Governor Olli Rehn
Bank of Finland
European SSM Round Table
21 May 2021
Governor Olli Rehn’s welcome & opening remarks at the 13th European SSM Round Table digital conference
Dear Colleagues, Dear Friends,
Let me welcome you all on behalf of the Bank of Finland and our co-organisers to this joint conference on competitive business models and sustainable finance. I hope you will enjoy today’s discussions on issues that at least I find both most topical and highly relevant.
Let me start by few words on the current economic outlook. The COVID-19 pandemic continues to have a negative impact on the economic situation and prospects in Europe and throughout the world. However, the economic recovery is expected to accelerate in the second part of this year, as more and more people receive their COVID-19 vaccinations. But, of course, there are still major downside risks related to virus mutations and potential delays in vaccination rollouts.
The Governing Council of the ECB has taken numerous policy decisions during the pandemic to maintain favourable monetary conditions for households, firms and other economic agents. Without the strongly accommodative monetary and fiscal policies, the contraction of the euro area economy would have been much more severe.
In the COVID-19 crisis, monetary and fiscal policies have operated in complementary and mutually reinforcing ways. As the inflation outlook in the euro area remains muted, economic growth still needs to be supported by a strong monetary policy stimulus.
The ECB monetary policy strategy review was launched last year and is expected to be completed later this year. The underlying reason for the review is the profound structural trends in the global economy, including the fall in natural interest rates and flattening of the Phillips curve. COVID-19 and the extraordinary circumstances over the past year have further underlined the need to reassess our monetary policy strategy.
One of the key issues is how to anchor inflation expectations in an effective manner. I would find it important that our price stability target is understood by the public as symmetric at — and not below — 2%. I would also prefer a reaction function that delivers sufficiently forceful and equally effective policy actions to deviations from that target in either direction. This would take the increased risk of hitting the effective lower bound into account.
Next on banking. The banking landscape is getting more and more complex and diverse. Digitalisation is enabling new players to enter financial services, with bigtechs, fintechs and established companies from other industries leading this march.
Moreover, new technologies, such as artificial intelligence, cloud and blockchain, are enabling new and innovative ways to do banking. And digital channels allow scaling of business at a speed that would not have been possible in the past.
But while it promises a lot, adopting new technologies requires significant investments, and even new business models. And these efforts are just the beginning. Successful firms must continue to keep up with technological advances.
Customer experiences are also shaped by digitalised services in other fields. As a result, the expectation of 24/7 services that are immediately available everywhere becomes the new norm. Similarly, the integration of financial and other services becomes more important. This is especially true in payments, where the transactions happen seamlessly in the background.
So, what does a future-proof competitive banking business model look like? As I see it, there are no straightforward answers.
First, no single business model would work for all. Instead we will see a myriad of different business models.
Second, we will not go back to an age when an organization could work with the same business model year after year. It is safe to expect that the evolution of banking is not slowing down. The rapid pace of evolution will continue to test the competitiveness of banking business models. New innovations in banking will continue to emerge, possibly at a faster pace than ever before.
Moreover, it is not only banks and other financial enterprises that need to innovate in order to stay on top of their game. Central banks have established their own innovation networks to co-innovate and share ideas. The Bank of Finland, for example, is participating in the global BIS innovation network that focuses on topics like open finance, green finance and next generation financial market infrastructures.
One of the key issues for central banks has been the possibility to develop a central bank digital currency, or CBDC for short.
Take, for example, a digital euro. A digital euro would be a central bank liability offered in digital form for use by citizens and businesses for their retail payments. The idea for the Eurosystem is not to compete with commercial banks but to act in cooperation with them. The possible issuance or the specific design of this digital euro have not yet been decided. In this project, we want to work with the private sector and consult it throughout the process.
Ladies and gentlemen,
With ever more ambitious climate goals across the world, we all know that our economies need to go through a fundamental reform in order to become climate neutral. No sector of the economy is unaffected, least of all the financial sector that is responsible for directing capital for investments.
Sustainable finance has been significantly growing in the past years. With the EU Green Deal, Next Generation EU and national initiatives in the Member States, the EU is well on its way to maintaining its global leadership in this field. The EU’s sustainable finance work is creating the ground rules on which financial institutions can build their services.
The EU’s sustainable finance taxonomy is one of the most important parts of this. The taxonomy needs to be technology-neutral and environmentally credible to prevent greenwashing. At the same time, complying with the taxonomy should not be overly burdensome.
It will not be easy to achieve balance, as national industrial policies tend to get mixed with climate policies. But this balance can be achieved. I know this from personal experience, as I oversaw the report on the National Energy and Climate Strategy for 2030 as the Minister of Economic Affairs. Finland is well on its way for carbon neutrality by year 2035.
Global phenomena like digitalisation have triggered a fundamental change within the financial sector. Digitalisation forces banks to reconsider their business models and find the one that allows them to flourish in the future. But most important is to start now, even though it will take years for major changes to occur.
And the same is true for climate change. In the absence of a global carbon price, second-best solutions are needed. This elevates the role of the financial sector in climate change mitigation. Importantly, sustainable finance can provide a business opportunity for banks and help in mitigating climate change. We should seize this opportunity.
With this, I hope you will seize the opportunity to enjoy the presentations of the distinguished speakers and actively participate in today’s discussions.