path forecast and various dots, but I'm certain that what Jay Powell is doing is going to be data-dependent because this is the sort of key principle that he has applied, that he has advocated, that certainly we very, very strongly support just not as far as the Fed is concerned, but as far as central bankers are concerned with the legitimate and necessary independence. So if he has slightly changed his stone during his latest communication, that is probably because he's seeing data and analysing particularly the labour market numbers and the slightly varying numbers on inflation that will actually lead him to change slightly or to qualify slightly the course that he had adopted. But as far as room to manoeuvre, he's one of the very few... Mark is maybe one of them as well, but he's one of the very few central bankers who have a little bit of space. And I would agree with Sergio, it would be very nice if the economies at large didn't have to rely on the central banks yet again in order to resist the next shock, which is why I think that policymakers have to really take the right course of action when it comes to fiscal policies, when it comes to actually completing the reforms that some of them have undertaken, but that some of them have only just touched softly and need to go much deeper into. Can I come back one second on the FinTech? Yeah, briefly. Because I think that the point made by Mark is critically important and in a way touches on what Mary was saying. I was just thrilled to hear you, Mary, talk about the concern that banks have about their clients, consumer protections, long-term planning for them, stability and all of that, because I think those are really legitimate concerns on the part of the banking sector. If there is one word that I'm taking away from Davos so far, it is the word purpose. I think that we are hearing that loud and clear from civil society, from the millennials, from many, many corners around the planet. I think any sector, the financial sector alike, needs to have that purpose and it cannot just be single-mindedly the pursuit of profits. It has to be multifaceted and it has to take into account multiple stakeholders. I would caution the sector against one thing. One is the significant development of fintechs, which is good in and of itself, provided that it is adequately regulated, that anti-monellondring risks are taken care of, that the financing of tourism is legitimately addressed and consumers are protected as well. But they are going to come and shake the system and I think many of the large banks actually know that, have internalised that and are taking measures to either include them or move in the same direction. The second caution that I would like to also address to the banking sector is, watch out where your compensation systems are yet again going. I'm a strong believer that people move depending on incentives. I think we are seeing some incentive systems in some corners of the financial sector, yet again moving in a direction that I find not exactly aligned with the sense of purpose that I hope banks actually have. Do you want to name names? No. Never mind. Hugh, go very quickly. Yeah, I'd like to mention that the fintech actually would be a very big thing for us to invest, particularly in China, because we really want to build a scalable and sustainable business because China was so many users of the mobile internet users, particularly with the AliPay and the WeChat Pay, so they can reach a lot of customers very quickly. I think now it's really, they change the people's habit going shopping, travelling in China particularly. So now I hear a lot of opportunity for us to get into that one. That's what I'm thinking. OK, can I circle back to interest rates with you, Governor, because I think we still need to, we still need to tie off this issue. Since the global financial crisis, we were all encouraged to borrow. Governments were out there saying, you know, build up your cash, get out there, buy cars, stimulate the economy. Now we're seeing growth momentum slow again. Can we rely on the same old party trick and will we force the central banks to engage in doing that to make it happen? OK, I'm going to pick up on something you said earlier on, which is Jay Powell's purpose of the Federal Reserve's this need to quote normalise interest rates. The purpose of the Federal Reserve is to meet its dual mandate for inflation and employment, full employment. Purpose of the Bank of England is to meet its inflation target and subject to that support, the real economy. So you stick to your purpose and there's not a magical level of interest rates that we're just trying to get back to, interest rates that were consistent with an entirely different structure of the global economy. The reality is that with interest rates as low as they are in balance sheets as large as they are, central bank balance sheets as large as they are, there is some stimulus being provided to the economies but not that much, not that much. And if you look at the speed limits and the speed limits of the economies have gone down. Now one speed limit being growth and labour force and productivity as you know. Now we can't influence productivity in the economy except in a bad way. We can influence it in a bad way by letting inflation get out of control, messing up the financial sector and having to drag on productivity. Productivity is driven by the private sector, it's driven by innovation, it's also driven by the right public sector, infrastructure, education, et cetera. We don't influence any of those things. So the world being in a growth path and we'll take the IMF forecast, which I believe Christine is sort of decelerating to something around global potential. So kind of three and a quarter, three and a half bouncing around in that area around, let's say three and a half I think for the IMF around global potential. Ten years ago global potential was north of four, in some respects even four and a half. That difference is not because of central bank policy, central banks can't magic up moving from three and a half to four and a half. The real economy is going to make the difference there. So I think it's important to have all that context. And I will say one other thing, which is that if you look at the US, the UK particularly, household debt, households have delevered over the course of the last 10 years. You wouldn't know that from the headlines, but they have paid down debt relative to their incomes. The corporate sector has levered up and that's one of the potential vulnerabilities and obviously governments have moved. But in terms of the core of the economy, households have not rushed out, gotten over their skis to use a skiing expression. And so they're in better shape at this point, which is one of the reasons, I'll stop here, why, because that imbalance in those economies is not what it was on the eve of the crisis, it's one of the reasons to have some confidence that the slow down does not, it does not necessarily follow that the slow down a moose stagnation. In other words, that it's a deceleration to a round trend. Lots of other issues that could knock growth in either direction, but I would just leave you with that point on the household side. And let's just talk a little bit about, what is it, the rumsfield-esque, known unknowns or unknown unknowns. And it's the unknown unknowns that I want to get into for a moment. Because I think as you at the FSB and others were crafting how the world would look after the global financial crisis, you couldn't have anticipated Brexit and you couldn't have anticipated the trade war, you couldn't have anticipated protectionism. What's been remarkable is we've had a rebound and a recovery that's seen very little inflation. Mary, I know you in speaking with CNBC over the last year have said this could be one of the unexpected consequences perhaps of the trade war that we begin to see real inflationary pressures begin to emerge in the United States and in the global economy. That doesn't sound like a very benign environment going forward, given where we are with debt and interest rates at the moment. No, that's right. That's why Christine Lagarde said the most important thing, which is that the Fed will act on data-dependent information and that data will show up or not. So we have wage pressures showing up. We don't have inflation rising as fast as wage pressures. We're watching those two things. You can see those daily. And you watch them, and you manage to them, and you try and stay ahead so that you have ammunition. You try and renormalize. You try and do all of those things. And so I'm very confident that that's what's happening. On Mark's point about the consumer, that is the whole problem with all these headlines. The headline that you read is that the US consumer has the highest debt ever, period, end of sentence. That is true. But what they forget is they have the higher assets ever. They have the highest net worth ever in the history. They have the lowest debt servicing ratio ever in the history of the US consumer. They have the most people employed, lowest unemployment rate. Most, for the first time in history, we have jobs posted being greater than people looking for jobs. And so you just have all these headlines. You have to pull together and you have to figure out how that's going to come to fruition. And the wage inflation is the thing that will maybe or not lead to inflation, but that's why the data dependency is the way. And they will act factually. But that's... Let's throw up some facts in. Then corporate debt as a percentage of GDP is the highest it's ever been. We've had companies in the United States, primarily, that have gone to triple B rating because of the amount of leverage they've taken on to buy back their own shares. There are pockets of concern. Let's not paint a picture of everything being... I would say it's expense to operating earnings is about 15%, which is about the 30-year average history. I would say that triple B means... Triple Bs used to only be about a third of the investment-grade market. Now they're about 50%. That means that there's a lot more companies that have been able to come and access the capital markets at very attractive interest rates. You see default rates in the high-yield markets still at about a 2% level. I mean, those are incredibly strong numbers that would take you forward a lot longer than I think what people are nervous about from a recessionary standpoint. So, then I'll hand it to Christine, because I know you want... Do you want to come in first, or yet, no? It was a very quick reaction to what Mary was saying, which is completely right, but what is really disconcerting to us economists is how the US economy is producing those unbelievable employment and unemployment numbers. And yet, we're seeing hardly a little shake in the wage numbers. And that is something which clearly needs deeper understanding and deeper research. But 3.5%. I mean, 3.5% I think was the last print out of the non-farm payroll. I mean, it's rate of change, perhaps. Mark, where'd you go? I'll pick up on the corporate leverage point. I agree with Mary's right on the stats and needs to have the context. But it is one of the areas I think we all look at, and I know the banks look at it as well and say, is this a pocket of risk? It's a two, I mean, by our calculations, when you roll everything, all the CLOs, what's unbalanced, the revolvers, et cetera, in leverage loan space, it's more than $2 trillion. It's about 15% of credit. It's been growing at 15 points a year. Sorry, it's about 9% of credit growing at 15% a year. And the underwriting standards have deteriorated over time. So it is a concern. Then we go to the next stage and say, who owns it? And actually very little is on the bank balance sheets. Very little is warehouse, sort of in between being on the bank balance sheets and going. A lot of it is in longer term, people who have long term liabilities who own it, so they're matched. And some of it is in these funds, and I alluded to this earlier, where you get more concerned because they have daily liquidity, they're a mutual fund effectively, and they own what can be quite an illiquid asset. That's where we get concerned. In the universe of this two trillion of leveraged lending, most of it is with institutions that can take the risk. And they may be, if there is a sharper slowdown, if this keeps going, they may be about to lose a chunk of money. But that doesn't propagate, or is less likely to propagate through the system. It's more akin to equity being behind something. So it's important to follow the money all the way through. But from where I sit, Central Banker, you're paid to worry, and we see these trends. And what we worry about is if you extrapolate them and if they keep going, potentially this risk comes closer to the core of the system. Therefore, it's good to be talking about it in an open forum and thinking about it, and again, not being complacent just because it hasn't happened doesn't mean it won't happen. Just off topic for a moment, I mean you've been such a good warrior for the UK. If there's a Brexit extension of the negotiating period, would you be prepared to stay around a little longer? I'm prepared to stay around for another five minutes and eight seconds, which is what the clock says. So I'm not going to get an answer on that. Sergio is a man with a balance sheet. He was about to say something. Just two thoughts. First of all, on your point, Jeff, you are right that many corporates in the US borrowed in order to buy back shares, but remember that kind of arbitrage on the tax of short retained profits that are now repatriated. And this somehow is going to normalize. I'm not so concerned about the quality of the corporate loans in the banking system. I fully agree with Mark that we just need to understand and when investors that are outside the banking system or through funds or through private equity will start maybe to see losses, then that's also going to impact their sentiment, their propensions to risk and so on. But last but not least, I think that what we are not really discussing in a normalized rates environment, the one we're most vulnerable are governments. I mean, some of those governments will not be able to fund a normalized 300 basis points icon on rates or a normalized environment. They will not be able to pay their debt, outstanding debt. And that's probably, crisis do come from two elements. OK. Well, let me take... Real estate and government and government. And let me take that to our minister because whilst Germany may have some fiscal headroom, there are plenty of other Eurozone countries, Italy, that don't. Could you perhaps talk to that? And I know you wanted to pick up on some of the other points. Yes, so I think on the sovereign debt issue, obviously on the one side, I think in Germany we've done the homework to a large degree by reducing debt-to-GDP levels, but not as a means in itself, but as a means to having the firepower needed that if there is a worsening of economic conditions, there is headroom to react. So I think that's important. On the other side, I think we've said all that needs to be said in terms of supporting the many statements of the European Commission on debt and your question on Italy, I think is also very easy to answer in that we've always said that we supported the clear words and analysis of the European Commission in December. That led to an agreement that has a very substantial impact on the Italian budget, and I think that's a step in the right direction. It's not the resolution of the problem, of course levels of debt, and we fully agree with what the IMF says there are generally too high. So the further need to consolidate and fix the roof while the sun is shining as Christine so often says, I think is something we can completely subscribe to. So in that sense, I think work still needs to be done quite substantially. On the liquidity topic, I think that's a very important point, and I think that is just the other side of the metal of compression of spreads in many asset classes, right? The fact that government bond spreads have compressed, corporate bond spreads have compressed, high yield spreads have compressed is very obvious. Whenever you talk to the institutional investors, what premium do they look for next? It's the liquidity premium. So in a way, the spread compression that we've witnessed in almost all asset classes is just the natural impetus to seek for liquidity premium, and that's why we in our macro-prudential work look very carefully at the exposure of banks, and I think what Sergio has said fully correctly, real estate market is one area that we're looking at very, very carefully because European real estate has seen very substantial price of premium. Terrific. Thank you very much, Minister. The reason I want to wrap things up is we're very close to the end here, but I did want to give Madam LeCarde the last word because while I'm hearing that we've made a lot of progress in different areas of the financial architecture, you made the comment not so long ago that if it had been Lehman sisters, then the world may look very different. And I call Goldman Sachs, Goldman and Woman Sachs, so that it would be better. But we, and just to give you the final word, we haven't made enough progress in that area, have we? It's a serious point, and we just published recently a study about the composition of boards and the gender of CEOs in the financial sector, banking, insurance, and the larger sector, and the numbers are just appalling. Thank goodness Mary is here with us, but if you look at the numbers, you have 20% of board members in the financial sector who are women, and you only have 2% of CEOs who are women. And, you know, just for... If anybody has some business common sense and purpose and understands that diversity actually precipitates productivity and is good for all, there should be significant changes. We're not seeing much of that, and I would hope that the financial sector takes that approach seriously. It's conducive to lesser risks. It's not conducive to less fees and less return, quite to the contrary, and clearly changes have to take place. Thank you so much for your contribution, and thank you to all of our panellists for this CNBC special programme, and thank you for tuning in. We'll see you next time.