Supervising the New Normal: A New Guide to Navigate the Pandemic
Monday, Nov 23, 2020

Supervising the New Normal: A New Guide to Navigate the Pandemic

This webinar focuses on the impact of COVID-19 on the financial system. The speakers discuss emerging trends for supervising the new normal.

Jameel Ahmad – Deputy Governor, State Bank of Pakistan
Kevin Cowan Logan – Deputy Chairman, Financial Markets Commission (CMF), Chile
Clive Briault – Chair, Banking Advisory Board, Toronto Centre

Babak Abbaszadeh – CEO, Toronto Centre

Read the full transcript

Babak Abbaszadeh:       

Hello. Greetings to our participants from around the world. I understand we have about 45 countries and 260 registrants. I am Babak Abbaszadeh, CEO of Toronto Centre. I'm very glad to be back with you today for another episode of Toronto Centre's virtual webinar series on supervising the new normal. Since inception in 1998, we have trained more than 13,000 supervisors from around the world in all sectors of financial services. Managing through the pandemic and adjusting to the new normal has not been easy for the supervisory community. The increase in financial sector risks of COVID-19 has coincided with tremendous pressures on supervisors arising from lockdowns, travel restrictions, the need to maintain social distancing, and suspending on-site visits. Especially in developing countries, supervisors have had to meet the challenges of underdeveloped digital financial services and infrastructure, not least, given the disproportionate impact on the poor, particularly women who are financially excluded.

We don't know when or if we can ever go back to the old normal. As our contribution, in late September, Toronto Centre published the most comprehensive, practical, and cross-sectoral guide to the supervision of the new normal in the COVID-19 world as you can see here. With input from a wide range of supervisory authorities and standard setters, I encourage you to read it. Thanks, Diana. There's so much more to this story of supervision under duress and adjusting to the new normal, and I have only barely scratched the surface, but our diverse panel is up to the task.

Our distinguished panelists are Mr. Jameel Ahmad, deputy governor of State Bank of Pakistan, Mr. Kevin Cowan Logan, deputy chairman Financial Markets Commission of Chile, and Mr. Clive Briault, chair of Banking Advisory Board Toronto Centre. I call them Mr, but we're going to be on first name basis. You have already seen their bios. I should also mention that Clive is one of the key authors and editors of the document I mentioned above. And in fact after the session is over, he will be moderating a few sessions going forward to dive deeper into these issues. Toronto Centre is also privileged to have provided capacity building programs to both Chilean supervisory institutions and the State Bank of Pakistan over the years. So it's very good to have our panelists here with us. Welcome gentlemen, it is good to have you with us today.

I also would like to thank our key sponsors, Global Affairs Canada, Swedish SIDA, IMF, Jersey Overseas Aid, the USAID, and Comic Relief. Let me also thank the Demet Canakci and Diana Burke who have worked so hard to bring you this quality webinar from behind the scenes. We aim to keep this a dynamic session. So I would ask our audience to please use the Q&A tab to submit your questions as soon as you can.

So without further ado, I want to go to our first speaker, Jameel. All supervisory authorities face challenging constraints. It's becoming increasingly clear that the world is not going simply to return to the old normal. Based on your own insights and conversations with colleagues outside of Pakistan, what will be the ... what is the new normal look like? What will it look like if you look at the macro issue? Go ahead please.

Jameel Ahmad:              

Thank you, Babak. Let me first of all say that COVID-19 shock has fundamentally changed the functioning of the financial system across the globe. And we all know that [inaudible 00:03:58] restrictions and social distancing have become a new norm. These developments are setting a new normal in which technology will play a major role. And we also need to say that this new normal is here to stay for quite some time. We are hoping for the vaccine to come in and obviously some of the post-COVID environment will continue the way we are operating right now.

So what we are expecting is that some of the trends under this new normal will continue and I will just mention few of them. First of all, we are expecting that macroeconomic environment is expected to remain for again [inaudible 00:04:48] some time. And this will also include some stress on trade and across border funds transfers. For us for instance remittances are our major source of external financing since a number of Pakistanis are living abroad. So this has affected our migrant workers who are working abroad. And we expect that as a result of low migrant workers, the remittances will be effective going forward.

Secondly, I think customers choices for new delivery channels for financial products and services will become more popular. And we are expecting alternate delivery channels to take a significant space in the financial services delivery which was not the case for some developing countries as we a have very low penetration as far as the alternate delivery channels are concerned, but will we have seen significant developments in this area. Thirdly, I think digital financing will gain more traction and acceptance going forward. And also we are expecting increased use of digital financial services. It will raise the risks for the supervisors also because of the ... and for the financial institutions also because when the technology use will be increased, then the associated risks will also increase. And already we are facing cybersecurity incidents increasing as far as overall financial institutions are concerned. Then we are also expecting that new ways of conducting and managing the operations of financial institutions will emerge.

We have already seen that technology-based solutions and virtual meetings are getting popular. And similarly, work from home is also becoming a norm. And both these trends will affect the the business environment and operating environment of not only the financial institutions, but also the central bank and supervisors. So we have to prepare for this new norm in conducting of the business. Then from policy environment perspective, governments as well as the central banks have provided various supports and incentives to the financial institutions as well as to the customers of the financial institutions. And we expect that this trend will continue for some time because the business forms will take some time to regain their free COVID status whereby if they ... some of them have suffered losses during this process, they will be able to take time to strengthen their financial conditions and to cope with the new risks. In the process they will expect from central banks as well as from the government some support.

We have already taken a number of years in this regard which I will share later on. What we are expecting is that this for some time will continue to be a norm, and we will have to continue to provide support on that front also. I hope I have answered your question.

Babak Abbaszadeh:       

Thank you very much. That was very well. I guess many insights are generated from what you're talking about. What struck me in a special way is the fact that it's not just contained in Pakistan. You have people outside of Pakistan. There's really a global dimension to this challenge that we're all facing and you articulate that very well and also the micro picture.

Kevin, I'd like to turn over to you now. You're closer to home. The America's Latin America has had a devastating experience with COVID-19. So our best wishes to you and frankly to everyone around the world. Chile I think has done relatively better, but some of your neighbors have really suffered the consequences. Can you give us also a bit of a macro perspective? The question I have for you focuses on supervision, but as you try to approach that, if you can give us that macro overlay that would be great. So how have you prioritized your supervisory activities within the Chilean financial sector in response to the heightened risks and reduce supervisory capacity? And which of those actions do you think will remain in the long term after the pandemic? And how has stress testing helped you here? So, thank you.

Kevin Cowan Logan:       

Thank you very much, Babak. And thanks to Toronto Centre for the invitation to discuss these issues with you this morning or this afternoon. I'll try to be brief. Although the questions that you pose probably each of them were married at a complete seminar. So as you mentioned, Chile and Latin America has been particularly hard hit by COVID. This has been, Chile in particular, a combination of two factors. Obviously, we are a small open economy both in the trade side and from the financial side with large growth of financial flows. So both of these are from external dimension. It have hit Chile hard particularly financially in March in terms of trade flows in the following months. And then on top of that, we've experienced the domestic supply shocks coming from the lockdown which as you mentioned, the Latin America has been one of the more severe, and in Chile in particular was particularly long. So what we see moving forward is really at the base scenario is of improvement, but very much with increased volatility. We see that in terms of financial markets, in terms of news on the real economy what we expect moving forward is a very turbulent period for the next couple of years.

In addition for Chile, we are also in a relatively more complex political situation than we had been prior years. So that's certainly going to add to some of the volatility. In this context, your question as how we are reprioritizing supervision, first of all I think one of the things that has been most obvious is increased importance of the financial system working from a remote perspective given the restrictions on mobility. This has meant two focuses of supervision. One is internal business continuity and how we make sure as in our case, an integrated supervisor that key infrastructure is working, the core business of banks and insurance supervisions is continuous. And then additionally to that, the diverse financial providers have been able to compliment attention through offices with an increased presence on the internet through access to diverse financial service remotely.

So I think it's been a challenge to make sure that things continue to work and at the same time financial industry offers their consumers and their users continued service provision. So in that sense and as Jameel mentioned, all of this means that increased concern of operational risk and cybersecurity and something that obviously was there, has moved forward very significantly. More generally in supervision, I think two lessons or two conclusions. One is by nature, this shock has forced us to be forward looking because really what is happening now is a poor indication of what may happen in the near future. We're not in the usual business cycle scenario, but the nature of the shock also makes it incredibly challenging to be forward looking because you're based on historical data. So I think it heightens the need of forward looking, but makes it challenging. And the second is we've also put a lot of resources in having integral view of what is happening in the financial sector. We merged as an institution last year. So we've been able to take advantage of having insurance securities and banking under one roof. It has actually proven important because these many of the shocks have ramified to the financial sector in ways we didn't expect.

In terms of forward looking, I think also coordination in the current scenario with the central bank which is separate entirely and has a large installed capacity in terms of generating macro scenarios. These scenarios has been key and also in terms of coordination with the finance ministry, because a lot of legislation and support programs have been rolled out which directly or indirectly affect the financial sector. So when this forward looking components, coordination I think is one. Stress testing is the other. If you want to put it in a very simple way, it's a way of putting in numbers with our qualitative concerns. And again here, Babak, I think the benefits are high, but the challenges are also high. What we've done is introduced a lot of ad hoc stress testing with probably simpler models, but more intuition both in insurance, securities, and banking. So instead of relying on more sophisticated macro models, ad hoc shocks to credit risk, to liquidity based on conversation with the central bank. I think that's been particularly useful as to then where to focus on, as you mentioned, a relatively scarcer supervision.

A third point maybe. So forward looking, integrated. Data has been key. We've made a lot of efforts to streamline data that we felt weren't key in the current conjecture and ramp up requests for data from our supervisor entity in the positions that we were thinking were priority. So in that sense more granular data on [inaudible 00:15:30] negotiations, more granular data on insurance company portfolios, less data or self evaluations, and other things which are part of a longer term supervisory process. Which are the things are here to stay? I think the forward looking stress testing is something that was here before. It has been reinforced and I think it proves that good supervision is forward looking supervision. Data is clearly key. I think we've learned a lot as to how to work remotely and what data to request but obviously, that's an ongoing process. I'll try to stop here because I know there's a lot of interest in adding additional questions.

Babak Abbaszadeh:       

So Kevin, first of all, big hands to you. It's very rare that someone can put such incredibly difficult and big topics together in such a concise fashion, but I think you definitely succeeded. The forward looking perspective is very much appreciated. You talked about integrated view and cross-sectoral view. And everything you're talking about is also something we've seen ourselves that there's a lot of demand for our training programs on the cross-sectoral aspects and holistic view. And it sounds like what you have already obtained and learned is going to stay with you regardless of the pandemic because these are just essential skills.

Clive, you have a tough shoes to fill. These are two speakers going first, but I want to come to you as the main editor. You interviewed many supervisors to gather information on the current and future challenges in the COVID-19 world as you were preparing the guide. Can you share some of your top observations with us on what supervisors said about the new normal especially as you listened to our first two speakers. Thank you.

Clive Briault:                   

Thanks, Babak. The supervisory authorities we spoke to in preparing the publication and subsequent discussions are supervisors at various Toronto Centre programs. I highlighted four main issues here that I think it would be useful to cover. Some have already been mentioned by Jameel and Kevin, but perhaps a better repetition, not least, to provide a backdrop to considering the implications of them for the supervision of financial institutions. At first, and it's becoming increasingly clear and most supervisory authorities stressless that the world is not going simply to return to the old normal, nor indeed to reach any settled position in the near future even with a prospect of mass vaccinations next year.

Generally speaking, supervisors thought that COVID-19 will have a prolonged and fundamental impact on financial institutions and on how they are supervised. So as already mentioned, financial institutions have faced heightened levels of many different types of risk, not at least from a shock and potentially prolonged decline in global real GDP and fluctuations in assets and commodity prices. So many financial institutions need to revisit and adjust their strategies and business models as a result to cope with those pressures. And most supervisors expected some financial institutions to fail as a result of COVID-19 in particular once the multiple types of government support are withdrawn. But perhaps, it's also [inaudible 00:19:01] their concern that the increased role of governments and central banks in the economy be it through higher fiscal deficits, money printing, bailouts, wide range in capital market purchases may have an impact in terms of distorting markets potentially holding back economic growth leading to a deterioration in the creditworthiness of some sovereign borrowers and generates greater uncertainty particularly as support is withdrawn.

Second, the COVID-19 outbreak has, as others have already commented, accelerated the general trend towards the increased use of technology and digitization. And within the financial sector, supervisors highlighted in particular the impact increased use of digital access through mobile phones or whatever to financial products or services, the use by governments digital channels for making payments to households particularly support payments in the context of COVID-19, the declining use of cash and an increase in the use of digital retail payment systems, and the increasing use of digital methods of identification and for the electronic submission of documents as a substitute for the previous physical know your customer type checks. Those shifts will continue and will not be reversed. Business models of financial institutions are becoming increasingly digital based as they accelerate the adoption of technology. And there will also be a further shift away from cash to digital retail payment systems.

Third, COVID-19 is likely to have a perverse impact on higher rates of working from home, the use of substitutes and workarounds for on-site supervision, and reduced overseas travel including, for example for supervisory colleges. And fourth, and finally, supervisors drew attention to shifts in financial flows. Capital flows, including foreign and direct investment, and remittances have fallen sharply in many parts of the world as Jameel has has already mentioned. And their volume and pattern are likely to change permanently. Financial markets may become even more fragmented. And some supervisors mentioned that there could also be renewed outbreaks of COVID-19 or variations of COVID causing further inequality, social divisions, and geopolitical tensions. So let me end on that happy note and pass it back to you, Babak. Thanks.

Babak Abbaszadeh:       

Thank you, Clive. You've touched on some very key points here. And in fact, when I step back, I look at a lot of different things. I think if one can look forward a few years down the line, I'm wondering if people will look at COVID-19 as the disrupter or as the accelerator of all the changes that were happening. Just to give you one statistics from the Economist Magazine of October the 10th issue of this year, the share of the global top 500 banks since a financial crisis in 2008. Basically, back then they had about 96% of the share of the financial services around the world. That dropped to about 81% at the beginning of this year. And since COVID has come, it's got dropped down to 76%. And all these other digital players that you talked about are the ones who are coming. And so of course it's a chipping. It's not a major drop, but it's a pretty dramatic ... still a dramatic stat. That kind of signifies what you're talking about.

Let me move back to Jameel, please. Jameel, I want to bring the focus back to supervision and State Bank. You guys are doing a great job there. And I know that because our teams are there and helping with you, working with you, and we know how hard your professional team works. So what are the implications of the new normal on supervision at the State Bank of Pakistan, please? You're muted. Jameel, you're muted. Yeah.

Jameel Ahmad:              

Thank you. So I think first of all as we all know that COVID-19 pandemic has posed a number of novel risks and accentuated also the traditional ones which are influencing the underlying risk drivers. This new normal would require the State Bank of Pakistan also to strengthen its supervisory process and take other buyers so that we can effectively supervise the institutions. So in this regard, we have taken a number of initiatives which I can list down few of them. First of all, we have taken some macroprudential supervisory measures. And under that, we have recently established a national financial stability council which includes the central bank as supervisor of banks and other institutions as the Securities and Exchange Commission of Pakistan and the Ministry of Finance. So this will provide a very effective coordination from financial stability review perspective, so that we can review the underlying issues in financial stability and take decisions at the highest level.

The representation of this committees including the Finance Minister and the chairman of Securities and Exchange Commission and [inaudible 00:24:48] State Bank of Pakistan. Secondly, on macroprudential level, we have also strengthened our supervisory process. And as you mentioned, we have engaged Toronto Centre also to help us in this process. And for that, first of all, we are moving from the previous CAMELS approach to the risk-based supervision approach. And as you know, this is more focused on the off side surveillance and risk assessment of the institutions. So it will require a significant change in the way we are currently supervising the institutions. And related development is that we have also reviewed our organizational structure at the central bank so that we can bring the required changes to to introduce the risk based supervision. And also we are trying to further strengthen our skill set by bringing some new people also who are well trained in the supervisory skills. So that's from the way we are supervising and the strengthening our financial stability process and structure.

In addition, we have also focused on FinTech developments. And that's, I think, an area where we have recently done a lot of work. And thanks to COVID-19 this process has been expedited. So I will mention that there are at least four major projects which we are undertaking currently. And I will briefly just mentioned those projects. First of all, we have recently introduced a new kind of digital account. We call it a Roshan Digital Account for the experts Pakistanis which are working in various countries. It was not previously allowed to them to open accounts remotely. So what we have done is now we have introduced through partner banks a new account whereby anybody, any person, a Pakistani working ... a non-resident working in any country they can open this special account and then they can transfer funds through that account. They need not have to visit any branch. It's a remote account. And through that they can make investment in stock exchange, in bonds, in real estate, and they can also maintain their families through this account. So that's one development.

Secondly, we are in the process of implementing a micropayment gateway. And that's a very ambitious project for us. We are doing it with the support from Bill and Melinda Gates Foundation. And that's also about to be completed. Now, we are expecting that early next year, we will make it operational. This is a retail payment system which will bring efficiency and also the cost reduction for the public to transfer funds from one place to other place, and will also help in financial inclusion also for us. Thirdly, we have also implemented another project which we call Knowledge Management Project and it has various components. One of the significant component is that under this project, all of our approval process internally has been digitized, which means that we are not working on any paper-based environment for our internal approvals. And as a part of that project also, it says somewhat separate but related project whereby we have required financial institutions and other stakeholders who have to send various requests to us for seeking the approvals. So they can now submit all those requests digitally. So they need not have to send any papers and documents with their request.

So that's another I think major achievement whereby the convenience has been provided to the customers of banks as well as to banks themselves and other financing institutions so they can approach us digitally. And we process their request internally within State Bank digitally and then grant approvals through this digital process. I think these developments has facilitated the customers significantly. And on the payment side also, we are also working on a number of other initiatives also. In order to promote the digital channels and alternate delivery channels, we have made ... took a decision also whereby we required banks and other institutions which we regulate that they will not be charging any fee at least during the pandemic period, that they will offer all the digital services free of cost so that the customers can be incentivized to use the digital channels. And I think this has helped a lot in our case.

Just to give you an idea that before COVID, there were on average 180,000 transactions daily taking place with a number of financial institutions. But as a result of this fee waiver as well as some other initiatives which we have taken, now the daily average has increased to 800,000. So just imagine within this seven, eight to 10 months of COVID, it's more than four times increase in the digital transactions which are taking place in the country. So I think that will also help us in achieving our broader objective of financial inclusion because many new customers have registered with the finance institutions and they have started availing the financial services. So that's, I think, is a good development. On related initiative which we have-

Babak Abbaszadeh:       

If I can interrupt you for a second, just because there's so many questions coming in and you have a lot to offer. So let's see maybe if we can address some of the points you want to raise in response to some of the questions so we can move the panel. But thank you so much, and I apologize for ... This is the tyranny of trying to do so much in one hour. But everybody's very busy these days, and there's so many different things to look at and observe. So thank you so much for that.

Kevin, let me move to you. In the context of new normal, how has bank lending transformed in Chile since the outbreak of the pandemic? What are the main challenges you face the monitoring of risks and vulnerabilities related to bank lending and financial stability in the aftermath of COVID-19? And before you answer, I'd like to ask Diana, could you please send the link about that guide that I mentioned to the participants? I know we have sent it out before but that's so relevant to this conversation. It's good for people to have that link and distribute it. Kevin, please go ahead.

Kevin Cowan Logan:       

So let me just very briefly give some background in terms of loan behavior and public support policies, and I'll start with the letter. Chilean authorities have have put forward, I'd say, three main support mechanisms for lending under the initial and I think confirmed view that at least a significant part of the shock was transitory and she want to be able to sort of lens through it. That has been a rollout or a relatively large for a Chilean prospective rollout of state guarantees for firms and particularly SMEs, significant expansion of central bank facilities to banks including long term lending with priority on access to lending to those banks which are prioritizing SME lending. And from our perspective as a regulator, probably the biggest changes that we were currently in the process of implementing Basel III. So we have delayed the rollout of the capital requirements for a year at least to be able to not generate a procyclical responsive credit. So that's the context.

In this context, we've seen mortgage loans being relatively stable. And that has been a feature of the Chilean financial sector for the last three external shocks. Consumer loans have been collapsing at a rate we haven't seen ever. We're talking about two digit collapses in consumer lending, very much spurred by cautionary approach by banks in the face of a very significant increase in unemployment. And also we see by falling demand by households which are very much aware of the need to be liquid in the short run and not take on additional debt. And then in commercial loans, we have seen ... and this has been in contrast with previous external shocks like the ones we experienced in 98 and 2008 that commercial lending has actually expanded through the cycle. A large share of that has been supported by state guarantees, but part of it hasn't been supported by state guarantees. So that's where lending is.

Moving forward, I think our main concerns from an aggregate risk perspective is a series of financial institutions have offered payment deferrals. And some of these payment deferrals are starting to to end currently, obviously very much an aspect to our stress testing, what we expect non-performing loans to behave when these payment holidays meet a labor market which is still relatively soft. Second, another source of concern is that especially large firms drew multiple funding sources at the beginning of the shock. So we saw it in May, June, which is when lockdowns hit the Chile hardest, significant drawdown of lines by large firms with banks, international banks, some issuance including in the local bond market. So we have firms that responded by increasing debt, but obviously a clear risk is if this debt starts ... even when the steps are maturing and the speed of recovery is slower than expected. And thirdly, I think this is something which is structural, although it's not a significant exposure, most of our final institution's non-commercial real estate market is clearly a challenge we're looking forward because here we combine the short run effects of falling demand and falling supply with a point that Babak mentioned before. Clearly what we're going to see in the coming years is much more teleworking in general and that sense commercial real estate particular offices will be a sector under significant stress.

Some issues in terms of supervisory approaches to these risks. May be one of what I would have expected, supervising credit and liquidity risks remotely is actually easier. And this is maybe ironic. I mean easier than supervising operational and cyber risks remotely because you can rely on data, you can rely on granular data in terms of exposure. Understanding risk, understanding liquidity, but when our teams go in and try to supervise operational risks, cyber risk, it actually is ... a lot of that is done based on actually going into the systems sitting at the terminals, showing that the systems do what they say they can do. And we do not yet have the technology to be able to connect systems with systems. And there's obviously cyber risk. And that's why our supervisory team say, "This is actually surprising that cyber risk is one of the things that is actually harder to supervise from a remote perspective." So I think that's been a big challenge in terms of supervision.

The third reflection is we've tried very hard to not derail our medium term agenda with COVID. And that has actually put stress on our teams, but I think it's been a worthwhile effort. As I said, we've been rolling out Basel III. And what we have is we have all the norms, secondary norms up for consultation which will give banks a year and a bit to add, and we've worked hard on that through the year. Second, this is in line with what Jameel ... we've worked putting forward a legal proposal to the government on regulating FinTech. We think we have a fairly active FinTech environment in Chile. They have been providing multiple services during the pandemic. In fact, some of these services have expanded, but there are several aspects of this FinTech system that don't have adequate regulation. So we have been working hard so that we can come out with primary and secondary legislation soon. And thirdly, we have actually been trying to ease access to debt markets for large and medium sized firms.

One of the more scarce resources in coming years is actually bank capital. So if you can generate that outside the banking sector then I think that will certainly help recovery and also reduce systemic risk. And in that sense, what we've been working on to see how we can streamline that issuance, how we can lower requirements for smaller firms in a structure similar to mini bonds so that some of our institutional investors and foreign institution investors can take some of the weight off the banking sector in easing this this recovery. I'd say for now, Babak, that would be the main the main points. Yeah. That's all.

Babak Abbaszadeh:       

Thank you. That's great. A lot of interesting insights. The one that just jumped at me was that it's kind of counterintuitive that it's easier to supervise cyber risk if you're actually on site. It's very interesting. So just how these things are not all one size fit all. Clive, coming back to you to kind of wrap up this around before we go into the audience Q&A. And I see a lot of interesting questions out there. So you're a seasoned supervisor who has had experience dealing with a lot of different financial crisis. And also you're one of the key instructors that are in crisis programs. Toronto Centre has done 120 crisis simulations around the world since 2008 and you've been involved in many of the recent ones. What are the implications of the new normal for supervision? And will supervisors need new skills and approaches to supervision?

Clive Briault:                   

Okay. Thanks, Babak. Okay. Well, here are five, briefly, most important things for supervisors to be doing right now in my humble opinion. First, it's important the supervisory authorities conduct high level forward looking scenario based exercises to consider what the new normal might look like, how risks or operational constraints might intensify or emerge as the crisis evolves, and how these risks might affect supervised firms and financial markets. Second, I think supervisory authorities definitely need to enhance their crisis preparedness including as part of that their cooperation and collaboration with other authorities at home and abroad against the possibility that one or more major financial institutions may run into serious problems. I think that's also a lesson we take from, as you mentioned, Babak, the many programs that we run on crisis preparedness.

Third, I think supervisors definitely need to focus more on FinTech related risks including developing their capacity to understand and respond effectively to those risks to assess the ability of incumbent financial institutions and new FinTech based entrants to find and implement viable strategies and business models to assess the governance and risk management of civilized firms in particular in some of these areas of strategic operational cybersecurity and outsourcing risks to focus more on the operational resilience of supervised firms. Not only in preventing operational failures from occurring in the first place, but also in responding and recovering effectively and quickly if and when such failures do occur considering whether to be more or less accommodating, and the licensing of a new FinTech based entrance in order to boost competition and innovation, and obviously monitoring the regulatory perimeter because increasingly, activities are now being done by firms who are pretty much on the border of that perimeter. Fourth. I think there's considerable scope as some of the other panelists have already mentioned for supervisory authorities to improve and extend their own use of technology which is known as suptech and how to become more data-led and intelligence driven. And that becomes even more important because it's circumstances where onsite supervisory activities are restricted.

And last, but by no means least, supervisory authorities need to consider when and how to revive initiatives that may have been suspended or deprioritized during the height of a pandemic including climate change related risks, financial inclusion, and gender equality. So let me finish there to provide at least some time for some questions and answers. Thank you very much.

Babak Abbaszadeh:       

Thank you, Clive. That was very useful to be able to categorize it that way. So our speakers, we have a challenge here. We have a lot of interesting questions, about 15 minutes to go. So help me try to answer as many of them as possible. So give us your top line answer to the questions that I pose to you. The one takeaway that you want people to have and we all know that your answers are not complete, but that's in fairness to everyone involved. So let me let me start with you Jameel. It's a central banking question. How are central banks dealing with the risks arising from global corporate bond market due to COVID-19 induced market stress and the linkages to the insurance sector particularly to the bulk annuity business and equity release products? What is your view on the risks posed? Do you have any views on this? You're on mute. Sorry.

Jameel Ahmad:              

Thank you. Let me say that first of all on the banking sector in [inaudible 00:44:42], the fundamental risk is the credit risk. There are many other risks also, but credit risk is the most significant which has historically posed substantial losses to the to the system. So on that front, I think [inaudible 00:44:56] we have seen some stress on the portfolio and the non-performing loans are increasing. That is partly due to the businesses affected adversely by COVID and also the individuals have reduced the level of income because of the reason that some of them have been laid off, the others have been given the reduced salaries. From Central Bank perspective, we have tried to cope with this risks by supporting the individuals whereby we have introduced a scheme and that was a very popular scheme. We call it Rozgar Scheme, which is the protection of unemployment for the employees of the large firms, even small SMEs firms also. So this was a liquidity sport provided by central banks through two banks and got a very at a concessional rate and then all lending by banks to the customers at concessional rate. The only condition was that the forms and SMEs they will not lay off the workers when they avail the concessional scheme.

So I think that was quite popular and it has contributed a lot in protecting the employees of the firms. And this enabled in a way to avoid the risks which could have been there on the consumer lending side. So a number of people would have defaulted their installments to banks if that scheme would not have been there. Similarly, for banks also ... for the corporates also who we provided the additional schemes which boarded the corporates also. So this has resulted into some mitigation of the risk, but still I will see the credit risk has increased to some extent. So that's one. On the operational side, we have seen a number of risks posed by COVID, and particularly cybersecurity risk due to increased digitization, digital services availment, and also due to the work from home. Many banks have started offering some services from homes of the employees. So in the process, they are facing some cybersecurity related issues and we have seen increased frauds and incidents as a result of this. So these are, I think, are the challenges which we as supervisor will have to cope with. And we are trying to provide guidance to banks and banks are also taking steps at their own to mitigate these risks.

Babak Abbaszadeh:       

Thank you so much. I really appreciate that. We have a couple of questions from the courageous anonymous attendee. Kevin, let me go to you on this one. It's an interesting question actually. We often think of financial stability and financial inclusion as two different silos. How do you see the role of financial inclusion and its relevance to financial stability in the new future, I guess, in the context of the new normal? I'm sorry you're muted, Kevin. Yep.

Kevin Cowan Logan:       

There we go. Okay. Sorry about that. That is a very interesting question. I'm going to be pressed to give you sort of a short answer. Let me try. There are several aspects in which I think actually their financial inclusion will help financial stability. The first is one of the things we've seen here is that there are still a lot of coverage gaps in insurance in Chile. So when we're talking about households being hit by COVID, you see that actually the stability of income and wealth for house would be much better served if we had much lower insurance coverage gaps both for health perspective from income and unemployment insurance, and you can aggregate that up to a macro perspective. And I think it becomes relevant because for some, for example, non-bank consumer lenders, unemployment insurance has actually been a source of mitigation so far. So I think that's one aspect.

The second is in Chile, we've probably moved faster in terms of financial inclusion in debt than in other sectors. Payment would probably be the second saving a very long third. And I know that we're facing, as particularly lower income households, a very key challenge between saving and debt, but it is the case that saving in the financial sector is low.

A lot of saving takes place outside the financial sector or lower income households. So your access to liquid assets in a case of a shock like this is very limited and that also helps. And the third, obviously, this is something that I'm not ... is not new in me saying it, but if we talk about financial inclusion from a holistic perspective, we're talking about financial education. I think it's also very clear. And this is something that came out very clearly after 2008, 2009. It's ultimately and beyond prudent debt policies by financial intermediaries. It helps a lot if households and small firms understand the benefits and risk of debt in particular and can take well informed decisions. I think that's the third area in which financial inclusion and financial risk or stability act in tandem. So off the top of those said, those three areas, Babak.

Babak Abbaszadeh:       

Very good. Lots of stuff to think about. So I'm just going to move around here. There's one question to Jameel. It's a compound question. So I'm just going to take the first part of it. In Pakistan when approvals are digitalized, how do you check the authenticity of certain documents?

Jameel Ahmad:              

I think this is a challenge, but you have to take some risk. When we extended this was [inaudible 00:51:21] of a remote submission of documents through digital channels. Obviously, it's not a perfect substitute for the paper submission, I will say, but at the same time, we have also introduced some checks whereby the system, the IT system or the platform which we are using for this purpose, will not accept the applications or requests from banks and other customers of the banks until there is a certain minimum, and the cheques are okay, and the platform accept the submissions. So that's one.

Secondly, we have a very strong on-site inspection process also. Right now I think we will not be able to do that, but going forward, we ... on post facto basis check these documents particularly those which are submitted by banks. So it's the responsibility of banks to ensure that their own documents are ... If they are submitting on behalf of the customers, so those documents are authentic and there is no forgery in that. Normally the customers of banks first they will be ... they are required to submit their requests to the banks platforms. And once banks are satisfied, then they onward submit to the central bank platform. So that way there is a check on the part of bank. First of all, they will have to ensure accuracy of documents and then when the documents comes to State Bank, then we have digital checks also. And then from central bank also on post facto basis we ... on test check basis, we'll be verifying the documents on site also. So that way I think the risk is reduced, but it will not be completely eliminated I would say.

Babak Abbaszadeh:       

Thank you so much. It's very interesting. We have several questions that touch on social goals. And I'm going to try to pose one of them to Clive. Everyone thinks supervisors are a very serious, suit and tie, but there's some that ... The world is changing rapidly around us. Clive, let me pose this question to you. How about climate related risks? Some have said climate is like the slow moving pandemic. With so many issues that we supervisors need to deal with, would there be space for climate issues? If so, to what extent?

Clive Briault:                   

Well, absolutely, yes, Babak. I think at a minimum. For me, the basic here is that supervisory authorities should focus on the impact of climate related risks on financial institutions. So the impact of rising sea levels, impact of adverse weather, events on insurers, but also the impact on banks because after all banks lend to people who may be located in floodplains or next to the coast. And they may also be affected in terms of credit risk, and indeed, operational risk because you may find that the head office of the financial institution itself is threatened by climate change.

So climate change should absolutely be in there anyway for every supervisor across all sectors because of the impact on the core risks that they are looking at. And that, for me is basic number one. Basic number two is about disclosure and transparency. So we have, for example, the recommendations of the task force on climate related financial disclosures set up by the Financial Stability Board and those recommendations should be followed by financial institutions as well as by other companies. I think supervisors have a role there in encouraging and perhaps even mandating the use of such disclosures. Beyond that, it becomes trickier because I think beyond that, you're into questions about the extent to which regulators and supervisors should be looking to influence the extent of climate change itself. And that is as a much more contentious area, much less agreement on that around the world, but debates are occurring.

There are debates, for example, in the banking supervisors community about whether risk weighting should be changed so that you impose a higher risk rate if people then to brown borrowers. Brown in the sense of fossil fuel producers, carbon emitters and the like. Either on the basis that is just riskier because those people may get wiped out as a result of new rules on carbon emissions and like, carbon taxes and the like, or simply because that is part where regulators and supervisors are arguably doing their best to prevent action, to prevent further climate change in the wrong direction. So I think there are basics. And to be fair, I think a lot of countries have not even done those basics yet. So that definitely the place to start, but beyond that there are all sorts of interesting potential initiatives whereby regulators and supervisors could, if they wanted to, be more active and more proactive in attempting to tackle climate change itself.

Having said that at the end of the day as people like the IMF have pointed out, the thing which is really going to make a difference to climate change around the world is countries introducing a proper level of carbon taxes and countries spending government money on things like insulating homes moving to electric powered transport and the like. Those are the things which are going to really make a difference to climate change. Regulators and supervisors can, in that sense, tinker at the edges. That's why I say the key basics are to focus on risk management and disclosure.

Babak Abbaszadeh:       

Thank you, Clive. Well done. And I want to remind the audience that Clive has also written a really good Toronto Centre notes on actually a couple on the topic of climate change. Also, as some of you may have heard that it's very likely that IMF will be including climate risk in as part of FSAP examinations. And the final thing is the insurance sector has dealt with climate risk for eternity even before climate was a sexy word. So this is not actually a brand new topic for supervisors. I'm going to get the very last question to Kevin. And Kevin, I ask that you give us your basically fairly brief answer to this because we are definitely running out of time. So CNN style. You have 30 seconds to break it down. So what kind of systemic measures are the supervisory and other state authorities contemplating now to address increase of MPLs in the banking sector in the coming years?

Kevin Cowan Logan:       

So when in 30 seconds, two. One area is in coordination with government authorities. The finance ministry is currently evaluating its state guarantees for firms including the possibility of [inaudible 00:58:47] being guaranteed. So I think that is something which will serve as in part a mitigator of risk and allow what should be viable but illiquid firms to move forward. And I think that's important because past the lockdown, there is still a long way up for recovery. And the second is we are being, as I said ... I mentioned before, we're rolling out Basel III. One of the things that we have not delayed is Pillar II. And in that sense, we are currently sort of undergoing a first round of stress tests that are not supervised, but are actually aimed at generating a discussion with banks as to their capital buffers for the coming year. And obviously, the results of the stress test will very much generate a view on capital adequacy because ultimately it is to capital that some of the banks will absorb some of these appeals. So I think of those two directions, Babak.

Babak Abbaszadeh:       

Thank you so much, Kevin. We promised our audience if we start on time, we're going to end on time. And thank you so much for our excellent speakers. You did very well. I wish we had more time. I think we could have easily taken up three hours of everyone's time here. A big apologies to the audience for the questions that we left on the table. Your questions are not going to be lost. We are saving them and one way or another, we will address those questions to our courses, programming publications. These are all excellent food for thought. And thanks again. And Kevin, I'll see you on December fourth. And everyone else, thanks a lot. [inaudible 01:00:28]. Bye-bye.