A paper published by the International Monetary Fund in May 2015 raised the issue of “too much finance”. It suggested that policymakers should pay attention to the speed and level of a country’s financial development since excessive and unregulated financial development could be detrimental to economic growth.
This is because rapid credit growth leads to high and unsustainable macroeconomic leverage. It may also accelerate economic cycles and amplify economic instability or lead to a misallocation of resources including an inflated financial sector, rampant speculation, and diversion of human capital away from productive sectors and towards the financial sector.
An outsized and inflated financial sector may also be particularly susceptible to moral hazards such as greed, corruption and rent-seeking of senior executives of financial firms. The paper pointed out that good corporate governance, as well as timely and prudent supervision, can ensure the sound and healthy development of financial markets.
Apart from providing the hardware and software needed for financial development, a country’s financial regulatory policy is key in promoting a sound financial market. Only when a good balance is struck between financial development and financial supervision — taking both financial innovation and financial stability into account — can the innovative development of the financial sector project its positive energy and dutifully serve the real economy.
Importance of professional market-based financial supervision
While China’s financial market needs the invisible hand of the market economy, it more so needs the visible hand of professional market-oriented financial supervision. This would promote the timely and well-calibrated formulation and implementation of supervisory policies, which would help drive healthy financial innovation while ensuring stable and orderly financial market growth.
In the recent past, China lacked timely and proper regulations which resulted in numerous operators of P2P lending platforms fleeing with investors’ money; an inflated financial sector caused by voluminous investment products circulating among financial firms; high macroeconomic leverage and the disorderly rampant expansion of capitalism. These are indeed signs of “too much finance”.
But striking a balance between financial development and financial supervision is easier said than done. Apart from administrative management, in an era where the division of labour is increasingly refined and specialised in the financial industry and where financial technology is rapidly developing, we are also in great need of professional regulatory talents with innovative thinking, financial and technical skills, and a good understanding of market development. Then only can regulators keep up with the market dynamics and maintain a good balance between financial development and financial supervision.
Professional regulators with practical experience are familiar with business tactics and tricks practised in the market. They can keep an eye on any malaise or irregularities in financial intermediaries and understand the pulse of the market.
Following the Mexican, Brazilian and Asian financial crises in the 1990s, global financial regulatory reforms took place with a paradigm shift to better manage the relationship between safety and efficiency, while paying equal attention to financial development and risk management. Increasingly, the compliance-based regulatory approach of the past, which tends to be a one-size-fits-all and ticking-the-box exercise, was seen as a basic but not sufficient condition to meet supervisory objectives, and the concept and application of risk-based regulation thus emerged.
Simply put, risk-based regulation emphasises the professional knowledge and ability of regulators to understand the business activities, identify the risks assumed by financial institutions, and assess if they are well-governed with adequate risk management and internal control measures to control and manage the risks; thereby promoting a stable and orderly development of a well-regulated financial market.
Professional regulators with practical experience are familiar with business tactics and tricks practised in the market. They can keep an eye on any malaise or irregularities in financial intermediaries and understand the pulse of the market. They can nip problems in the bud and adopt market-based methods to resolve problems such as unfair and irregular market behaviour in a timely manner, so that issues like monopolistic behaviours do not go out of hand. Otherwise, the cost of resorting to harsh administrative orders to root out a problem will be greater, and the impact on society will be even more severe.
Regulations targeted at business activities and their related risks are also applicable in the emerging fintech sector. As different technologies bring forth different risks, it is necessary for the professional identification and assessment of risks in order to differentiate regulatory priorities, instead of imposing one-size-fits-all regulation.
For example, digital payment tokens are associated with risks involving personal identity, money laundering, and terrorist financing; crowdfunding and P2P lending platforms are associated with risks involving investor protection and moral hazard problems of the intermediaries, while big data and data sharing are associated with cybersecurity-related and privacy-related risks.
Also, in this era of rapid technological advancement, technology iterates and reinvents itself very quickly. To keep up with technological development, we need professional regulators and private technopreneurs to form partnerships to facilitate close exchanges and even work together to innovate and develop a good grasp of global trends in technology, industry, and policy developments.
This partnership will be very helpful to ensure financial stability and safety. It would also allow the industry to leverage the competitive edge of innovative and forward-looking rules and regulations that are well-informed by market dynamics and skillfully crafted by the government and regulatory agencies. The technopreneurs can then stand out and do well amid the intense international competition while balancing innovation and safety. The Monetary Authority of Singapore (MAS)’s FinTech Regulatory Sandbox, Sandbox Express and Sandbox Plus are good examples of such public-private partnerships.
Nurturing and retaining regulatory talents
However, given the shortage of financial and technological talents and the intense competition in the talent market, how can regulatory agencies recruit, nurture, and retain such talent who know about fintech, know how to grow the emerging digital financial sector, as well as market and financial risks?
In my view, it must start with top-level system design. Unlike the centralised staff recruitment by the governments of some countries, including the recruitment of administrative and management personnel in financial regulatory agencies, the MAS — a statutory board established under the Monetary Authority of Singapore Act passed by Parliament— has operational autonomy including its financial management, meaning that it takes care of its own expenses with no funding from the Ministry of Finance. This allows MAS flexibility in manpower resource management, where it can come up with sufficiently attractive remuneration and incentives to bring in and retain in-demand professional and technical talent with practical experience.
Also, MAS implements an innovative “revolving door” rehiring scheme where it welcomes good staff who resigned from MAS to gain first-hand experience and learn the latest financial technology in the financial markets before returning to serve in MAS. In this way, MAS is able to stay on top of the market development and technological advancement by constantly and timely renewing and upgrading its market knowledge and professional capabilities to regulate the fast-moving financial markets.
Another systemic and inherent advantage of the MAS in boosting regulatory capabilities is its dual mandate. After the Act was amended in 1998, MAS took on a financial development function in addition to the original financial supervision function. The new function requires MAS financial development executives to broaden their horizons, gain a good grasp of the latest development trends in global financial markets, and familiarise themselves with current cutting-edge professional knowledge of finance and financial technology. These executives could then lead MAS to explore new areas of financial services in Singapore, promote Singapore to international financial institutions, and recruit international talents in finance and fintech.
All these valuable experiences and resources in financial development help financial regulatory officials gain a good understanding of the latest developments in the financial markets and their products, as well as sharpen their regulatory knowledge and methods.
In terms of talent management, besides generalists in management and administration, the financial regulatory agency needs to recruit and groom specialists, i.e., professional and technical talents, with equal emphasis. This includes empowering specialists with sufficient authority and job scope, creating middle to senior specialist management and leadership positions, crafting specialist career tracks, and creating opportunities for specialists to pursue their passion in their area of expertise. These opportunities could involve having specialists share their experience and bank inspection findings as peer group leaders, provide professional and technical insights to inform regulatory policymaking, and represent the organisation at international financial regulators meetings or technical forums.
To boost knowledge sharing and close cooperation between various financial regulators and developers, and even the central bank, one can consider establishing an internal academy to run courses covering the various areas of financial regulation. These could be courses on macro-prudential regulation focusing on overall financial stability, micro-prudential regulation focusing on the soundness and financial health of financial firms, market conduct regulation focusing on financial market behaviour and consumer protection, the functions of central banks, as well as courses on financial markets, financial institutions, and financial products and skills.
These courses would be very helpful in promoting the mutual understanding between the work of generalists and specialists, and those in charge of various areas of financial regulations and central bank. They could facilitate the exchange and integration of ideas, and contribute towards calibrating a fine balance between financial development and financial regulation.
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