Transcript of Question & Answer Session Emerging Threats to Financial Stability – New Challenges for the Next Decade

You describe, I guess, the challenges as ‘different and persistent’. What is your advice to the finance sector, who’ve got immediate challenges and longer term challenges to get this balance right, when there’s so many priorities? I mean, you talked about three sort of risk areas. What do you, as the Central Bank, expect the finance sector, banks and non-banks as a whole, to be thinking about now and over the coming months and years? We heard from Paul Bloxham this morning about headwinds globally still being a factor and some opportunities for Australia in terms of different industries, like renewables. What are you expecting from the finance sector at an aggregate and at an institutional level and at a customer level?

I think Paul’s right, in that the next decade is going to offer some fantastic opportunities for the financial system in Australia and for the economy at large. The main message that I wanted to leave with you is: the flipside to those fantastic opportunities is that the risk environment is becoming more complex, more challenging, and we’ve got some conjunctural issues in front of us but, as I tried to set out in my remarks, there are also a whole host of issues that are barrelling down at us where just looking at historical data is going to be really of limited usefulness to help us prepare. So that’s why I made the point at the end there about building program – risk management programs and running governance programs that are not so dependent on history repeating, because my sense is that a lot of these challenges are going to be new, and it means that how we think about this concept of resilience is going to have to evolve. The practices, standards of governance, standards of risk management that have prevailed over the last 20 years are probably not going to be enough for the next decade. And so that means, basically, looking under the hood very intensively at how robust your business is to shocks of various kinds. I think a central tenet of risk management is sort of thinking backwards from, ‘If X-event were to transpire, what would that mean for us?’ And I’ve laid out six risks here; I’m sure some of you here could probably come up with a few others. But we recognise there’s a trade-off here. Of course, you can’t just hide under the doona; that’s not the message, because there will be some fantastic opportunities, particularly around innovation. But how we think about resilience for this new world: it needs to change and we need to be thinking much harder about it. And just one final point. At the Bank, like I think most central banks, we spend a lot of time looking at the aggregate data. One thing that’s changed, enabled by better technology and better data, is that we and our fellow regulators are now spending a lot more time looking at disaggregated data. Yes, we care about the aggregates, we also care about the distribution, and it’s not enough for just the largest institutions to have the house in order. It’s really imperative that everyone in the financial ecosystem is building a business model that’s robust to shocks. That’s going to be, I think, in the best interests of those institutions, those entities. It will also be in the best interests of the financial system at large because, as we saw in March, you had a rupture in a number of small banks that most people around the world had never heard of and yet those ruptures were sufficiently significant that it spilled over and became, for a period there, a global issue. So we’re thinking very hard, I think much harder than possibly we used to, about the imperative for smaller institutions to have very, very strong levels of governance and risk management, including around areas like operational risk, which may be 10 years ago wasn’t really on the radar.

So what I’ve heard from you is smart systems. Are they going to use AI as well? You talked about smart systems, using technology and data, alternative data sources to better understand and model, and smart humans thinking about that and being creative in the future.

Yeah, and thinking about scenarios.

Human and technology, though. Not humans replaced by technology.

Indeed.