A Conversation with Ravi Menon | Future of Banking | Money, Regulation and Power

Thank you, Haslinda.

Oh, well, we've come quite a long way since 2015. It's quite heartwarming how things have taken shape. Most important is that we now have a vibrant fintech ecosystem. If you look at financial institutions, now fintech is not only about non-financial players applying technology to financial services. I think a big part of fintech is the application of technology within financial institutions to create better products. If you look at our financial institutions today, we've got more than 40 innovation labs. In 2015, I think there were hardly any. Many of the global banks, insurance companies, and asset managers have set up regional or even global innovation centers here. And they're doing very interesting experiments using a range of technologies from blockchain to artificial intelligence to cloud computing and so on, in a variety of use cases. So that's very interesting and exciting and a lot of collaboration is coming out of that. And if you look at the fintech community itself, in 2015 we had about 50 fintech startups. Today, we have more than 600 fintech startups. This is just over the space of 4 years and it's still growing, attracting a lot of interest. If you look at financing, in 2015 we had about $400 million worth of investments going into fintech. That's grown two and a half times. We've just crossed a billion dollars in funding for Singapore-headquartered fintech firms over the first three quarters. So, we're not done yet. We've got another quarter to go. So, we're going to be well in excess of a billion Singapore dollars of investments going into fintech firms.

Yeah. So, that's something we're reviewing right now. This was announced in 2015 and the funding period's going to end soon. I think it has been money that is extremely well spent, both in terms of supporting fintech infrastructure and architecture, which has public goods nature for which this funding is required. We can't lay all the cost burden on the financial institutions. So, this has been good. Secondly, innovation labs I spoke about. Going forward, I suppose we will have to take deep dives in certain areas of technology. Two areas that come to mind, cybersecurity and artificial intelligence. These are, in a sense, pervasive, horizontal types of technologies with very multiple applications. We have the IDA grant, where we support AI experiments directly. And an interesting feature of the grant is that even as you employ artificial intelligence, it requires, to qualify for the grant, the financial institution to make sure you train the people so that they can take on the new job. So, this is not about machines replacing people, but machines enhancing the jobs that people can do. And I think there is more scope to expand in our horizons beyond that. Cyber is another area we've given small grants to small financial institutions to upgrade their cyber security capabilities. But we can now think blue skies about what is the next quantum leap you want to make in building cyber resilience for the financial sector. So, very tentative ideas, we've not completed the review, we'll probably announce it sometime next year.

Well, if you're referring to the digital bank licenses, we've just put out the requirements and we announced getting lots of interest. So, I think next year you'll see who will be successful. We've got five licenses, two full bank and three wholesale bank licenses up there. We want this to inject more competition, and I think that's good. It's part of the purpose. We're not starting from a position of weakness. The banks here, both the local and the foreign banks, have very strong digital offerings. And I think some of the local banks have won accolades for being among the world's best with respect to digital infrastructure and offerings.

It's already changed. The last four, five years, the last three years, I think, it has changed tremendously. It's been a big leap. So, it's not as if we are lacking something, and no banker you speak to in Singapore will say competition is lacking either. It's very keen competition. But we thought we could do even more. So, the main purpose is not so much that the existing landscape is lacking, but can it be made better?

Not clear to me that we are aiming necessarily for consolidation. If some consolidation happens, may not be an entirely bad thing, but one needs to be also mindful about concentration risk. Three banks is not too many because if they were three local banks, I mean, firstly, we have to understand there are 150 banks operating in Singapore. About 20 of them probably are very active in the retail business and have very large presence. Some of the foreign banks like Citibank and Standard Chartered Bank have almost as much head count as the local banks. And in many areas of business, they're also dominant. In the wholesale side, Deutsche and so on. UBS and Credit Suisse are the dominant players in private banking. So, if you look at business lines of various business lines, foreign bank presence and strength is very strong. So, we've quite a diverse landscape. It's not clear to me that we're going to be able to need to see a lot more consolidation. What we're more likely to see and what we like to see are interesting joint ventures and combinations between traditional financial services and non-financial players. That really harnesses and synergizes rather than consolidation on its own, which is mostly about cutting cost, which I'm not sure is the paramount need for now.

We should be involved. Meaning, we need to keep abreast of the technology. We need to get our hands dirty in actually working with cryptocurrencies. And we've gained valuable experience from Project Ubin Jasper. Because we issued the Singapore dollar as a digital currency in the blockchain. So, I think it's important for us to be immersed in it and not stay away from it. Then, the question becomes a bit more nuanced. For what purpose? What is the digital currency supposed to do? So, we make a normal distinction between a wholesale digital currency and a retail digital currency. The wholesale digital currency is what you see in blockchains. Whereas with any digital token, it does not necessarily have a life of its own, but it's used to effect the transaction. And so, Singapore would issue a digital currency, Canada would issue a digital currency to effect cross-border payments. But it doesn't get outside of the banking system. What people hold on to are still traditional fiat currencies. So, if the problem you're trying to solve is cross-border payments, you don't need a retail digital currency. A wholesale digital currency would work just as well. So, our leaning is that for now, we don't see a compelling need for retail digital currencies, which means central banks issue digital currencies directly to the public. That's not how money is issued in real life and for all these years. It has always been through the banking system. And there was good reason for doing that because the banks then create out of the monetary base, create money through their lending activities, through credit, through the credit creation process. If central banks were to be directly issuing digital currencies to the general public, what do the central banks do with this money? Central banks are not well, not geared up to be the people who extend credit. That's the job of banks. So, we need to think that through how that will work in practice. And then you have to also ask why is there a demand for central banks to issue digital currencies quite apart from the cross-border settings for retail. And I think if there is, and this is probably less of a monetary policy question than a political one. If people feel they need to have a digital equivalent of cash with all the properties of cash, the two most important being anonymity and finality. What do I mean? Anonymity means today if I make an interbank transfer to your account, it's confidential. But if the authorities suspect some wrongdoing, they can actually lift and look into the transaction. And that's how we detect money laundering, tax evasion and so on because there's a digital trail, there's a transaction record. So, when we go into digital payments, you lose that absolute anonymity of cash because if I give you a suitcase of cash, there is just no way that can be traced.

We welcome the innovation. I think Facebook's proposal has generated tremendous amount of new thinking, which I think is essential for the future. And all that you said earlier on about the interest that central banks are showing in digital currencies have been given a big boost by what Facebook has done. On the face of it, pardon the pun, Facebook's proposition is that it wants to make cross-border payments cheaper, faster, and better. And it wants to enhance financial inclusion because it's far easier to have a Facebook account than to have a bank account. And Facebook can play that role. Now, again, on the face of it, I think those are lofty ambitions and I think they deserve an answer that the central banking community and the banking community needs to work on. It's partly because we've not done too good a job at this that you have proposals like this emerging. Not that the proposal is bad, but what I'm saying is that it is pointing to a real gap and I have empathy for that.

So, that's yet another nuance to the whole issue of central bank issued digital currencies. Is it for purely for payments? Is it for anonymity? Here, I think the argument is about the dominance of the US dollar and whether that is a healthy thing for global financial stability. Because even when two countries trade or when two people make transactions, there is a dollar leg. It gets converted. Our exchange rates, bilateral exchange rates, are all referenced to the US dollar and then back to the cross rates. So, is that a good or bad thing? Well, that system has served us pretty well so far. Going forward, I think it's not unreasonable as Mark seems to be alluding, not unreasonable to ask if that is the best way forward, whether we should find a more stable system of global reserve currencies. Again, it's got nothing to do with United States per se. It's all about the way regulators and central banks think, concentration risk. Do we have a concentration risk in the US dollar? And what if something went wrong? So, do we want something that is a bit more diversified? I think those are the questions. Libra poses that because of its proposal to peg to a basket of currencies, and I think Mark's proposal for a Libra-like solution from the central banking community is trying to get at the same thing.

Yes. So, I think that is one of the big burdens that has been placed on central bankers across the world, that because of what they did fabulously during the global financial crisis and subsequently in holding up the global economy and the global financial system, there's now tremendous unrealistic expectations placed on central banks that every rough patch that we run into, monetary policy is going to get us out of it. I think that is wrong. And I think it's also wrong for central banks to feed that expectation. Monetary policy provides the basis for sustained non-inflationary economic growth. It provides stability, predictability over the medium term that the value of money will be stable. And that is the basis for then carrying out economic activities. But it can't be that every slowdown, every risk or threat on the horizon has to be addressed by a loosening of monetary policy. I think fiscal policy has a strong role to play. And that has not been sufficiently addressed partly because too much of the weight has been placed on monetary policy. So I think we need a better balance between the two. Otherwise, it is exceedingly unfair on the central banking community.

Well, I think you always want to keep some powder dry and not deplete all your policy buffers. Singapore is fortunate. We've got both monetary and fiscal policy buffers, quite good. Our public finances are strong and we can, if we want, if it's felt necessary, apply more fiscal stimulus. Likewise, we've been on an appreciating path of the exchange rate for some time now, so that's sufficient buffer there. We have reduced the slope, so the rate of appreciation is lower. Let's see how the data comes out over the next two quarters. A key assessment to be made is whether this is bottoming out and whether we're going to see a modest recovery next year. If that's the case, then I think we're in pretty good shape. But if things were to take a turn for the worse, then I think you need some buffer. You need some ammunition. And so we're keeping some powder dry and we've said as much that if necessary, we're prepared to use it. And there's still space.

Singapore wouldn't need QE because our monetary policy is based on the exchange rate, managing the exchange rate. So we're not subject to the zero lower bound of interest rates. And even there, they're thinking of negative interest rates and QE as supplements. With an exchange rate-centered monetary policy, those considerations don't apply. We can, if necessary, bring the exchange rate path to zero as we've done before. We've never before had a policy of deliberately depreciating the currency, but we can recenter the exchange rate downwards, which we've done before, too, if we think the current rate of the exchange rate is too tight. We can always recenter the band downwards. And with that flexibility, there is actually no constraint. So we have fair amount of policy space on the monetary front without having to think about QE.

Yes, we've been in very close touch with the US Treasury on this. Very good conversations, very good exchange of views. We're keeping very close touch. They understand how monetary policy works. And I think in the report, there is an acknowledgement that in a small open economy, the exchange rate matters more than the interest rate and therefore we've chosen to target the exchange rate and that means sometimes you have to intervene in both directions to keep the exchange rate on its prescribed path. So I think they understand that, but they have a framework which they need to apply globally. They want to make sure that currency intervention is not carried out with the purpose of gaining unfair export competitiveness advantage for current account purposes. We've explained to them extensively that it's never the way we operate. Our exchange rate is solely guided by inflation and growth considerations. The typical monetary policy considerations, not the current account or the trade account. We've also announced that we will be transparent in our exchange rate interventions. We will, beginning next year, next July, announce how much we have intervened. But we can't do it in real time for obvious tactical reasons. But we don't have a problem disclosing how much we intervened in the preceding 6 months. So that people know how much we've intervened.

Well, we actually run a trade deficit with the United States. So there ought not to be a complaint on that front. So I don't see this becoming an issue and like I said, although we've been named in the report, we've had very good conversations with the US Treasury, ongoing dialogues, exchange of views, very constructive and fruitful. We know where they're coming from, we understand what their concerns are. They understand where we're operating from. So, I think I'm pretty hopeful that being named in the report is one thing, but whether it will lead to adverse consequences is quite another, which I don't think is likely.

When you ask this question to bankers, you'll get a very similar answer. I think it's about technology risk. Because all the stuff we've talked about, economic slowdown, trade wars, they're not entirely new. You can figure out what the likely consequences are, what the likely countermeasures might be, and so on. Traditional financial stability issues, I think we've got a reasonably good handle on it. Since the last crisis, I think the Financial Stability Board has done a very good job. I think we have not paid enough attention to technology-related risks, and the pervasive use of technology has been hugely beneficial, but I'm not sure all the players involved, this means both financial institutions, consumers, central banks, regulators, and governments, whether all of us have a really good handle on the various kinds of cyber risks, or more broadly technology-related risks that can potentially have systemic consequences and can bring down institutions potentially or bring down or create gridlock in the financial system.

Thank you, Haslinda. Thank you.