Pandemics and Financial Stability (Part 3)
Wednesday, Apr 01, 2020

Pandemics and Financial Stability (Part 3)

This is the third part of a Toronto Centre Webcast Series to help financial Supervisors and Regulators gain insights and perspectives on COVID-19 and its impact on the global financial system from supervisory experts. This episode features:

  • Bill Coen – Immediate Past Secretary, Basel Committee on Banking Supervision; Toronto Centre Board Member
  • Tim Adams – President and CEO, Institute of International Finance

 

Full transcript 

April 1, 2020

Babak Abbaszadeh:

Good morning. Good afternoon. Good evening. Welcome to Toronto Centre's third segment of our
Pandemics and Financial Stability Webinar. I'm delighted that we have so many participants almost
reaching close to 400 from several countries. Just let me list a few that have more than a few people
signed up Australia, Brazil, Dubai, Ecuador, the list goes on Mexico, Nigeria, Zambia, all of you welcome
and all of you that I didn't mention welcome.

Babak Abbaszadeh:

Today, the COVID-19 public health and economic crisis is ravaging Europe, North America more severely,
and it seems to be creeping up in developing countries. In today's episode, we sit down with two
prominent experts to cover financial sector regulation and supervision dynamics. Their bios have been
distributed to you.

Babak Abbaszadeh:

Bill Coen is the immediate past Secretary General of the Basel Committee on Banking Supervision where
he was preoccupied with setting global banking standards. He also worked at the US fed and the US
Office of the Comptroller of Currency, so he's a supervisor supervisor. We're also fortunate to have Bill
on Toronto Centre's Board of Directors.

Babak Abbaszadeh:

Tim Adams is the CEO of the Institute of International of Finance or IIF, the global association of major
financial institutions. He's also a former US Under Secretary of Treasury for International Affairs, where
he worked with the World Bank, IMF, G7 coordination, and other important matters.

Babak Abbaszadeh:

Finally, I would like to thank our key sponsors Global Affairs Canada, the Swedish International
Development Cooperation Agency, the IMF, the Jersey Overseas Aid, and Comic Relief without whom
we could not achieve our global mission. Before I start, I know that many of our viewers have questions
for these two experts, and we have allotted time to deliver answers to you. Please type your questions
in the Q&A tab, which you will find below the video screen and we will answer as many as our time
allows.

Babak Abbaszadeh:

I'm very excited to start. So this is a question to both of our panelists. Bill and Tim, I'm sure you have
both been involved in various crises regional, international, especially the great financial crisis of 2008.
This one seems a little bit well a lot different, both in terms of magnitude, and in any dimension that one
can think of. So let's start with you, Tim, what's different this time?

Timothy Adams:

Sure. Well, thank you for having me on this morning. It's a pleasure being with you. And it's a real honor
being on with Bill Cohen, who's one of the great public servants, and has been just wonderful to work
with. We haven't always agreed on everything. But I'll tell you, he always had the public's interest at
heart. So, it's an honor to be here and be with him today.

Timothy Adams:

There are similarities, enormous uncertainty, chaos, the fog of horror as often described, market
plummeting, under stress, headline-grabbing stories. But what's different is just the nature of how this
transpired, this health crisis that became an economic crisis that became a financial crisis with a
feedback loop into the economic activity.

Timothy Adams:

And then layered on top of that there is a dispute among oil producers which has seen oil prices crashed
lows we haven't seen for 20 years, which is having implications for high yield debt, which also feeds back
into the financial system. So different from what we saw in '08, '09, which was a housing finance crisis
that led to a banking crisis or a sovereign debt crisis that led to a banking crisis.

Timothy Adams:

So it's different and we need to think of it differently. We need to learn the lessons from previous crises
not only '08 and '09, but before that, and take the best lessons we've learned. But also understand that
we need to think creatively and aggressively in this environment as well.

Babak Abbaszadeh:

Thank you, and Bill, you bring a different perspective into it. You were in the trenches in help setting up
the global standards. What's different this time for you?

Bill Coen:

Babak, first of all, thank you very much for organizing this. This is a tremendous series, and I hope this
webinar turns out to be as good as the first two or so, congratulations to you, your colleagues at
Toronto Centre. Let me also echo let me say likewise, what Tim had to say I completely agree, Tim, there
were many times we didn't agree. But we always, Tim and his staff, IIF, made a tremendous contribution
to global standards-setting, and it was a pleasure to work with them.

Timothy Adams:

Thank you.

Bill Coen:

Thank you for that, Tim. There is, Babak, tremendous similarities in the last crisis, the 2007-2008 crisis,
the same uncertainty, the same sense of fear or concern, capital market dysfunction, the volatility. So, a
lot of what we're seeing today really is reminiscent of what we were going through a little more than a
decade ago. To be sure though, there are some tremendous dissimilarities.

Bill Coen:

I think first thing that strikes me better preparedness, the financial systems are much better prepared.
This time there's actually a playbook. A playbook actually exists whereas the previous crisis that really
wasn't the case. The central banks, particularly the Fed really making up a lot of these programs facilities
as they went along. In many cases, they've dusted off the playbook, they've added to it. So I think that's
a very big difference. You've got some seasoned hands at the central banks and supervisory authorities
who've been through this before it makes a tremendous difference.

Bill Coen:

Now, I think everyone would agree there's more capital in banks and banking systems, the liquidity
situation is better. But it just doesn't stop with better capital and better liquidity, there's far greater
consideration to stress testing, business continuity. Some of the big differences though, geography. This
truly is a global crisis, whereas the last one, it originated in North America it spread to Western Europe.
It had knock-on effects to the rest of the world.

Bill Coen:

But here we've got something that truly is global. And it's moving very, very quickly. I think of the
operational risk. Tim's at home, I'm at home. I would assume most people on this call this morning or
today are similarly at home. What are the operational risks associated with that? We've had lockdowns
of entire countries and regions, what would be the impact of that?

Bill Coen:

The scope of the crisis, tremendously broader than the last time. Last time it started in the financial
sector. This time, we've got a contagion that's affecting virtually every sector of the economy. And
finally, the other thing I'd like to point to, public finances, how well equipped will countries be to provide
rescue packages? Just how strained are public finances in some countries that would preclude them or
prohibit them from doing so? So, yeah, a lot of similarities, Babak, but quite a number of differences as
well.

Babak Abbaszadeh:

Yeah, and thanks to you-

Timothy Adams:

May, I pull up on it?

Babak Abbaszadeh:

Please go ahead.

Timothy Adams:

I think Bill raises a great point and the global nature of this crisis. We're starting to feel lots of phone
calls about sovereign debt crisis ease in developing countries, other recipient countries. The question
about keeping credit lines open, the questions about restructuring debt, the questions about where
there are sovereign creditors.

Timothy Adams:

I think that's really the next wave in this crisis is how will the developing world which many of those
countries do not have the health infrastructure we have in the Western countries or in Japan, how will
these countries face not only the human crisis, the human calamity but also the fiscal and financial and
economic crisis? They don't have the tools, they don't have the capacity. And we in the multilateral
sphere are going to have to be very creative in the way in which we think about providing them
assistance. But also keeping credit flows flowing, remittance flows flowing in ensuring that this liquidity
crisis and health crisis doesn't become an insolvency crisis for the developing countries.

Babak Abbaszadeh:

Thank you. And thanks for both of you. And Bill, thank you to you and all your colleagues at the Basel
Committee for your hard work back then. But as you said, the dimensions are so different as both of you
alluded to this. This is a classic case of unknown unknowns, right? And we're all facing with that and I
know that a lot of organizations had developed prior to this their business continuity plans.

Babak Abbaszadeh:

One common theme that we've heard from various supervisors before, maybe during this Q&A here as
well is the need to update business continuity plans. Diana, would you please put up that notice if you
can. That is something that we have been working very hard to try to prepare the community. So as you
can see, there is a community of practice that Toronto Centre has established for supervisory
community to work on BCP updating them.

Babak Abbaszadeh:

The first one is going to be taking place on April 8th, space is limited, but I encourage our supervisory
colleagues to please register for this session as it's very relevant. And also if you need more information,
please contact Toronto Centre through the following website This email address is being protected from spambots. You need JavaScript enabled to view it. and the centre is
the Canadian English spelling of centre, re at the end. Thank you very much, Diana.

Bill Coen:

Babak let me quickly add, this is I think a tremendous service to the supervisory community initiatives
like that. I commend you and your staff for having the foresight of being able to put something together
like that so short of amount of time. So, kudos to yo.

Babak Abbaszadeh:

Thank you very much. Thank you. Bill, the next question is for you. You led the Basel Committee and
very heavily involved in regulatory responses to the 2008 global financial crisis. It wasn't an easy task.
With the COVID-19 pandemic continuing to cause significant pressures and volatility in the markets, can
we say financial institutions are in a much stronger position today resulting from Basel standards that
were introduced in the aftermath of the 2008 global financial crisis?

Bill Coen:

Babak, I think yes, without a doubt banks have entered this crisis in a much stronger position. But it's
not just in terms of capital and liquidity and to be sure, the quantity, the quality of capital is better, the
risk coverage of the global regulatory framework is broader. Banks operate with less leverage now. We
also have global liquidity standards, something we didn't have heading into the last crisis.

Bill Coen:

But the advances, it's been more than just Basel through related, we've got better stress testing both on
the official sector, virtually every jurisdiction I work with at least every jurisdiction that's member of the
Basel Committee has some sort of stress testing regime in place.

Bill Coen:

Banks also have done a much better job at stress testing, we've got margin requirements for noncentrally
cleared derivatives, a revised large exposure regime. We've got BCBS 239 risk data aggregation
risk reporting, better governance, we've got an expected credit loss, accounting standard in place both
IFRS 9 and in the US current expected credit loss framework, CECL.

Bill Coen:

So, I think we are much much better place to battle the fallout from this pandemic now. Am I saying
capital liquidity are perfect? No, that will never be the case. I'm a former supervisor regulator, I'll never
be happy. But we are in a much better place. We're still around the world implementing important
elements of Basel III, particularly the 72.5% output floor. I think there's still quite a bit of improvement
needed, IT, and risk reporting. There have been some advances but again, they're still as always, Babak,
there's more to be done.

Babak Abbaszadeh:

Thank you. Tim, over to you. I guess one of the virtues of this crisis if one can use that word is that banks
are not the culprits this time, right? They got beat up pretty heavily in 2008. And a lot of things had to
change. Moving to your question, last week, your organization published two important documents,
global prudential regulatory responses, and global policy responses. These are very useful initiatives and
reflect the overall concern that there may not be global coordination of different policy measures
around the world.

Babak Abbaszadeh:

So that's actually an important point. And it's very unfortunate that this crisis broke as some world
leaders were so busy over the last couple of years to dismantle the entire global trade architecture and
all that and everything else that I know as a former international affairs person at the US Treasury. I'm
sure you have some views on that as well. But moving to your question, what is the financial services
industries overall reaction to those policy measures? And to the prudential regulatory responses in
particular.

Timothy Adams:

Great question. It is an international, it is a global problem, requires a global response. Reminded of the
Pittsburgh Summit in 2009. It says there in the statement, we were elevating the FSB and the G20 Heads
of State where he said this is a global problem it requires a global solution. It was true then and it is true
now.

Timothy Adams:

And so I'm heartened by the fact that the G20, the G7 and other the Basel Committee, the FSB are all
actively participating now. I've been on the phone the last few days with Agustin Carstens at the BIS,
every head of every multilateral or international standard-setting bodies incredibly engaged. I applaud
that as we would expect them to be because they're all professionals and they're all seasoned veterans.

Timothy Adams:

I applaud what we've seen out of the key central banks Jay at the Fed or Christine at ECB or Andrew
Bailey at the Bank of England, Corazon at the Bank of Japan. It is truly historic whether it's interest rate
cuts or QE or new credit facilities for commercial paper and mortgage-backed securities or setting up
new special vehicles for corporate bonds either off the run or on secondary market. It's been historic
and we should applaud them and many times I think they probably push the envelope but that's great.
They're not going to sit around and wait for others to act.

Timothy Adams:

And then finally, the fiscal authorities, while a little slow, have come to fruition. We now have three
packages in the United States. I think there is potentially a fourth and maybe even a fifth package in the
pipeline. So officials are coming to the rescue, but it's been slow, a little cumbersome in the fiscal side
but the monetary authorities and supervisory regulators should be absolutely applauded. If there were a
Nobel Prize for these kinds of activities and central banking, or leading international standard-setting
bodies, they should receive it and receive it quickly.

Babak Abbaszadeh:

I wish there was that kind of coordination when it came to the public health part of this crisis. And thank
you for that response. Bill, moving over to you. The current situation may be a classic instance of where
macroprudential capital buffers should be removed to free up capacity to preserve the flow of credit so
that businesses can function and move on. In fact, we see that from various countries around the world,
right? Various regulatory authorities are removing some of these buffers or reducing them.

Babak Abbaszadeh:

But how do micro-level supervisors view this? Do they agree with lower capital requirements at a time
of declining asset quality and higher levels of non-performing loans? Are we setting ourselves up for a
bigger problem down the line?

Bill Coen:

Babak, the point you're making relates to conflicting mandates. You've got a typical example, you've got
a macroprudential body like the central bank has one view of the crisis. You've got other authorities in
the same country. Supervisory authorities say without the macroprudential mandate, and they've got
their own set of responsibilities.

Bill Coen:

This has got to be made abundantly clear, crystal clear by senior staff of the organizations of the
authorities in every country. This is not the time for turf wars. Not the time for a narrow view of
individual mandates. Word has to be passed from all levels of the organization starting at the top that
we are in crisis mode.

Bill Coen:

This is about we're talking country, national jurisdictional global financial stability. I'd hate to be too
dramatic about it, but we are in an existential moment in some respects. It's not the time for microindividual
mandates. I've been quite vocal about the importance of implementing the global reforms in a
full, timely and consistent basis. But that always presumes we are in quote-unquote, normal times.
These aren't normal times. And the standards or standards we've reproduced in Basel, they're based on
the presumption of a steady state. This isn't a steady state.

Bill Coen:

On the question of buffers though, Babak, I think everyone in the Basel Committee always thought that
from an academic or theoretical perspective, it makes abundance sense, right? You build up capital in
good times and allow banks to draw that down, draw down the buffers in less good times so that they
could continue to lend to the real economy just at the time when credit is most needed.

Bill Coen:

And up until now, we haven't had an opportunity to test it. Well, we're going to see how it's going to
work out. And I think it's been, I think the central banks and the authorities around the world have made
an excellent start with... There's this communication, which is so important, the Basel Committee last
October published something and just to confirm that the buffers in the Capital Framework, they're
there to be used. So, it's about the usability of the buffers.

Bill Coen:

I think that was I wouldn't say it was prescient on the point of the Basel Committee. I don't think anyone
knew back in October that we would have this, a global pandemic, but nevertheless, a statement was
made and I think it was great statement to be made. To again, confirm the usability of the buffers.

Bill Coen:

I think the statements coming from the Fed, the Bank of England, the ECB that emphasize that point the
buffers are there to be used. I think that's really important. Other jurisdictions I know the Swiss said
they're studying it. So just the fact that all authorities, central banks and supervisory authorities are
aware of the buffers, and they are making the point that the buffers are there to be used. I think that's
really important. So I think on that front, Babak, I think we're off to a really encouraging start when it
comes to using the buffers.

Babak Abbaszadeh:

Thank you. So I guess you're underscoring that these are firefighting times, these are not times for being
Puritans about standards that were set up at a different time for different needs. Tim, I want to ask you
the last question because I'm very anxious to get to the audience questions now. And this is also a
subject that I think was covered at the Financial Times in our earlier conversation and you brought up.

Babak Abbaszadeh:

In the years leading up to the 2008 financial crisis, big banks were among corporate America's most
generous dividend payers. And indeed, Citigroup, which received the biggest bailouts among the large
banks did not even halt dividend payouts until it was forced to do so by the government in November
2008. Do you think all banks should refrain from discretionary capital distributions like bonuses,
dividends, and buybacks until there is a clear sense that the jurisdiction's financial system is stable?

Timothy Adams:

It's a great question and a topical one, just given the headlines. Let me just step back for a second and
then I'll answer the question more directly. And that is there are 20,000 banks globally. They all have
different capital structures and investment profiles, and most pension funds invest in banks, they do so
because they're considered on a risk-adjusted basis fairly safe. And most of the banks pay a nice
dividend.

Timothy Adams:

So if you're the teachers fund of Texas or the fireman's fund of Chicago, your pension fund invest in
banks and Citigroup or JP Morgan because you like the nice dividend. So giving up that dividend means
that pension funds will not be receiving the income they normally receive. And the numbers out for
Europe this morning, if dividends are seized across the board of all firms in Europe, that means
European pension funds are going to be starved with close to 300 billion euros in income this year. So
what may be a banking crisis could become a pension crisis given the pensions have their own
challenges in generating sufficient returns, given their payout structure.

Timothy Adams:

But look, in a perfect world I'd say it's up to each individual institution to make that judgment, some
institutions like Santander in Spain voluntarily gave up dividends. US banks voluntarily gave up buybacks.
But what we are seeing is public authorities coming together and asking for financial institutions to
refrain from distributing capital back to their owners and shareholders. We saw it in Europe in the last
couple of days, in the UK overnight.

Timothy Adams:

The downside of that is that bank stocks are really being hammered. I just saw this morning HSBC and
Standard Chartered down about 12%, European continental banks equally so over the last couple of
days. That makes it very difficult to raise capital. It makes it very difficult to raise capital in the future.
The basics of banking or any business is you've got to earn your cost of capital, and you've got to be
profitable. If you don't have profitability, you're not earning your cost of capital, then you're not an
ongoing business. And that in itself is a financial stability problem.

Timothy Adams:

And so the question is, is this a short term phenomenon? And I think it does make sense. Throughout
this year, I think it makes sense that we retain as much capital on the balance sheet as possible so that
we can continue to provide credit to the economy. And I think if you were to survey every C-suite of
institutions, and certainly the G-SIBs, they would say absolutely.

Timothy Adams:

But just want to make sure that this isn't a permanent status that ultimately undermines the capital
structure, the institution's their capacity to raise capital, the capital they're going to need, if they're
going to be Basel III compliant over the timeline of Basel III implementation. And just the ability to have
a capital structure that makes them an ongoing business.

Timothy Adams:

If you look at the price to book ratio for the G-SIBs, I think JP Morgan's the only firm that has a price to
book about one which the market is saying that they'd be better off dismantled than they are given the
enterprise value of the firm. That's not sustainable. And so we need to think about the structure of our
industry and various jurisdictions. But the key is you've got to be profitable, you've got to earn your cost
of capital, you've got to return capital to shareholders, especially those shareholders who have invested
in your stock because they think they're going to get a dividend.

Timothy Adams:

So, I'm all for it in the short term. I think we'll see more of it over the coming days. But I think once we
get to normalcy, whatever that means, we have to return to the kind of capital structure and payout
structure that is been typical of these kinds of institutions so they can compete for investors and capital
from other industries and other firms.

Babak Abbaszadeh:

Thank you. What's interesting about the answers that each of you gave to the asked questions was you
both kind of held your breath, but said this measure is okay for this time period. So I'll take that as a
constructive feedback, but it does underscore the time period we're in. So, now we're on to the
audience questions which I'm very excited to start reading to you.

Babak Abbaszadeh:

I guess the first one I'm going to give to you Bill. From a financial stability perspective, what are the main
and most important aspects to take into consideration in order of priority emanating from COVID-19? So
if you were back at Basel again and this was hitting your desk, how would you prioritize some of these
issues?

Bill Coen:

From a standard-setting perspective, Babak, and you alluded it just a moment ago. It doesn't matter if
we're talking about banking standards, global standards for banking, or securities or insurance or
accounting for that matter. You don't set standards, you don't develop standards in a crisis, in the fog of
war. I mentioned this earlier, they're developed during quote-unquote normal times. That's the
presumption that standards would be in place in a steady state.

Bill Coen:

So setting standards at this point where we are today, that it's almost irrelevant. What really is
important from a financial stability perspective, liquidity in the capital markets, smooth functioning of
the capital markets. And that's really the province of the central banks.

Bill Coen:

I think the Fed, ECB, Bank of England have done a magnificent job. It's striking to, again, not to repeat
myself, but the similarities between today and where we were in 2007-2008. And it's all hands on deck,
let's right the ship. Let's make sure we've got a sense of stability as far as the capital markets are
concerned, as far as the flow of funds are concerned. And I think the massive injections and the liquidity
facilities provided by central banks have done exactly that.

Bill Coen:

The benefit of that is in addition to keeping flow of funds moving, it creates a sense of confidence.
You've got some seasoned hands, ethic controls, people who know what to do, and they're doing it. So
again, I think this creates a bit of it instills confidence among market participants. And that's really in
terms of priority that's, I think, priority number one.

Babak Abbaszadeh:

Thank you. And this question, I think, Tim, I want to give you a bit of heads up, I think we have
egalitarian in our midst, someone from the mainstream, not so much the Wall Street, and this individual
invokes the word billionaire. So I don't know if they're from the US or some other country, but maybe a
Bernie supporter all though I don't know. But let's give it a shot.

Babak Abbaszadeh:

Don't you think that now is the right time to ask billionaires to show solidarity and to share their wealth
with the poor population? It is okay to ask from governments to use their sovereign rights to issue debt
and support economies and businesses. But now is the moment to show different kind of solidarity. So
we can take it as a common, but might be interesting for you to also give it some bit of a thought on
this.

Timothy Adams:

Sure. Well, I don't know that they're not sharing their wealth or keeping businesses open. And,
unfortunately, the discussion about billionaires and I don't know what the difference is between
someone who has a billion versus 900 million becomes an artificial distinction is that we're often missed
the point that many of those if you look at the top 400 richest people in the United States, many of
them are self-made individuals. They came from nothing. They've build businesses, or they are creative
artists, someone like Steven Spielberg, who created a massive business or Jay Z, or Oprah.

Timothy Adams:

We want to make this about financial sector and we think of bankers. But really, if you look at who
composes the wealthiest people in the United States, for example, they tend to be industrialists, they
tend to be entrepreneurs. They tend to be a lot of technologists. And they tend to be people in the
creative arts. And as far as I can tell, they're all engaged in running their businesses.

Timothy Adams:

Jeff Bezos is certainly out there every day trying to ensure that Amazon is running and Amazon is now an
important part of the sustainability of our US economy. He's vowed to hire 100,000 people and to
ensure a safe environment for his workers. And so he's doing what he should be doing and that is to
keep his businesses going, keeping employment and keeping the wheels of the economy turning.

Timothy Adams:

How much taxes they pay? I don't know. I do know the numbers in an aggregate fashion, and that is the
top 5% of income earners pay half of all federal income taxes. And I think the top 10% pay about 80%.
So we do have a fiscal structure in the United States where a small percentage of the population ends up
paying for almost the entirety of the federal government. And you might ask, what should the top 10%
pay if it's not 80%? Should it be 85? Or 90? I don't know. That's a conversation we'll have in this political
cycle. And really, it's up to the voters to decide what kind of fiscal trajectory they want in the future.

Timothy Adams:

I will say this, we're going to run huge deficits. We've been running deficits for years, trillion-dollar
deficits, pre-crisis, we're going to run multi-trillion dollar deficits going forward which are going to be,
10%, 12% of GDP. That is sustainable in the short term because interest rates are low and because of the
nature of this crisis. They are not sustainable over the long haul. And my children and my grandchildren
someday are going to have to pay it back. So at some point, we're going to have to think about a more
sober and sustainable fiscal structure. That is not the issue today, but it will be in the medium to long
term.

Babak Abbaszadeh:

Thank you. I'm sure it's the question that's probably on a lot of people's minds, and thank you for giving
that perspective. Bill, this question goes to you. It's not necessarily the fairest questions because it
covers insurance. And I know you're a banking expert, but nonetheless, you have been operating in
various capacities in different sectors. So let's give it a shot.

Babak Abbaszadeh:

Given the interest rate cuts, market volatility, adverse mortality experience with COVID-19, huge
operational risks with the current situation. So that's the context. How do we see the financial
institutions in particular insurance companies remain solvent? Were there any stress tests conducted to
examine the impact across countries and any possible solutions that are being examined? Do you have
any view on this point?

Bill Coen:

I mean, the list of challenges confronting insurance firms that you just articulated. Yeah, there's some
tremendous challenges and even before all this start, I thought the challenges that banks face, low
interest rates, competition from FinTech, very competitive local markets in some jurisdictions, lingering
acid quality problems, still trying to get up to Basel III standards, efficiencies or lack of efficiencies. So, I
mean, the list is quite long, Babak. And that is for banks and for insurance firms.

Bill Coen:

I think the one thing you could say that and again, it's the point I made earlier. When you've got a crisis
and we are in a crisis, all bets are off. Standards or the rules, regulations might be temporarily
suspended. I hate to use the word forbearance, flexibility is a better word in my view. As long as those
changes are not made permanent, as long as they're not extended, what's the expression? The most
permanent thing is when somebody says it's only a temporary situation. So, it's very dangerous when
you go down that road, it's hard to go back to making something that was meant to be temporary. It's
hard to make it truly temporary. So, I think that's a risk.

Bill Coen:

Now, as far as the solvency of insurance firms, the jurisdictions, I've worked with my contact with
colleagues at the IAIS in Basel. This is an important supervisory question. How well did insurance firms
stress test a scenario like this? I know after the last crisis, we would sit around we'd think, "Okay, well,
where's the next crisis coming from?" And usually it's never a single factor. It's typically, convergence of
several factors at the same time, the perfect storm, so to speak.

Bill Coen:

I know, when we were in Basel thinking about the next crisis, I'm sure I never said and I'm sure no one I
was working with said, "Well, there's going to be a pandemic. And it's going to be coupled with a
collapse in oil prices." But you don't plan for specific events. You plan for the fallout. So, I think it's an
important supervisory question to the extent that banks and insurance firms did stress test the impact
of something, not necessarily the precise trigger and the contributing factors that lead to that fallout. I
think that's going to we'll see in the coming months just how well they did stress test, and how well they
did plan.

Babak Abbaszadeh:

Well put. I'm going to send this next one to Tim. The questioner asks the problem with systemic liquidity
is that in times of crisis, it stays with the financial intermediaries and does not move to the real sector or
real economy because of credit rationing and risk aversion. I mean, that's the rationale they're
providing. Would it be appropriate for central banks around the world to emulate the US Fed and take
on corporate debt on their balance sheets?

Timothy Adams:

Well, I think you raised one of the most important and fundamental issues in a crisis is liquidity. Because
liquidity crises ultimately become solvency crises, and if you can't provide liquidity then you've got a
challenge. It's important for financial institutions to keep credit lines open. But there's a prisoner's
dilemma or a collective action problem. Every single firm would like to close their credit lines, but want
to make sure all their competitive firms keep their credit lines open so that they can benefit.

Timothy Adams:

That's where you need a public policy solution. That's where you need incentives and efforts to ensure
that financial intermediaries of all types, not just banks, but all intermediaries keep liquidity flowing
credit lines open. I think the biggest banks do try to do that for their best clients because they try to see
through the cycle.

Timothy Adams:

Now, one of the interesting discussion I had after the last crisis is how many CEOs and chairman of the
major institutions said, if we're banking, if we're HSBC, and we're banking Siemens. I'm just making that
up, then, we've been banking them for 50 years, we're going to bank them for another 50 years. We're
not going to let a small crisis get in the way of an important business relationship.

Timothy Adams:

So I think in many instances, they do try to keep credit lines going and liquidity flowing. But when that
does break down, when it's not possible, then in most certainly there's a public policy and a public
sector role. We saw it with the Fed. And I would say that it's where those jurisdictions that have the
legal authority to do so they should, it should be a short term measure, it should not be a permanent
situation. It should not be where we turn institutions or recipient companies into state-owned
enterprises. It is a temporary nature, but most certainly you've got to ensure there's sufficient liquidity
in the system. So that liquidity crisis doesn't become a solvency crisis.

Bill Coen:

Can I weigh in on that as well?

Timothy Adams:

Sure.

Bill Coen:

I think the question, I think it's a very fair question. And it's an observation that was made from the last
crisis. Central Banks providing massive amounts of liquidity only for the banks, not all banks, but for
many banks just to hold on to that liquidity. And this isn't the plug for Basel III. But again, going back to
what I said before, big banks especially have entered this crisis with tremendously different liquidity
profiles, both to survive a 30 day stress period. That's the liquidity coverage ratio, the LCR. They're
better structured long term that's net stable funding ratio.

Bill Coen:

I really do think that banks... I would never say this time is different. It's very dangerous. I'm not saying
this time is different, but in many respects, the profiles of banks as they came into this crisis, the
liquidity profiles are far improved, far different. So, hopefully, the observation that was made from the
last crisis won't be made this time around. I really do you think banks are better equipped to handle
their liquidity pressures than they were last time.

Babak Abbaszadeh:

Thank you. Just picking up on this time is different. So Bill, one of our board dinner speakers in the past
was Carmen Reinhart, one of the authors of This Time is Different. In fact, I believe she's written an
article, which I'm waiting to read, it's called This Time is Very Different. So I'd like to find out what she's
saying in that context.

Babak Abbaszadeh:

This other question is an interesting one. And all of us, I think, can relate to aspects of it. I think we're all
nostalgic about time of normalcy. When handshakes were involved, when we could stand shoulder to
shoulder take pictures. This questioner is taking a different tack. This one's for you, Bill.

Babak Abbaszadeh:

Is there anything that regulators and supervisors can do to ensure the eventual recovery from this
current crisis is sustainable and inclusive? So emphasis on inclusive. How to help make the post-crisis
financial system more green and more inclusive than the pre-crisis one. So, in a sense, how do we make
sure that we don't lose all the gains we made with respect to climate risk and everything else that we
were talking about? I guess that's how I'm interpreting this question. But over to you.

Bill Coen:

I like that question because it's so easy to get caught up in fighting the fires that we're seeing today and
making sure that banks are going to be able to continue to lend to the real economy. This is a really an
excellent question because it's looking a little bit beyond and it's easy to lose sight of the bigger picture.
Financial inclusion, green finance, really important questions, but complicated questions.

Bill Coen:

On green finance, I mean, there's certainly at a minimum, from a disclosure perspective, and I think the
official sector has done the right thing there. I think that's kind of the road we've started to go down for
me from a regulatory perspective to have common disclosure. I think that's a good start. I think that's
something when it comes to green finance is this is a really important question for the boardroom.
What's the bank's strategy when it comes to green Finance? Are we going to stay in so-called brown
finance? And if so, how are we going to price those kinds of exposures?

Bill Coen:

So there's an important risk management and governance question here. From a regulatory perspective,
Babak, I've been quite public about staying I think this is more if there's a socially desirable initiative like
green finance terribly important. I've got three teenage daughters. I want the world to be a better place
when they're adults, and they've got families of their own.

Bill Coen:

But when you've got a socially desirable initiative like green finance, I think there's an important role for
government to play, not necessarily through regulation, perhaps through direct subsidies. I think that's
the most effective, the most efficient way to promote a socially desirable initiative. I'm not so sure bank
regulation is the way to do it.

Bill Coen:

I think there are risk-based capital implications here. But that's more along the lines of if we want a risksensitive
capital framework, what are the risks associated with green finance? Does it warrant a
favorable capital risk weight? Does brown finance how punitive should it be? Is it a risky venture? Could
be given the way things are going. How punitive should the risk way be?

Bill Coen:

But again, everyone wants a risk-sensitive framework, banks, and regulators. Let's focus on risk.
Financial inclusion, this is something that Basel and I personally have been involved for 20 years that I
was in Basel. Back then, we called it micro-finance. Financial inclusion is a better description, a more
encompassing term.

Bill Coen:

I think that's the banks have done an important role there. FinTech has had a tremendous impact on
financial inclusion, making finance available to all those who need it. Again, I'm not so sure that this is
that regulation is the way to address financial inclusion. I think banks have seen the benefits of financial
inclusion on their own merits. So, I don't think banks have really needed regulators to say, "Look, here's
a little capital incentive, be good for you to expand your horizons." So I think there's a lot to be done not
necessarily from a regulatory perspective, though.

Timothy Adams:

Babak, may I jump on that as well? It's a great question.

Babak Abbaszadeh:

Please, go ahead.

Timothy Adams:

The ESG sustainability agenda is one that's really dominated our boardroom and our activities for the
past year, 18 months. In fact, prior to this crisis, it really was the dominant issue for us for 2020, our
annual membership meetings in October, the title is financing a sustainable future. And there's so many
different layers to how financial intermediaries play in their part, which is intermediating the trillions
that are needed to transition to a low or zero carbon-based economy, which is the desire by midcentury.
And the trillions of investable dollars that are sitting out there where investors want to invest.

Timothy Adams:

And for something other than just pure return, but you don't have to give up return. And I think we're
starting to see that with a number of funds. You can do something that is both socially desirable and
also achieve an appropriate risk base return as part of that. But you need good data, you need good
analytics, you need a taxonomy because there's multiple definitions of what is green. When a bank in
Sweden may issue a green product and that's different from a bank in Singapore. So we need
harmonization and consistency and taxonomy. And we need appropriate disclosure.

Timothy Adams:

We at the IIF are working night and day on these issues. And I think it's a transformative event for the
industry and for financial intermediation. And I look forward to once we get back to normalcy, whatever
that means, we can get back to talking about climate, get back to talking about sustainability. I do think
it's the most consequential issue of our time.

Babak Abbaszadeh:

That was a very fascinating passing exchange for me because we've been thinking a lot about climate
risk and how to approach it and deal with it. And it comes down to some extent to the point that Tim
you mentioned, which is disclosure. Also, so the Bloomberg Task Force foresees to deal with that. Bill,
just taking off from what you were saying, financial institutions will be smart if they actually be ahead of
all of this before regulators even have a chance to think about it. In fact, Tim is underscoring that.

Babak Abbaszadeh:

Because if you think about it, when it comes to petroleum, especially in Western Canada, US elsewhere,
it's really the cost of capital that's going up. So there's a lot of issues that they can actually do on their
own. And then we can have a different discussion about what is the role of regulation? And what is the
gaps here? And what are the government policies that regulation is trying to address?

Babak Abbaszadeh:

So again, I agree with both of you. This is a very well put comment and it's good to know that someone's
already thinking ahead to the post-COVID time. I want to come to you, Tim, it's an interesting question
here. I'm just wondering what's your general thought on this? Do you see an increasing need for or to
research and implementation of artificial intelligence or into the fallout of this virus?

Timothy Adams:

Indeed, and Bill had mentioned the role of technology. And it's interesting. I've been in the shell about
eight years, and how technology has become such a central part of our industry. In fact, many firms now
refer to themselves as technology firms. I think they like the stock valuations as a technology firm rather
than a bank. But if you look the amount of money that banks are spending, JPMorgan $12 billion a year,
Bank of America 16 billion, Morgan Stanley, I think it's about six or seven billion.

Timothy Adams:

There is a technology arms race that's going on, and it's looking at the front end, which is how to deliver
seamless services to consumers that there used to from other kinds of institutions. It's about how do
you run your business better? How do you do better risk analysis, better risk management? And then
how do you take cost out of the system as well?

Timothy Adams:

Artificial intelligence and machine learning is a central part of that. And the challenge is that from
supervisor perspective, it's a bit of a black box technology, right? It's tough to validate, it's tough to
backtest. And so part of our job over the past two years is trying to help supervisors, regulators become
comfortable with not only that technology, but alongside moving to cloud-based computing, which gives
you scale and gives you durability. And also, with respect to things like pandemics, I think also
operational resiliency.

Timothy Adams:

So artificial intelligence is here. It's a part of not only banking, but is central to some of the
epidemiological modeling that's going on that we're seeing either from Washington State or from
Oxford or others, as we're trying to better understand the trends and tracks of this terrible crisis. It is a
part of every industry, it will be a part of our life going forward. Whether it's the integral to the Internet
of Things. It's how we do analysis in insurance companies in terms of evaluating risks of climate or in
terms of things as mundane as auto accidents.

Timothy Adams:

So it is part of what we do, it's going to get more sophisticated over time. We have to think about data
bias, we have to think about ethics and data. There's a whole host of ethical issues regarding data sets,
but it requires a very close cooperation between the industry and supervisors in getting both sides
comfortable with what is a truly remarkable and fast-evolving technology.

Babak Abbaszadeh:

Thank you very much.

Bill Coen:

Babak.

Babak Abbaszadeh:

Go ahead.

Bill Coen:

Let me just a quick point on AI, artificial intelligence machine learning. I mean, Tim put it very, very well.
This is for banks, the investment needed in technology is massive. And this is part of the evolution, the
FinTech evolution, the technology evolution, which we find ourselves.

Bill Coen:

My only concern is it's been several years since we published BCBS 239 risk data aggregation risk
reporting. There still is a substantial gap. There's been good progress in meeting those guidelines, but
there's still a tremendous amount that needs to be done. And you've got some big, very large banks
around the world, they're still grappling with legacy issues. And so they're still trying to get some of the
basics right, risk data aggregation, risk reporting. And at the same time, they're trying to move ahead,
they're trying to evolve. They're trying to maintain the level of competition.

Bill Coen:

So, it's a considerable challenge for banks these days to have to invest on the one hand, but also to be
able to perform the basic IT functions of firms at the size of some of the big ones around the world.

Timothy Adams:

May I just follow that? You're absolutely right, Bill. There are institutions out there, household brand
name banks that have as many as 40 different legacy systems that have been bolted on over the years.
And in someplace, they're actually still running COBOL processing language and so the programmers are
actually 70 years old. They can't let them retire.

Timothy Adams:

But the amount of capital expenditures that institutions have to put in place in order to have cutting
edge technology is really off the charts. And it's not competing with just other banks. They're competing
with internet platform companies, they're competing with Google or Facebook that have a very
different business structure, very different capital structure. And going back to valuations can raise
capital incredibly easily.

Timothy Adams:

In some places like Europe, where there's open banking, have the capacity to scrape banking data,
enrich it, and use it whereas banks don't have the same capacity. There's an asymmetric relationship.
So, in many ways, the technology piece of this is very important, not just about banks, but who are
banks competing with that are financial intermediaries, but have a different a rule book. That's not quite
as constrained as banks have.

Babak Abbaszadeh:

Excellent answers. And this also underscores, I guess, it's relevant for another question that we had
received. So I'm going to take as a friendly question because I think you've pretty much covered it in the
course of this one, which is what level of importance would you place on information technology during
this time? Obviously, one importance is we can all operate and work in during the COVID time, but also
information AI go hand in hand for now and in the future as well.

Babak Abbaszadeh:

One big apology to our viewers. One the most difficult parts of my job is to really decide which questions
to read and not to read. Your questions are great, we just don't have time to go through all of them. But
I want to assure you if we don't read your questions doesn't mean that your questions will be wasted
because we have plans on what to do with this series. And we will work on addressing those questions
or use them as a source of inspiration for a product that we're trying to develop by way of advice to
supervisors, regulators, and the financial system.

Babak Abbaszadeh:

This is one question I'd like to pose to both of you and after this question, try to bring a little bit wrap up
this session. It's a forward-looking question. In your view, can central bank support packages, be enough
to handle the huge liquidity shock that is expected to hit banks after prolonged lockdown? So once
they're lockdown, the lockdown in quotation marks is a catch all I think for going back to normal when
it's lifted. Are we ready? I mean, are we going to see a liquidity shock and as the central bank supports
enough to get us through that? Let's start with you, Tim. And then Bill.

Timothy Adams:

Sure, that's a problem I hope that we experienced soon. I'd like to get a feel what recovery looks like.
Look, I think what we've seen from the Fed and others, the CB is whatever it takes, unlimited capacity. I
think the Fed has already added close to a trillion to its balance sheet, which is now an excess of five
trillion. Maybe that doubles over the next 24 months. I don't know. It's hard to say.

Timothy Adams:

But I think they're willing to provide liquidity, whatever it takes. And given that inflation is quiescent or
non-existent, interest rates are incredibly low. If you believe Larry Summers, we were suffering from a
structural stagnation prior to this crisis, then I see very little downside risks to letting the printing
presses fly.

Timothy Adams:

It may be QE that has become MMT which was a fashionable topic six months ago or a year ago and
maybe it comes back. But I think we will see central banks provide whatever it takes to get the economy
back up and running. And I look forward to that happening sooner rather than later.

Babak Abbaszadeh:

Great. Bill, do you have anything to add?

Bill Coen:

Tim, used the expression, whatever it takes. That's exactly what I was thinking. The immortal words of
Mario Draghi, my former boss, the Chairman of the Basel Committee's Governors and Heads of
Supervision. We've heard quite a bit of that phrase these last couple of weeks. And I completely agree
with Tim. I think central banks have demonstrated not only have they said, but they've demonstrated
that they will do whatever it takes and will it work?

Bill Coen:

We can think otherwise. I'm confident it will. I'm really impressed by how quickly central banks have
acted so far. I think compared to last, 12 years ago, I think they've gotten out much quicker, out of the
chute than they did last time. So, I'll leave it at that. I think there's no other way to think of it that it's
going to work, central banks will do whatever it takes.

Babak Abbaszadeh:

Thank you, again. Lots of great questions. I have to say, the two of you really did kick ass. This was a very
good session, good conversation. I like to have you back. Maybe, we create a Toronto Centre channel
and have a discussion and do it more like a fireside chat at some point. Actually, all the speakers in the
series have been really, really good.

Babak Abbaszadeh:

So just want to thank our global audience for tuning in. Tune in for other programs that we are going to
develop in this series. And after our Pandemics and Financial Stability series is coming to a close, we are
going to launch pandemics and financial inclusion. So stay tuned for that as well because there's two
sides of that equation.

Babak Abbaszadeh:

Also, for information on support for business continuity plans or crisis preparedness as you know we
have launched our Centre of Excellence for Crisis Preparedness having done 120 simulations since 2008
in various jurisdictions. Please contact This email address is being protected from spambots. You need JavaScript enabled to view it.. Again centre is the English Canadian
spelling. Sorry, I have to mention that. This email address is being protected from spambots. You need JavaScript enabled to view it. and a huge thank you to our speakers
and thanks a lot. Bye-bye.