New phase in financial regulation call for tech-savvy, collaborative central banks: Ravi Menon

Monetary Authority of Singapore managing director Ravi Menon said the regulatory changes of the last eight years are substantial, especially when taken cumulatively.
Monetary Authority of Singapore managing director Ravi Menon said the regulatory changes of the last eight years are substantial, especially when taken cumulatively.PHOTO: ST FILE

SINGAPORE - Nine years on from the 2008 financial crisis, regulators are now entering a new phase, one that requires them to take stock of the reforms implemented so far and position themselves for the technological changes sweeping the financial industry, said Monetary Authority of Singapore managing director Ravi Menon.

Mr Menon, speaking on Thursday (April 20) at a lecture in Washington, D.C., said regulators must now evaluate the effects of the regulations that have been set out over the past eight years, consolidate what we need to preserve, and fine-tune what we need to improve. The event was organised by think tank Official Monetary and Financial Institutions Forum.

Mr Menon said the regulatory changes of the last eight years are substantial, especially when taken cumulatively.

"It is incumbent on us as regulators to be accountable for these changes, to evaluate objectively their intended outcomes as well as any unintended consequences," he said.

With memories of the crisis fading and the compliance burden of new regulation continuing to grow, pressures have begun to mount to unwind some of the reforms, he added.

"Any adjustments to be made should be grounded in an objective assessment of the impact of the reforms."

There are concerns, Mr Menon noted, that these regulations have for example dampened market liquidity and bank profitability.

"We have rightly focused our regulatory efforts to minimise the risk of another financial crisis. But we must continually ensure that we do so without minimising economic growth and opportunity."

Some fine-tuning may be necessary to reduce the unintended effects of reforms while preserving their benefits, he said.

But in doing so, regulators must be careful to avoid pendulum swings that could undermine the gains in financial stability that have been achieved, not to mention prolong and add to the uncertainties facing the financial industry, he added.

Regulators' next challenge is to grapple with rapid technological change by developing a deep understanding of emerging technologies and the risks and opportunities they present, Mr Menon said.

"Financial regulators should not be afraid to work collaboratively with financial institutions or even fintech companies."

Regulation must not front-run innovation, he added, as introducing regulation prematurely may stifle innovation and potentially derail the adoption of useful technology.

And regulators should allow experimentation to facilitate fintech innovation while limiting its risks to consumers and the financial system should these innovations fail, he said.

The regulatory sandbox is a useful device to test new ideas in a confined environment, he noted, adding that Singapore was among the earliest in the world to adopt one.

Aside from regulating it, central banks must also look to harnessing fintech to better regulate and supervise financial institutions and help them manage their risks, Mr Menon said.

For example, predictive analytics is being used in stress testing, to assess the ability of large, complex financial institutions to withstand a variety of stresses affecting different parts of the business in different geographies.

At the same time, he noted, the world needs to strengthen its management of cyber risk.

"Given how inter-connected systems across the global financial industry are, common standards for the swift recovery of critical functions disrupted by a cyber attack will help reduce systemic vulnerabilities," he said.

And given how often cyber incidents stem from compromised user IDs and passwords, a global minimum standard for robust authentication for online financial services is worth considering, he added.

There should also be sharing of cyber intelligence within the financial industry, he said.

"This will heighten the industry's collective situational awareness, so that it can respond more quickly and more effectively to impending cyber threats. Regulators can help to establish common infrastructure, processes and protocols to facilitate this."

Regulators, too, need mechanisms to share cyber intelligence efficiently in real-time, Mr Menon added.

There are already informal, bilateral arrangements for such information-sharing, but more can be done, he said.

"We need to identify and reduce the barriers inhibiting cyber threat information sharing, such as legal, confidentiality, and operational constraints."