The Financial Sector: Redefining a Broader Sense of Purpose
IMF News, February 28, 2019
Source details
- Canonical URL
- The Financial Sector: Redefining a Broader Sense of Purpose
Other formats
Bibliographic details
- Published: February 28, 2019
Key themes and framing
- Speech delivered as the 32nd World Traders' Tacitus Lecture by Christine Lagarde, Managing Director, International Monetary Fund, London, United Kingdom, February 28, 2019.
- Central thesis: build a financial sector that is safer, more sustainable, and ethically sound—“a financial industry with a broader sense of purpose.”
- Two organising questions:
- How can we make the financial system safer—to encourage the good, not the bad, side of finance?
- How can the financial sector support long-term growth that is more sustainable and more inclusive?
1. How can we make the system safer?
- Overarching approach: harness good innovation, better regulation, and a broader sense of responsibility.
- Good innovation
- Historical role of financial innovation: development of writing, mathematics, accounting, probability theory; examples include Chinese paper money (9th century), Venetian prestiti (13th century), early stock exchanges (Antwerp, Amsterdam).
- Recurrent risk pattern: financial innovation has accompanied unsustainable credit booms and speculative bubbles (Rome, Tulip Mania, South Sea Bubble, Railway Mania, dot.com bubble).
- Global financial crisis drivers: financial engineering, inadequate equity capital, flawed business models—resulting in massive bailouts and fragility in advanced economy banks.
- Assessment: “they are safer, but not safe enough.”
- Better regulation
- Post-crisis reforms: collective work by the IMF, the FSB, the G20 and others has increased bank capital and liquidity, tightened regulation for big banks, lowered leverage, made winding down failing banks easier, and increased transparency in large parts of the derivatives market.
- Concentration statistic: in the United States, the top five banks now hold about 45 percent of total banking assets, compared with about 40 percent in 2007.
- Debate on higher equity funding: calls for further increases in equity funding beyond current capital requirements; counterargument that higher equity might reduce lending; existing evidence points to relatively small costs of higher capital.
- Emerging risks and blind spots:
- Cyber risk estimate: cyber-attacks could potentially lead to net income losses in the global banking system of up to $350 billion.
- Shadow banking vulnerabilities: sharp asset price adjustments could affect fast-growing shadow banking; need to regulate underwriting standards in high-risk debt markets, including leveraged loans.
- Policy imperative: resist rollbacks of post-crisis regulations and complete full implementation of existing reforms.
- Broader responsibility
- Remuneration and incentives: pre-crisis pay structures drove reckless risk-taking; post-crisis alignment improved through deferred variable remuneration.
- Exact practice example: senior bankers in the City defer 40 to 60 percent of variable remuneration over 3-7 years, with potential reduction, cancellation, or claw-back in case of poor performance or misconduct.
- Accountability measures: Senior Manager and Certification Regime (U.K.) increases accountability; recommendations include more consistent claw-backs across countries, enhanced disclosure of disciplinary actions, and a possible global code of conduct.
- Legal enforcement: increased pursuit of individual wrongdoing, but firms often bear fines perceived as a “cost of doing business.”
- Values and ethics
- Call for an “ethics upgrade”: intrinsic virtuous behaviour (justice, courage, self-control, prudence, generosity, honesty) is necessary to earn trust—“credit” derives from Latin for “trust.”
- Corporate purpose: encourage linking individual purpose to social purpose; challenge narrow shareholder-value maximisation and promote broader common responsibility.
2. How can finance support sustainable and inclusive growth?
- Framing: finance must help deliver higher employment, greener growth, and good living standards for all by aligning with societal values and stakeholder interests.
- Data point driving urgency
- Intergenerational transfer: Over the next 15 years, $24 trillion of wealth will be inherited by millennials—who are more than twice as likely as other generations to invest in companies or funds that target social or environmental outcomes.
- a) Fintech
- Goals: foster fintech that is substantially cheaper, more accessible, and serves customers and communities better; rethink economics of the financial industry to reduce rent extraction.
- Historical observation: in the United States, the unit cost of financial intermediation has remained largely unchanged over the past century, while income from finance has risen and fallen with the value of financial assets.
- Inclusion impacts:
- Examples: mobile payment systems in Kenya and China; peer-to-peer lending in Latvia and Brazil; blockchain for faster, cheaper transactions.
- Inclusion statistics: 1.5 million adults in the U.K. still have no bank accounts; about 33 million U.S. households are under-or unbanked (2017 survey: about 8.4 million households have no bank accounts; an additional 24.2 million households have accounts but no access to other financial services).
- Policy needs: fintech must be supported by better regulation and smarter supervision—banking-type fintech services should be subject to banking regulations (especially consumer protection). Collaboration with regulators is essential.
- Reference framework: Bali Fintech Agenda (IMF and World Bank, 2018) provides key principles on competition, consumer choice, and fighting money laundering.
- b) Female leadership
- Rationale: greater diversity sharpens thinking, reduces groupthink, leads to more prudence and better decision-making.
- Empirical finding: IMF research finds a higher share of women on the boards of banks and financial supervision agencies is associated with greater financial stability.
- Current gaps:
- Only two percent of bank CEOs are women.
- Less than a fifth of bank board members are women.
- Policy tools: quotas can be effective if properly designed—example: Norway’s mandatory quotas increased the proportion of women on corporate boards from 9 percent in 2003 to almost 40 percent five years later.
- Demand side: surveys show women are far more likely to engage in sustainable investing than men and are driving products targeting gender equality in corporations.
- c) Investing for the global public good
- Need: trillions of dollars of private-sector investment required to tackle climate change and achieve the Sustainable Development Goals (SDGs), which aim to eliminate poverty by 2030.
- Time horizon shift: climate risk moved from a distant threat to present-day economic reality (hurricanes, wildfires, flooding); implications for productivity, incomes, financial stability, monetary policy, and migration.
- Finance response: shift to sustainable finance grounded in better risk management and longer-term thinking; mobilize finance for people and infrastructure via bank lending, project finance, and “blended finance” (grants, concessional financing, commercial funding).
- Public–private complementarity: public and private investments must be complements, not substitutes; requires sound economic policies, strong legal frameworks, good governance, and zero tolerance for corruption.
- Financing gap estimate: the additional spending needed by low-income countries to achieve the SDGs—in key sectors such as health, education, and low-carbon infrastructure—is about $520 billion per year in 2030.
- Sustainable investing scale: sustainable investing sector accounts for $23 trillion, or 26 percent of global assets under management.
- Actions for fund managers and policymakers: launch products that encourage corporate alignment with the SDGs; create global standards for sustainability accounting and reporting to boost transparency and credibility.
Conclusion and policy implications
- Moral and economic case: serving others—not oneself—is the “real magic of finance”; a purposeful financial industry supports higher employment, greener growth, and better living standards.
- Policy priorities summarized:
- Continue strengthening regulation and resist rollbacks of post-crisis reforms.
- Address concentration risks and consider further equity funding while monitoring lending impacts.
- Close regulatory blind spots in shadow banking and high-risk debt markets.
- Implement consistent incentive and accountability frameworks (deferred remuneration, claw-backs, disclosure, legal enforcement).
- Promote an ethics upgrade across financial professions and embed corporate purpose that includes social responsibility.
- Harness fintech for financial inclusion with appropriate regulation and supervision (guided by the Bali Fintech Agenda).
- Advance female leadership and board diversity—consider well-designed quotas and other measures.
- Mobilize private finance for the SDGs and climate action through blended finance, policy reform, and global sustainability standards.
Source: The Financial Sector: Redefining a Broader Sense of Purpose — Christine Lagarde, Tacitus Lecture, February 28, 2019, International Monetary Fund.