 Our discussion today is looking at whether the regulation that was introduced following the Great Recession, whether it actually made the system safer or made it more risky. In other words, whether it future-proofed our system against further crises or whether it actually just served to encourage investors to put their money into riskier, less-regulated assets. We have a fabulous panel of speakers who frankly don't need any introduction, but I'm going to go through this procedure and for the benefit of our online audience to do that anyway. We have Larry Summers, one of America's leading economists, a former Treasury Secretary in the Clinton administration, a former economic adviser to President Barack Obama, and a former chief economist of the World Bank. We have Barbara Novick, who is the vice chairman of BlackRock, the world's biggest asset manager with $5 trillion in assets under management, and Barbara is in charge of government relations and public policy. We have Greg Metcraft, who is the head of the Australian Securities and Investments Commission. Greg was chair of IOSCO, the Global Securities Regulator, until May of last year. He is also a member of the Standing Committee on Supervisory and Regulatory Cooperation of the Financial Stability Board. Now, everyone here in this room and online knows that regulators have spent the best part of 10 years trying to fix the fault lines that caused the last financial crisis. We know that banks have become safer, they have higher capital buffers, lower leverage, and sounder risk management. But with tougher bank rules, this has meant that more money has shifted into the so-called shadow banking sector, a vast unregulated system in which non-bank lenders, be they asset managers or hedge funds or insurers, provide credit and financial services. So I'd like to ask each of the panelists whether they think with this rise of so-called shadow banks, we have the roots of the next financial crisis. Larry, maybe I'd start with you. I think it's hard to argue that the system is not safer today than it was 10 years ago. There's more capital by many measures, there's very substantially more liquidity, there are better procedures for resolving failed institutions, there's more transparency with respect to liabilities, there's more comprehensive regulation of systemic institutions, there's better procedures for international cooperation. I find untenable the argument that no progress has been made. At the same time, it does bear emphasis that if you look at a ratio that I've found relevant to some of my work, the market value of equity to the total value of assets for large banks, it's lower than it was in the decade before the financial crisis, which suggests that the cushion is not all that we might think it is because while we have mandated much more book capital, the dynamic capital represented by future profitability in many cases has left the industry. I think you're right to be concerned about the movement of activities to the shadow banking system, though in many cases the design of that activity makes it much less prone to destabilizing runs, and in many cases there is restraint exercised over the shadow banking system through regulation of the traditional banking system. If you say do we have any basis for complacency, no. Are there important issues of liquidity and functioning of markets in difficult circumstances that remain to be addressed? Yes, but is this any moment for the wholesale repeal of the changes that have been made in the last eight years as suggested by some? No, I think that would be a grave mistake. Barbara, your view? So I would largely agree. There's been an enormous amount of change, and if you think about the crisis, it came down to a lot of different problems, but even some basic things like lack of data. So you roll it forward and today I'd say there's been improvements on five areas. There's obviously the resiliency of the banking system itself, whether it's the capital, it's the liquidity oversight, lots of things there. There's the OTC derivatives market going from a bilateral to a central clearing, more transparency, more capital, things like that. Third is the improvement in cash investing rules. A lot of the problems that we saw had to do with the reinvestment of cash, and cash being defined very, very liberally. That has been improved a lot. The reporting of data, just the registration alone of private funds. Up until the crisis, the SEC literally wouldn't know who to call as a large hedge fund manager or something like that. So having more data available, once you have the data you can study it, you can figure out do I have the right data, do I need more data. And lastly is mutual fund rules themselves. So there's been a lot of discussion about shadow banking. I'm going to take exception to that phrase. It's called market finance. As Larry pointed out, it is subject to regulation. It's also less prone to the run risk of a bank. And yet there's been all sorts of talk about whether all these bank rules have reduced liquidity. I'll simply point out that in the last week we've seen record earnings from a number of broker dealers, all of which refer to their very strong trading after the election, bond trading in particular. So I think the scenario where bonds were going to stop trading, that there was no market liquidity, et cetera, et cetera, because of all these bank regulations, we're seeing that that's just not accurate. In fact, there is trading. Some trading has moved to electronic trading. Some other things have changed in how people manage money. But the downside scenario of increasing resiliency has not materialized. Greg? Well, look, I completely agree with the comments of Larry and Barbara. Particularly, one of the things I have is I really don't like the term shadow banking. I think it brings the wrong connotation. I'm really strongly opposed to it. And FSB doesn't use that term anymore. They actually do focus on sustainable market-based financing. So I think that's what we've got to be focused on. And secondly to the point is actually market-based financing is regulated. It's regulated by market regulators like myself. So, and I think it's not regulated by banks or like banks, but it's different. And I think the other thing that we've got to think about is that we have a long term structural change occurring around the world, which is the actually growth in basically savings in the pension fund sector. And generally what that flows into is not necessarily banks, it actually flows into markets. So you've got both probably if you want a cyclical change occurring here or impact, but also a structural change. So, but I do think, I agree, I do think we are a lot more resilient than we were at the crisis, you know, in terms of being able to plan for shocks and volatility. I think the crisis was a wake-up call for regulators. I think it showed that we needed to cooperate a lot more. We needed to be far more proactive and forward-looking and looking at emerging risks, what's coming down, thinking about stress testing. But I think we did respond with things like the, you know, the too big to fail principles of the FSB worked on, as Barbara mentioned, the OTC derivative market reforms dealing with, we'll use the word backward shadow banking, but starting to think about, it's actually, that's why it's sustainable market-based financing, how it is a good source. Let's not kill it. Let's make sure that it's safe. And there have been changes, like mentioned, on mutual funds, et cetera. But also, you know, the area of just simply just cooperating more globally, I think, has been really important as well. So, but in terms of, perhaps, some of the movements to market-based financing, some of the things that people are buying, you know, high-yielding instruments, et cetera, I don't, I actually think a lot of that's coming really from the lowering of interest rates and the search for yield is creating, perhaps, dysfunctional behavior. So, I don't think it's really necessarily just the fact that, of the changes from the crisis. So, we're not worried about, you know, the growth of open-ended mutual market funds or, you know, there's quite a big growth in private credit funds. Are there, you know, issues around there, you know, in terms of investors losing out, fire sales? Well, at the end of the day, it's very simple. You know, markets versus banks are very different. You know, at the end of the day, markets, you invest in a market instrument, you can, you can actually make a lot of money or you could lose a lot of money. So, it's very different to putting your money in the bank. So, what we always say is that, you know, at the end of the day, that markets, when you invest, disclosure, you know, the biggest thing is actually, if you don't understand it, don't buy it. And markets also can be volatile. So, I do think, again, though, it does mean that we've got to make sure that those products are sold to the right customers is really important. And I think that's something that a lot of us are now focusing on is making sure that suitability, I think, is really important, that the right party gets that it gets the right investment. That's generally our attitude. So, you make a good point, people should know what what they're buying, right? That's critical. Do you think, I mean, maybe Barbara, you can answer this, do you think the average retail investor in the US realizes, you know, what their mutual fund is investing in? Two different questions. First thing is your private credit fund question. So, part of looking at funds is understanding how are those funds structured? So, most private credit funds are actually structured as private vehicles. They may have gates, they may have side pockets, they may have redemption terms that are designed to address the liquidity or illiquidity of those assets. And so, you can't lump private credit funds with mutual funds. Okay, that's the first thing. Second thing is, when you look at mutual funds, there's tons of disclosure. Whether people read every word of a prospectus is highly questionable. But certainly, the information is made available, I'd say more and more investors are being educated or aware they can go to sources like Morningstar, they can, you know, use an advisor. I'd say that the level of awareness of what they're getting is increasing, not decreasing. But Larry, if you then where would you see the risks right now in the financial system? It's very hard to, very hard to know. I'm not quite as certain as some others that the risks have been entirely removed from large banks, particularly in Europe. I think there are substantial risks of a crisis in some ways like crises that hit a number of emerging market Asia countries in the 90s taking place in China. I think that we've introduced enormous uncertainty into the US outlook with the kind of rhetoric that the president elect is engaged in. That could set off a cascading decline in markets. I think there's risk of a big increase in risk premiums on longer term bonds. And if long term rates were to spike upwards, that could cause quite substantial dislocations. And I think there's some grounds for concern about liquidity at the moments when you need it most when there's a great deal of strain in markets. I think those are all risks. I'm not sure the greatest risks we face right now are of future financial crisis, but all of those would seem to be causes for concern. You mentioned the European banking system. Do you think the rescue of Monte De Paschi showed that the architecture that was set up in Europe has failed? You could argue that was a bank that really should have been put into resolution. I think each context is different. I tend to believe that there's some inherent need not to have protocols and to improvise in times of financial crisis. I think of failing financial institutions as in many ways being like kidnaps. You want to solve the problem by paying ransom, but you don't want to set terrible precedents. So you could say in principle that government should have bans on paying ransom so that they don't ever do it. But actual governments don't find themselves able to stick with that regimen. And so I think something not dissimilar is present with respect to financial bailouts. Greg, your view on this. You headed up Iosco until last year. What is your biggest regret? What's the piece of regulation that you wish had gone through that didn't? I'm doing an ex-investment banker. I'm not really in favour of my next piece of regulation, I'm afraid. But I do think that in the area of infrastructure, capital markets, one area and in securitisation, it's not so much about regulation, but I do think both those areas have a huge amount of potential in capital markets. And I must say, I'm a big fan of seeing the way you can expand those markets around the world in capital markets. And one way I think is standardisation. So I am a big fan of sort of standardising more to broaden the investor base. And to your point about liquidity, because I always get annoyed when people talk about illiquid markets being an ex-investment banker, the corporate bond markets and whether it's these at the ABS market or infrastructure, the way you truly develop markets is to think about how you make them agency markets rather than principal markets. And the thing of actually having banks holding lots of bonds on their portfolio, generally they're not there when you need liquidity. What you need is sustainable liquid markets. And actually what people got to do is think about what investors need, not what issuers need. And pre-crisis, we were too focused on what issuers wanted. So I do think some respects it's healthy. I think now, bond markets in terms of thinking how do you build sustainable markets. So there is debate about whether there is liquidity issues in bond markets. But I do think that the, you know, securitisation infrastructure, I think of the two ones that I'd like to see more, because I think in terms of funding economic growth, I think both those markets have enormous potential to help fund economic growth, right? Infrastructure. Because infrastructure really, really from a longer term perspective, really can't be funded sustainably from the banks because of capital and liquidity requirements. So actually opening it up more to, you know, pension funds, insurance companies, etc. You know, I think it is a great opportunity. And equally, banks are having trouble funding themselves these days. So the more that you can actually fund consumption through securitisation markets as they do in the United States, I think this can actually help a lot more in terms of funding economic growth. So that's why those things are important. So you mean the introduction of rules that would standardise securitisation as a way of boosting? Personally, I don't like actually forcing rules. I actually rather, you know, having the American securitisation forum, I'm much more about having industry and coming in behind industry developing their standards that are appropriate for the market. And it's one of the things that ASCO is doing at the moment with the industry, looking to establish sort of standards in terms of various asset classes. So I think, you know, the more that actually that you can get industry to push forward on this, I think it would be good. But actually helping being a catalyst, I think is important. Now, there is work underway, Ryan Rick, but it is, I think you've got off really it's sometimes it like herding cats, but it's important long term work. And I think, you know, it does contribute to the developing the global economy. Barbara, you get asked about risk all the time. Where do you see it in the market? Where should people be worried? So I would identify three areas. One is the market plumbing, right? So things like CCP's while we've taken the risk out of banks and put it into the CCP's. That's a good thing. But we need to make the CCP's themselves resilient. And we can't think that we may waive the magic wand. The risk disappeared. Now, the risk is now more concentrated. And it's more transparent. It's manageable, but it needs to be addressed. And that's something that is actively being discussed right now. I mean, that's on the table. The second is an area that doesn't get discussed much at all, which is pension funds. We have a worldwide crisis coming in terms of underfunding. The WEF is actually putting out a report on the defined contribution side. And I think it's a very, very important area. If you think about what will happen if some of these funds run out of money and there's no money to pay benefits. I'm not talking about just cutting benefits, but just running out of money. I think that's a huge issue. The FSB touches on it in its recent report and something in the area to look at. And then third is cyber security. And you just can't avoid putting that on a short list. It is something that every company is dealing with, not just in financial services, but every type of company. And it's a very real risk and you have to be constantly vigilant. So you mentioned the central clearing houses. They are subject to stress tests, but we don't actually hear much about them. There's not much sort of transparency in the way that there is, say, in the annual bank stress tests, both in Europe and in America. Should there be more transparency around the stress tests of central clearing houses? Do you think Barbara? They're not actually mandatory on stress testing yet. It's something that's coming into being. There's also some questions on how much capital they have. What is the waterfall in the event you had? A resolution? Things like that. So there's active conversations globally. I think all regulators realize, all policy people realize, we do need to make them more resilient. And there's a number of different dimensions of that. And I think we're going to get there in probably 2017 or so. I can comment on that. She's up until recently. I was chairman of CP Maya Oscar. So in fact, we are developing standards for stress testing and also stress testing at the individual level, but also more global stress testing working with FSB. So that is all underway. And I do think the issue is these I'm very supportive of we've got a we've created these vehicles and we've got to make sure that everyone has trust and confidence that if you want there to, you know, they are, they will be resilient. So they should never actually fail. So I do think the efforts are going into the moment are really important. So but it is happening and it should be transparent. I agree with you. So we're obviously discussing financial regulation on the same day that a US president who has pledged to dismantle Dodd-Frank is about to be inaugurated. Larry, maybe I could ask you about what you think Donald Trump will do to US regulation and the impact it may have on global global economic security. I have to say that I am struck by the contrast between the tone of this dialogue where people may or may not completely agree, but they seek to bring evidence forward in support of the things they believe. They listen to the positions of others. They're prepared to change their minds. And a great deal of what passes for economic dialogue in Washington as the new administration transits to power. I think policymaking by tweet is likely to be a substantial danger to economic performance over time. I think regulatory policies framed by what is felt by regulators, rather than what is thought by regulators, are likely to be dangerous over time. And I think the propensity to general sweeping and passionate rhetoric on technical matters is unlikely to be helpful, whether it comes from the left or from the right. So more than I'm focused on any particular change that may or may not happen with respect to Doug Frank, I am focused on the need for continuing thoughtful internationally, internationally worked out, comprehensive, complex to reflect the complex world regulation. And I think the propensity to reduce regulatory debates to slogans that fit into 140 characters is a very troubling propensity. Greg, you're an international regulator. How worried are people internationally about the rhetoric coming out of the U.S. as it pertains to regulation? There's lots of rhetoric. I think, to Larry's point, at the end of the day, it's too early to tell. But I do, big concern I have, and that's not with what's happening in America, but fragmentation really worries me, which is inconsistent approaches to really what our global markets. So I do think one thing we're going to have to be very, it's going to be really important to explain what we do in the future. I think, and why we need to do it this way. And if you don't have globally coordinated markets and that stops the flow of capital, that's not good for anybody, right? So what we want is free flow of capital. So making sure we remain consistent and explain the story, I think, is really important. Just other two other things. Another related that technological developments are huge. And I think developing, say, global approaches and standards to say, digital identity or interoperability and blockchain, this is all stuff that's, it's global and it's going to have to be continued to be global. Even things, cybersecurity, I agree, is the number one big risk, I think, to the markets, right? Again, making sure that the big issue at the moment is interdependencies. People don't really think about what, how interdependent they are, right? That often the thing is going to blow you up, is actually not maybe within yourself, but somebody you've got an interdependency on. So I think that, I actually think that we've actually just got to, again, there is going to be change. You've got to explain why we do what we do and, and I think, and be adaptable and flexible. And I do think also, one of things with financial service, I do think inclusiveness is going to be really important. And not thinking about governments have got to not think about the one size fits all. It's got to be a lot more proportionate, you know, for emerging markets. And that's where I think we have gone a bit wrong over the last few years is we've tried to make it a one size fits all rather than actually thinking with your little market, okay, you've got to be a bit more proportional in terms of that might, I think that might be probably a very good development in terms of pushing perhaps a bit more flexibility. So look, I think I'm always half glass full sort of guy, right? So, you know, Barbara, for you, how do you see the US financial regulation changing in the next few years? So I couldn't agree more with Larry. Policy doesn't fit in 144 characters. The devil is in the details. You could say things like I'm in favor of fiduciary standard. That's a good thing. Then you can look at hundreds of pages of the rule that was passed and say, well, this doesn't really solve the problem where this creates new problems. So the devils in the details, you could have a good idea. And it's almost like in business, you say, I need a business strategy, but I also need a good execution in policy. Same thing. It should be data driven. It should be based on fact. It should be based on expertise in the area, really digging down and understanding. When you say things like Don Frank going away, there's no proposal in Congress or anywhere in Washington to make it go away. There are proposals to address it and make changes to it. But that's very different. So I think it'll be an interesting 2017 and beyond. And we're looking forward to working with the new administration. Well, the market certainly seemed to expect there's going to be some sort of deregulation. We've seen quite a run up in the share prices of the banks. Do you think investors may be getting ahead of themselves, maybe reading too much into it? You talk to some people here and they seem to think it'll be the smaller banks that will benefit. The larger banks may not actually gain as much as they hope. I would call it let's right size regulation rather than let's deregulate. I don't think we want to take all these things off the table. They were put there for a reason. But in some cases, the pendulum has simply swung too far. So let's right size it. Let's make sure that we're not sweeping up everyone with one size fits all rules. Let's make sure we're combining some supervision and responsibility for supervision, accountability for supervision with rules that are maybe a little simpler. It's almost like the analogy is the tax code. In the United States, the tax code, I think you could put a book on the bottom, a paper on the bottom and pile them up and you can go past the ceiling. That's our tax code. No one can read all that and actually understand all that. Maybe if that's your full time job. Well, we now have stacks of paper like that for every one of these categories. It's just too much. No, that's right. I agree with that. You know, both domestically and globally, you've got to think more proportionately. Not one size. If anything comes out in the next few years, that should be the big thing, particularly say SME sector, making it a lot easier. I agree. So we're certainly seeing more fragmentation. Maybe just one last question. We are certainly seeing one more fragmentation in the kind of global regulatory landscape. One thing that the U.S. and Europe are all over is how you measure the riskiness of a bank's assets. Larry, do you think we're going to have any agreement on that this year between the U.S. and the Europe? I don't know. I think we probably need to put more reliance on market values and attempts to gauge market values and less emphasis on accounting values. I think one of the quite disturbing things that has come out of the reviews of the crisis has been the number of institutions that failed, whose regulators were busy explaining up to and passed the day when they failed, how splendidly capitalized they were. And I think that counsels more emphasis on liquidity. I think it also counsels some care in the measurement of capital. So my big take-aways from today's discussions is I'm going to get horrible looks if I use the term shadow banking, that the market-based financing is perhaps not as risky as we feared. Sustainable. Sustainable. There are how, you know, we are definitely in a safer place as far as the banks are concerned. We have comprehensive regulation, but there are some risks out there and I think you've named them, you know, cyber security, central clearinghouses, the risk of regulatory fragmentation and perhaps, you know, most cognitive all in today, given the day that's in it, sort of the rhetoric that is coming out of some countries as it pertains to regulation. And I think we've got to watch technological development to make sure that it doesn't go ahead of us too fast because usually when that happens we have problems, right? So I think we've got to watch that one. There will probably be all robots here in a few years doing this panel. Well, as long as the robots we watch the algorithms that are behind them, we will be fine, right? But let's, you know, the person behind always is going to be responsible for that algorithm we've got to think about and make sure we get that right. So Greg, Barbara, Larry, thank you so much. Thank you. Thank you.