Financial Markets: Increasing Complexity, Maintaining Stability

3–5 July 2019, ST. PETERSBURG

    In this speech, I would like to address the Bank of Russia’s strategic goals and plans for the next five years. At this time, when our economy is embarking on a new cycle, it would be appropriate to focus on just such a planning horizon and determine the overall strategy for financial market development.

    The Russian economy has restored positive growth rates, although moderate so far. This year we project 1.3–1.8% growth. The agenda for stabilization and adjustment to new shocks that was a dominant trend in recent years has naturally given way to a discussion on how to restart the economic development engine. And that is precisely why the topic of this Congress is Finance for Development. I hope these two days will help us better understand the changes currently going on in the financial system, both in Russia and globally.

    I will start with the issues of global economic development. It has been ten years now since the financial crisis struck.

    In fighting the new waves of crisis that surged thick and fast over the years and mitigating their consequences for the economy, central banks of many countries were constrained to take unprecedented actions to stabilize the situation and turn the tide. Only now, after ten years, are they starting to drift out of such actions.

    What is everyone concerned about? It is the fact that growth remains rather low and vulnerable?

    It is true that the global economy is now entering a new cycle, after a long period of crises and stagnation. But what is it bringing along with it?

    The first thing is a higher debt burden compared to 2007. In developed economies, it is primarily a problem of public debt, while, in many developing countries, it is corporate debt.

    Second, inflation is way too low, and some developed economies are even reporting deflation.

    Meanwhile, on certain markets, there are bubbles threatening to grow, including as a result of the longstanding soft monetary policy.

    Fourth, low productivity and investment growth rates not only sideline development, but also prevent growth, owing to the high debt load.

    The fifth is the progressing inequality recorded in developed countries on the back of middle-class income already stagnating for the last 30–40 years. This trend is often attributed to globalization. Yet unequal access to new technological opportunities has obviously contributed to it as well. In this context, the digital revolution and the new wave of workplace automation, which is changing completely the traditional labour marketprofile for quite a number of jobs and sectors, are creating considerable social risks. As we can see, political response to this comes in the form of increasing populism, which by itself implies new economic risks and contributes to continuing volatility of financial markets.

    The sixth point is something that concerns us: the fact that the global economy is entering its new cycle at a low phase of the commodity, primarily oil, super-cycle. So far, there is no confirmation of the forecasts that low commodity prices will contribute to global growth by giving commodity importing nations a positive impetus compensating for the negative influence of exporting countries. Still, technological progress in the oil sector on both the supply (shale technology development; by the way, investment in shale oil, having declined for a while, is now growing again against the background of the low oil prices) and the demand sides (development of the electric car market and alternative ‘green’ energy) should be recognized. Essentially, there is persistently high uncertainty around the mid-term ratio between these factors, so the markets are constantly changing their assumptions concerning mid-term trends – almost every quarter, while the oil market is still quite volatile.

    And last, the global economy is entering the new cycle with growing cyber-risks that can threaten both sustainability of financial systems and economic growth.

    At the same time, the financial technological revolution (fin-tech and associated cost cutting, increasing penetration and quality of financial services) and growing resistance of financial markets to various sorts of shocks can be recognized as positive aspects. The financial markets’ resistance has been repeatedly put to test in the last 18 months, obviously abundant in political surprises. To all appearances, the reforms developed and implemented jointly by major countries’ regulators after the global financial crisis did, in fact, help strengthen the financial system.

    The very structure of the global financial markets has changed significantly over the last decade. The role of global banks and cross-border bank crediting has diminished, while the capital attraction markets (stock markets) have witnessed stagnation and even delisting of companies.

    The role of market crediting (bond market) and asset managers, being the markets least affected by regulatory reforms, has grown, yet these markets may well turn out to be more volatile.

    So, what does all this generally mean for global growth? In our opinion, it won’t be sustainable, and the average rates will be lower than in the early 2000s.

    The key trends in the coming years will be a slow recovery of the economy and policy stiffening by leading central banks, including interest rate escalation and balance curtailing.

    For financial markets, such dynamics entail two controversial trends. On the one hand, economic growth has a positive effect on financial markets and the appetite for risk. On the other hand, rising interest rates cool down the markets, so there is a high probability of financial market volatility despite the overall stabilization.

    So what are the implications for the Russian economy?

    External demand will provide less support for our economy, while external volatility will be more sensible.

    Although our economy has learnt to adjust to external shocks, as the experience of the last years has shown, there is still a range of internal factors that make us rather vulnerable.

    These are the insufficient diversification of the economy, the lack of flexibility of institutions and regulations, and a weak competitive environment (where new companies struggle to enter the market and economically laggard ones remain there for a long time). As a result, even given a potential for growth, which – as you know – the Central Bank is estimating at 1.5–2%, considerable issue fluctuations are possible by the year. That is why structural transformations are urgently required to raise the growth potential above 1.5-2% and make it sustainable. Such structural transformations are also necessary in the financial sphere, amongothers.

    What policy response to these challenges do we see in the financial sphere?

    We should aim for maximum flexibility in the first place. The floating rate should be preserved by all possible means. There should be continuous adjustment and re-adjustment of regulations in conventional and new spheres based on a risk-proportionate approach. Since rules quickly become outdated, we need to move gradually from managing by rules to managing by principles.

    More attention should be paid not only to sustainability of specific institutions but to systemic problems and risks; practical implementation of the counter-cyclicity principle and use of macro-prudential tools; early problem prevention both in the system as a whole and in individual institutions.

    We need more transparency in the financial sphere. This implies both transparency of capital sources and combatting financing of the business of financial institution owners.

    We have to abandon dogma, such as the idea that banking regulation is neutral and aimed at risk management only. We are now starting to shift towards a stimulating regulation.

    We’ve got to support new technology with a special focus on that with greater resistance to cyber-risks.

    Let me dwell a bit more on the Bank of Russia’s key areas of activity.

    The first is momentary policy. Its role is to mitigate macro-economic risks, thus creating conditions for banks, business and the population to expand their planning horizons, make long money and implement long-term projects.

    In the coming five years, the focus of our policy should gradually shift from delivering inflation targets and abating inflation expectations to maintaining inflation around the target level and keeping down and, most importantly, anchoring inflation expectations.

    However, while moving to this fine-tuning policy, we will have to face many new challenges.

    Eventually, inflation is obviously a monetary phenomenon and its average rate, if considered in the mid-term, depends primarily on monetary policy. The average inflation rate will be close to 4% but it will surely fluctuate, and these inflation fluctuations around the average level will be different in nature and have a different impact on inflation expectations and hence monetary inflation.

    According to our own experience, given high volatility, we should avoid responding hastily to shocks (and, by shocks, we mean any material changes, whether positive or negative). Such a policy helps prevent ‘twitching’. Earlier this year, for instance, if we had reduced the key rate faster, as many wished, we would soon have confronted the need to increase it again.

    Nevertheless, there can obviously be some shocks requiring a more decisive response, as in 2014.

    But what we have to mitigate are not just the consequences of shocks for inflation but also the very causes of that shock. These are often beyond the Central Bank’s control, but this doesn’t mean there are generally no appropriate state policy measures for countering them.

    This is true of the dynamics of food inflation and regulated prices and tariffs in the first place. The state policy for developing the infrastructure, logistics and competition on the markets, primarily the food market and natural monopoly tariff regulation, can contribute significantly reducing price volatility and thus lead to a quicker drop in inflation expectations. And this, in turn, will enable the Central Bank to bring the key rate to a neutral equilibrium level faster (remember that, according to our estimate, it is 2.5-3% in real terms, or 6.5–7% in nominal terms). We will discuss these issues in more detail at one of the forthcoming sessions with Minister for Economic Development Maxim Oreshkin.

    Maintaining financial stability is another sphere of our activity. The focus is shifting here, too, from relieving negative consequences of accumulated risks to preventing new systemic risks from materializing. There are three key points to be made about this:

    The first one is about systematization of macro-prudential regulation. We already have some experience of cooling down the bubbles on the consumer lending market (in 2013), moving away from foreign currency predominance in bank balances and de-dollarizing the economy. Yet such measures were usually implemented through amendment of our standard regulations. As early as this year already, we expect to draft separate regulations to cover all macro-prudential policy actions. We believe this will allow us to align the system, provide it with greater opportunities for a counter-cyclical approach and make use of such tools more comprehensible and transparent for the market.

    The second point is introduction of a payment-income ratio in order to influence the consumer lending market more effectively. We have published a relevant consultancy report and discussed it with the market already. Specific proposals will appear very soon.

    And the third point is about setting new requirements on credit bureau, which constitute the key infrastructure for gathering information about a borrower’s aggregate debt. And here we have a bifurcation. Our base case scenario is to make several backbone credit bureaux responsible for consolidating information about aggregate debt payment. Higher requirements, especially in terms of data protection, will be set for such bureaux. However, if the market fails to reach an agreement, we will have to follow an alternative scenario and set up a unified integrator. Apart from that, we plan to eliminate certain regulatory problems, for instance, credit history gathering in the case of securitization, licence revocation or sanation.

    Moreover, in recent years, financial regulation has been evolving to expand the scope of its objectives. For example, the goals of ensuring financial stability were added up to the aim of ensuring sustainability of individual banks and financial institutions. Now, we believe, another addition is feasible. What is it?

    Financial regulation is traditionally perceived as aimed solely at risk limitation. Any attempts to introduce differentiated regulation that would encumber some businesses and incentivize other, higher priority, ones have been always received almost as apostasy. But, for instance, the proportionate regulation we have started implementing stimulates development of small business crediting. This was one of the goals of proportionate regulation introduction. Or let me give you another example: de-incentives for unsecured consumer lending have forced banks to develop mortgages.

    Yet another example: M&A deals account for a considerable proportion of bank lending today and this creates risks for banks and hardly yields any evident benefits for the country, creates no additional gross product or new jobs, merely serving the purposes of property re-distribution. Meanwhile, our economy needs to build up crediting of company operations and investment activity.

    We have to understand for ourselves which development objectives can be delivered through regulations and which can’t. Under no circumstances should this be done to the prejudice of risk containment. We need to find a balance between limiting risks in some sectors and incentivizing other sectors. This is a great conceptual challenge with no simple solution. And we will discuss it here at the congress.

    Before moving on to the objectives we are pursuing in specific sectors, I would like to make a few remarks about the cornerstone precondition for development, which is healthy competition. Developing competition is our absolute priority.

    What do we do to develop competition?

    We are finalizing market sanation, in the first place. We believe that substandard competition is just as bad as no competition at all. Fair business should not compete with crooks. Our duty as a supervisory agency on the financial market is to create an environment offering advantages to efficient and sustainable financial institutions, while this means eliminating completely all mala-fide players.

    Another measure is proportionate regulation. It allows us to align competitive conditions for all players of various sizes and helps the market set up niches where different sorts of customers and their demands are matched by appropriate types of financial institution. A year ago, we announced in this very hall that we were planning to move to proportionate regulation in the banking sector.

    We have elaborated on the details of this concept for most of the year. Anatoly Aksakov has already said that the State Duma had passed the requisiteamendments to the legislation during this session, so, within the next 18 months, banks will have a chance to choose a licence type to operate under and, respectively, the set of requirements they should observe. We expect banks with basic licences to work actively with small business and retail customers. We are now preparing measures to enhance entrepreneurial trust in small banks; in particular, we have already supported the idea of introducing insurance of small business bank deposits.

    The third area for enhancing competition consists in development of a capital market capable of providing products alternative or complementary to bank lending. With the development of equity financing and the bond market, private investors will have a greater range of investment tools at their disposal. In this fashion, product competition will benefit both real sector enterprises and various types of investor.

    And now I would like to move to our objectives in the banking sector.

    We are seeing positive trends in banking sector dynamics. In June, both assets and credit to the economy continued growing; consumer lending went up markedly; mortgaging was built up at priority rates. Household deposits also demonstrated growth. It is remarkable that the share of household deposits in bank liabilities exceeded the share of corporate funding.

    Speaking of the overall results of the first half of this year, banking sector assets grew by 2.2% (normalized to the currency exchange rate effect); credit to the economy went up 1.8%. We see the overdue debt share stabilizing and starting to rise.

    The banking sector made profits of RUB 770 billion in 1H 2017 (which is double last year’s increase). This is the source of the banking system capital buildup.

    All these trends prove that the banking system is recovering successfully, having already started to build up lending and planning to expand it further in the future.

    What goals are we pursuing in the area of banking sector development?

    A proactive supervisory policy and tighter regulation enable us to improve the financial system’s health and ensure its stable functioning even in the event of external shocks. We have significantly cleared the market of banks that built upon illegal operations, as well as many chronically unstable banks.

    At the same time, we have had to eradicate unfair business practices, make banks abandon the tools they used to conceal the real state of affairs or syphon off assets. Many kinds of unfair practice that used to be regarded as normal have gone for good. Although there is still a lot to be done or finalized.

    But now, with most of the banking system sanation journey already behind us, our regulation and supervision will get more focused on development and incentives.

    By introducing proportionate regulation, we expect to ensure sustainability of small banks and the validity of their business models. Just to remind you, proportionate regulation limits the risks that small banks can assume but, at the same time, applies simpler requirements to such banks. This will ensure fairer conditions for competition.

    Another novelty we also announced a year ago at the previous congress was the move to a new mechanism of bank sanation and set-up of a banking sector consolidation fund. We are now ready to use this new sanation mechanism both in legislative terms and in terms of practical work organization. Along with the progress of market clearance and early identification of problems, we hope to see more cases when it would be appropriate to try to restore a bank’s solvency instead of recalling its licence. Moreover, the new sanation mechanism as such may drive competition in the banking sector: consolidation will allow big enough banks to be brought back to the market. Big banks are ones that demonstrate the lowest level of competition today. So we have progressed in delivering two out of the three major goals announced at the congress last year. A quick reminder: the third goal was to establish high-quality supervision over financial groups. By now, we have produced a draft law that is currently being discussed by the Government and we expect it to be put into effect next year.

    Now let me move on to the tasks that are still pending.

    The top priority problem is owners’ business crediting. Restriction of owner projects funding – the N25 Norm – was introduced this year but is so far applied in a preferential mode.

    Owner crediting poses two threats. First, the bank will wink at the risks of its own company to which it extends credit, so there is a risk of non-repayment. Second, if an owner project really encounters difficulties, the affiliated bank will be the last to which it will give back the money, as our practice shows. These are not market credits but credits ‘by code’; banks can’t refinance or assign them.

    And, second, this is the eventual cause of bankruptcy of many banks. It is one of the factors that contributed to the collapse of the quite large banks from which we withdrew licences. Now we want to make sure the banking community realizes that we are serious about this and plan to stiffen our approach consistently. That is why I would recommend those whose business models build upon owner business crediting to start really thinking about changing this model.

    The quality of bank capital is another problem. We want to make sure our banks have real, not borrowed capital. To that end, we are introducing increased requirements on capital quality this year and we will disregard funding from non-transparent sources in capital calculation.

    Yet another major layer of problems is associated with mortgage finance. What is it all about?

    Mortgage finance accounts for a considerable part of lending in the Russian banking system. On the one hand, pledge is a good tool for motivating borrowers to repay loans; however, we are now seeing many banks expecting to dispose of the pledge as a source of credit repayment right from when the loan is extended, sometimes even extending loans to almost bankrupt companies, considering them just as a pledge straight off.

    This is fundamentally wrong, for not the pledge but the borrower’s operating profit should be the source of loan repayment. Otherwise the banking system might turn into a big pawnshop.

    The problem is further complicated by the fact that the pledge mass can be used to reduce the provision against possible losses. That said, many pledges have low liquidity and the value of the pledged item is often overstated in Russian practice.

    The problem arises when assets are being syphoned off through the pledge mass rights prior to collapse, so that, despite the restrictions and prohibitions imposed on the bank, its managers and owners have a chance to funnel assets out using pledge agreements. Today, the regulator has the right to restrict or prohibit only the banking operations but not transactions with pledged or other property. That is why the Central Bank should strive for the right to restrict not only the banking operations as part of supervisory action, but also operations with pledged property.

    Otherwise, what happens is that we reduce the mandatory reserves by taking the pledge into consideration. But, one day, this pledge is stripped off and the credit quality falls dramatically. Then, if the licence is revoked, none of it gets into the bankruptcy estate. The rights of depositors and creditors are thus affected. In our opinion, pledged assets may be included in the reserve calculation only if the Central Bank has the right to impose a moratorium upon operations therewith.

    At the same time, the bankruptcy law must be improved to enable bona-fide creditors to foreclose more quickly on property pledges under an agreement or other assets on the basis of a court ruling.

    I would like to emphasize once again that, in the regulator’s opinion, mortgage finance should not be the dominant type of lending. This is the only way the banking system can contribute to attainment of the economic development goals.

    Lombard loans should not be reinforced as the main type of banking business. Banks should work with customers and understand their business models instead of looking to seize their assets.

    As for our supervision priorities, the Bank of Russia has been re-engineering its supervisory operations for about a year. We have set up a risk analysis function (evaluating the quality of loans, the cost of securities and derivatives, and assesses the value of pledge), and we see some results already.

    We are now starting to centralize our supervisory operations by creating a current banking supervision function. This is necessary for making supervisory response more efficient and establishing a uniform supervisory practice in the country.

    We can call our target model ‘consultative supervision’. Consultative supervision enables us to identify problems at an early stage and help bank owners develop appropriate solutions.

    But, in order for this approach to be implemented, banks have to assume responsibility as well – to be transparent before the regulator. In fact, we are shifting towards more friendly relations with bank, provided they are prepared to furnish reliable and comprehensive information about themselves, because the consultative supervision tools are directly associated with bank internal procedures, such as internal stress testing, internal capital adequacy assessment and risk management procedures. This doesn’t mean that, where a bank has already violated the rules, we will advise them instead of applying supervisory action. Consultative supervision is joint work specifically at the early stages, when problems are just making themselves known.

    For the supervision to be proactive and to make sure that the tools developed for content analysis of a bank’s situation and early problem identification really work, the Bank of Russia should also strive for the right of reasoned judgment.

    In a great number of situations, for instance, when it comes to proving relations between parties, it is impossible to rely upon formal rules alone. And, unfortunately, this has often been precisely the case when the Bank of Russia’s Supervisory Service, knowing that a bank is in trouble but having no right of professional judgment, had to waste a lot of time gathering formal evidence, while the bank owners syphoned off the assets.

    Last week, the Bank of Russia presented for public discussion a report outlining our approach to use of professional judgment in supervision (and not only in banking supervision!). Hopefully, appropriate amendments will be adopted following the discussion with the professional community and legislators.

    Now I would like to turn to development of other financial market sectors.

    Let me start from the key, in our opinion, area, namely, creation of sources of long money in the financial system. This is the pension accruals system, investment of actuarial reserves and various forms of investment (above all collective).

    We are doing everything possible to preserve the pension accruals market. Considering demographic trends, the funded component is the only way to ensure a decent level of pensions. And it is extremely important in terms of prolonging the investment horizon in the economy.

    We have accomplished corporization of private pension funds.

    Today, all funds that provide mandatory pension insurance are part of the security system. Stringent admission to the security system and continuous control over private pension fund operations, as well as the launch of stress tests, promote financial sustainability of private pension funds on a continuous basis, and we will keep an eye on that.

    We plan to introduce fiduciary liability for PPFs in order to raise future pensioners’ confidence in profitability, and to change the compensation system in order to prolong the PPF investing horizon and avoid false motivation to fix profit in the short term.

    These measures are aimed at ensuring that PPFs are sustainable and act in the best interests of their clients. But this is not enough. We believe that, in order to preserve the pension accruals market in the event of the projected perpetual freezing of the funded component, a convenient and large-scale system of voluntary pension accruals is necessary.

    We have been working together with the Ministry of Finance for some time on developing a system of individual pension capital – voluntary pension accruals by auto-subscription. In our opinion, it is also necessary to set up a centralized system administrator that would provide a customer-friendly ‘one-stop-shop’ service, handle addresses, standardize and automate operations. By the way, we reckon that introduction of such a centralized administrator could reduce the rate of infringements on the rights of citizens migrating from one private pension fund to another. The draft law is almost ready now; the Government is working to settle the differences and, hopefully, the document will be presented to the State Duma quite soon.

    Now let’s move to the insurance market.

    It is demonstrating growth and generally positive trends. Nevertheless, there are still some troublesome segments, primarily, the third-party motor liability insurance (TPMLI). Solving the TPMLI problems is one of our immediate tasks. The mandatory sale of electronic TPMLIpolicies imposed on insurance companies this year has improved the situation concerning policy availability in problem regions. The number of electronic policies issued in the first six months of this year was seven times greater than throughout 2016. The priority of repair over payout introduced this April should help clear the market of bad faith intermediaries. We expect these measures to stabilize the situation.

    The strategic objectives of insurance market development are associated with ensuring long-term sustainability of insurance companies and protecting the rights of the insured.

    We have yet another gap in our law. Unlike in the bankingsphere, there is no legal mechanism for insurer market sanation. We plan to introduce one in the very near future. An appropriate law has been drafted and is now being discussed.

    One of our priority long-term goals is to implement the Solvency II principles as part of adopting a risk-based approach to insurer financial sustainability and solvency regulation.

    Micro-financing is a socially significant segment of financial services. We can see that MFO clients are usually not rich people who apply for micro-loans in very difficult situations (virtually when they have no enough money to survive to their next payday). That is exactly why the Bank of Russia’s policy on this market is aimed at protecting customer rights. The first thing is to reduce the borrowers’ debt load and restrict the maximum cost of loans. The limitations introduced have already reduced the cost of micro-loans, but we are planning to reduce it further.

    Another area is fighting illegal ‘black’ creditors. A law has already been adopted providing for liability and prosecution of illegal creditors. We are cooperating on that with law-enforcement agencies and are now focusing on informing the public. About a month ago, we launched a joint project with Yandex: in the search results, the MFO on our register are marked with a special sign, so that people can see whether an organization is legal or not.

    Moving on, this year we started mass issue of Mir cards accepted by all payment terminals and ATMs in Russia. The issue is progressing at a good pace, with more than 10.6 million cards issued so far and over two million cards in just the last month and a half. The card is very competitive and offers the entire range of services that customers with international payment system cards are used to on the domestic market.

    Our strategic objective for the coming years is to ensure direct international acceptance of Mir cards, primarily in the Eurasian Economic Union.

    We are progressing in this area together with our EAEU partners. Last week, the first cross-border operations were accomplished using Mir cards in Armenia’s Arca payment system. This is our first project for organizing equitable inter-system collaboration. (So our the citizens of our countries, will get new financial opportunities and I would like to express my appreciation to the Central Bank of Armenia and the Arca payment system management for their really efficient cooperation and quick advancement of the project).

    Now let’s move to financial technology development.

    Technology’s influence on the financial sector is constantly increasing. Russia is keeping up with global trends and, in some areas, even outrunning them: for instance, mobile applications of Russian banks are very advanced already and Ernst & Young ranks Russia third in terms of financial technology development.

    It would be negligent to ignore the technological revolution, so we are working in three directions here.

    The first two (we are rather active there, and hopefully you can feel it) are Fin Techsupport and cybercrime prevention in the financial sphere. The third is the so-called Reg Tech – new approaches in regulation and supervision that need to be developed to ensure appropriate management of the risks of financial institutions. which are becoming more like tech companies.

    What is the Bank of Russia doing to support financial technology?

    We have repeatedly stated our Fin Tech regulation and supervision principles: first observe and then regulate pro rata the risks. We maintain a continuous dialogue with the market, having set up the FINTECH Association. The next step in the coming years is to create a national Fin Tech infrastructure. This is an indispensable element, which will be of high value for and in great demand by all market participants and will ensure easy market entry for players of any size. The national infrastructure will promote competition on the market, creation of several financial ecosystems and, ultimately, appearance of cheaper and better products for the public.

    What are the elements of the national infrastructure?

    -         Remote identification - and not only for financial services but for public services as well. We are working on this together with the Government.

    -         Creation of an instant retail payment platform allowing customers to make payments and transfers easily, no matter whether they have open accounts.

    -         Creation of marketplaces to offer financial products and services to retail customers and help them choose the most expedient and safe products.

    -         Lastly, development of a national payment system. Our goal in this area is to provide the entire country with a payment infrastructure of a conceptually new quality.

    In this contact, it will definitely become increasingly important to combat cyber-threats effectively. We know that malicious software can paralyze operation of even major companies for hours and days. This is the first time at the congress that we are going to have a session specifically dedicated to information security in the banking sector and in the financial sphere in general. Our short-term priorities are to set up information security standards for financial institutions, continue working on threat identification and help the market develop effective methods for mitigating cyber-risks.

    Now, just a couple of words on Reg Tech.

    So far, all financial regulation and supervision has dealt mainly with prudential aspects: capital, liquidity, profitability, asset quality. The shift caused by digitalization in the financial industry has led not only to emergence of Fin Tech companies but also to wide use of new technology by conventional financial institutions. This is Big Data, systems for making risk and credit decisions, complicated mathematical models in the risk management system, open interfaces and cloud computing.

    All this implies that, very soon, a high proportion of risks will be of a technological, not financial nature, so we should be ready for those risks and our task is to develop uniform standards for data bases and data quality, requirements on the models used for data outsourcing, and information security requirements. This is a great deal of work and we will develop approaches to it in cooperation with the industry.

    The revolution in data use involves not only financial institutions but also the regulators – us, as the central bank. We now need to gather more data on transactions and operations, and apply advanced analysis methods to them.

    To that end, we are going to optimize the reports gathered and implement such convenient formats as XBRL. I would like to stress that we will improve data quality control and management systems, but we see their benefits in lower regulatory costs.

    And, last but not least, an area of work I would like to dwell upon is protection of consumer rights.

    Our goal in this area is absolutely clear: financial solutions should not cause troubles for consumers. Based on this principle, we suppress operation of outright swindlers, restrict the risks people can assume, and try to sort out specific customer complaints. Yet this is not enough. We need tools that for terminating practices that, although formally legal, are aimed at deceiving the customer, selling a wrong product, at a wrong price, or with excessive risks.

    We are preparing to build up a second vertical of supervision over financial institutions –so-called behavioural supervision.

    Our next steps in this area are to:

    – introduce rules for selling financial products and services to various categories of customer, especially concerning disclosure of information about a product being sold;

    – enhance the role of self-regulating organizations, which should develop basic standards of services provision and control compliance.

    In this context, we would really appreciate it if a law on financial ombudsman were adopted as soon as possible, since its discussion is already dragging on. In order to tune up this mechanism efficiently, it being new for our system, we suggest moving stepwise: first complementing the ombudsman’s scope of competence with TPMLI matters, then adding micro-finance products, then banks and other institutions.

    Moreover, it is quite impossible to set up an efficient consumer advocacy without raising the financial literacy of the population and reducing the number of ‘forced mistakes’ that people make when selecting financing services and providers. That is why we are going to pay special attention to financial literacy. We have already launched a series of programmes – from support for pupil and student training to creation of a specialized website.

    As for the availability of financial services, we have isolated this area into a separate priority, because it is very important for our country, for balanced development of service availability in different regions, big and small cities, and for evening out disproportions. I would like to point out here that it is unacceptable to deny a person access to financial services merely because of their disability, but unfortunately this still happens sometimes.

    To conclude, I would like to summarize the overall direction of the measures we are planning in different spheres over the next few years. What will be different from previous years?

    At the beginning of my speech, I mentioned that the Russian economy was entering a new cycle and Central Bank approaches should fit the new conditions. Our work will be consistent; we will keep resolving the problems we have already identified and successfully tackled. But we also have to think about a new stage in the Bank of Russia’s operations.

    We have, in fact, dealt with chronic problems in the past and partially responded to the consequences of external shocks. For instance, we cleared the financial market of weak and mala-fide players, added requirement elements to the national financial market infrastructure and finalized the transition to inflation targeting.

    Now that the situation in the economy and in the financial system has stabilized, we have more opportunity to focus on development. So we are going to give greater priority to competition, new technology, financial availability, development of long money tools and the capital market. What all of us can do to promote the financial sector’s development and what the financial sector can do for the economy is actually the subject to be discussed at this congress. I wish you all the most fruitful work and all success!Thank you for your attention.