I'm author of literature while I'm
working for IBM, which is all about
innovation. Innovation in quantitative
finance, innovation in regulation,
innovation in technology, the Fintech
Innovation, and the last one is
innovation in economic theory. This is a
forum on economics, whose title is also
"inclusiveness", so what I want to do with
you is basically to start with the
economic theory, we'll conclude with
inclusiveness, and in between we will
discuss a bit about regulation and
technology. So, why do we have a global
financial crisis? Everybody may have his
own opinion. I want to share with you the
opinion of Alan Greenspan, the former
chairman of the US Federal Reserve, when
after the default Lehman Brothers he
was asked by the US Congress to explain
what the global financial crises that just started was all about.
We listen to Alan Greenspan. Well, where do
you think you made a mistake then? I made
a mistake in presuming that the
self-interest of organizations,
specifically banks and others, were such
that they were best capable of
protecting their own shareholders and
their equity in the firm's and now our
whole economy is paying its price. Do you
feel that your ideology pushed you to make
decisions that you wish you had not made?
Well, remember that what an odd ideology
is. It's a conceptual framework with the
way people deal with reality. Everyone
has one. You have to to exist, you need an
ideology. The question is whether it is
accurate or not and what I'm saying to
you is yes, I found a flaw.
I don't know how significant or
permanent it is, but I've been very
distressed by that fact but if I may may
I just finish an answer to the the
question? You found a flaw in the reality?
Well, in the model that I perceived is the
critical functioning structure that
defines how the world works, so to speak.
In other words, you found that your
view of the world, your ideology was not
right, it was not working. That is precisely,
that's precisely the reason I was
shocked because I have been going for 40
years or more with very considerable
evidence that it was working
exceptionally well. So I wanted to start
from here because Alan Greenspan said
"I found a flaw in the model" which has
built economic theory after Second World
War.
Now, the Global Financial Crisis created
a big conundrum for financial
institutions because their cost income is
not sustainable any longer and financial
services need to transform. So what was
the response of the industry? Well, three
things happened: one is behavioural
finance, the second one is monetary
policy and the third one is the
regulation and the business model. Now, I
believe that if you understand that, we
know how true transparency we can
digitize knowledge to scale the
competence and transform financial
services for the benefit of our society.
So we start from behavioral finance.
Now, Alan Greenspan said: well the agents
and investors were not rational. That
doesn't necessarily mean they were
irrational, but the common belief is that
if you're not rational you are
irrational and that's when behavioural finance
became very fashionable. You know,
Richard Thaler got the Nobel Prize last
year for behavioural finance, because he said
that if you nudge someone that is
irrational
he goes back to become rational again.
But there is a problem with this model.
The problem is that it might not
necessarily work right at the time when
you need it. You can think about the
retirement crisis and what has happened
in Australia. The Australians were the
first to create superannuation funds,
basically to "super-nudge" individuals to
save a lot for retirement, making sure
that they would have enough money
because government would not be capable
of paying for everybody. What happened
is that in 2014/15, when the first baby
boomers started retiring, instead of
taking the money and buying products
like annuities (well it was actually
difficult because the interest rate were
very low and equity markets were not
performing, so they were actually very
expensive products) most of them took the
money and they went on vacation. So the
Australians had to realize that nudging
or creating incentives is not enough if
you don't make sure that this becomes a
"behaviour". Therefore, we need to start
with a concept of reality, which is the
real opponent of the concept of
rationality. Why do we need to start
from this one? Because only by
understanding how the homo sapiens
works, when he has to confront with the
uncertainty, we understand the way
people make financial decisions or other
decisions in the economy and in the
political system. You know, we are born
because we need to basically love, we
need to work, we need to have children, we
need to survive until we die. In our life
we need to face uncertainty continuously
and we need to find the way to do that.
But what happens is that we are used, in
the capitalistic system, to believe that
uncertainty can be somehow controlled
because we had an economic drift after
the Second World War. But Paul Krugman in
the 1990s, Nobel Prize for economics,
wrote a book called "The age of
diminished expectations". Well, basically
he said that the children of the American
families will have less opportunities
than their parents to make more money.
Therefore, the drift in the economy will
be negative and it will create what he
said is uncertainty, therefore social unrest.
We can call it the Brexit, we can
call it a transformation of sovranism, populism.
We can call it the gillet jaunes. So we
are actually seeing it today,
the fact that since uncertainty becomes
relevant to the individuals the
individuals change their behaviour. So we
don't understand anymore in economics if
people and companies and organizations
are rational or irrational. In reality
they're simply human, it is just the reality
of how you may react when uncertainty
becomes too large to cope with.
Now, what is the second issue here?
The second issue is therefore monetary
policy. So, on the one side we thought
maybe behavioural finance doesn't
work that well, on the other side we tried
to save the system by using the
quantitative easing. You remember Mario
Draghi with "whatever it takes"? Within our
mandate, the ECB is ready to do whatever
it takes to preserve the euro and
believe me, it will be enough. So the ECB
has been challenged
continuously for the
last ten years to save the
system (or a bit less given that the
financial crisis start in 2011). This has also
consequences. At the World
Economic Forum, in a conversation
among the CEOs, I remember the CEO of
UBS said that there is a problem with quantitative easing, because
the interest rates are so low it is
difficult for banks to operate on the
credit side and to make money after the
price for risk which continuously create a
credit crunch in the economy. My point
here is that monetary policy was
only used to allow the financial
system more time to breathe and to
restructure itself because it had to go
through a transformation, a change of the
business model, to make sure that it
could become more sustainable. But here
is another gap, in the problem of getting a
theory: the quantitative easing is also
accompanied by the idea of stability.
Stability is not the same concept of
anti-fragility. I know that we don't have
time to discuss this concept today. I
hope that you will have the time to
read about it inside the literature. The
point is that the too-big-to-fail might
create a problem because the dinosaurs
themselves were not too big to fail. So
the financial system is at the risk of
creating a further and bigger collapse
at the moment that quantitative easing
stops and basically is taken away from the
economy. So something else is happening.
The European Commission, which I believe
was aware of all these aspects,
thought about something else and it said:
well, we are actually starting to mutualize
the systemic put through regulation
which is based on transparency. You can
think of the PSD2, that means opening
the information of clients so that we can
create different services in front
of individuals. Or you can think of
the MiFID2 which is totally based on
transparency, which is the idea of
revealing the potential conflict of
interest of financial institutions in a
way that the regulation of the system
changes and makes the system more
resilient and more antifragile.
Now, I've been engaging a few of these
people through different conversations
and I want to report only those which
are publicly. The first one is Frederic Oudea, the CEO of SocGen.
Talking together at Paris Fintech Forum
two years ago he said:
the real transformation of financial
services these days, after the global
financial crisis, is a change from
transactions to services. Which, in my
language means: instead of selling
products with embedded fees, to
transparently packaging those products in
a mechanism called advice that the
clients are happy to pay for
transparently. The problem was explained by Sophia
Merlot, Chief Executive Officer
of a BNPP wealth management. She spoke
after us and said: we have asked the French
clients if they want to pay for services
and they said "pas du tout" and that means
"no way" because clients have a hard time in
understanding the value of the banking
proposition. But she said we want to do
that because it has to be in our DNA and
we know that the MiFID2 is asking us
to go through this transformation. I skip
Larry Fink of BlackRock but basically
the transformation is occurring also in
the U.S. not just in Europe.
The point here is that the FinTech
revolution is exactly the opportunity to
help financial institutions to go
through this transformation, from
transactions to services, in a
marketplace that due to regulation is
becoming more and more transparent. And
transparency, to become value-added to
generate a return on investment when it
comes to digital, requires to generate
value for the investors the investors or
the clients of the bank which now take
center stage.
That's a Copernican revolution:
the financial product is not anymore at the
center of the economic action of banks,
the client becomes the center of the
economic action of banks, because you
will have to pay directly for those
services. So then, we need to understand
what is value in this relationship.
This is Ginni Rometty, the CEO of IBM, last
year at Think 2018 in Las Vegas. She was
interviewing Dave Mckay, the CEO of
Royal Bank of Canada, and she asked Dave
a simple question. She said: Dave, what is
the value of digital (in a transparent
market)? Trying to create value not only
for customers but for our employees who
serve those customers,
bringing mobility, bringing advice,
bringing insight into data.  Knowledge,
value, and that's the equation.
So you see,
knowledge is value and that's why if you
followed me through these years of my
thought leadership in IBM, you'II recognize
that the late motive of most of my
presentations, here in Greece as well, is
the digitization of knowledge. Because
knowledge is what is transferred from a
financial institution to his client to
enable his client to take
transparently decisions for his personal
life, being that client an individual or
a small and medium enterprise. But now, I
thought that we needed to add something
else to this concept of the
digitization of knowledge, which is
basically at the core of this new book
"Financial Market Transparency" that is
the concept of Holistic Behavioural
Awareness, Because we need to make sure
that that everything that happens become
resilient in the society because we
cannot just make people responsible to
make decisions because there is the
MiFID2, because there is a MiFID
questionnaire. We also need to make sure
that people learn and understand how to
relate with their financial problem and with
uncertainty because it is a very difficult
concept to deal with. That is,
therefore, the reason why I believe that
only transparency, when is at the heart
of the design of digital platforms and
the transformation of financial services,
enables to create this value that is a
value-transfer to the individuals.
Because individuals are made
empowered to understand how to deal with
a financial problem and this is the only
way to create inclusiveness, making sure
that we can also use artificial
intelligence and digital technology to
re-skill people, to re-skill the bankers,
because also the bankers will have to
change in these transformation from
transactions to services. I want to
conclude listening to Ginni Rometty
again, the CEO of IBM. She was at the
World Economic Forum a few weeks ago in
a panel with other CEOs talking
about inclusiveness, which is the title
of the Delphi Economy Forum. Let's listen
to what she said for a couple of seconds.
With the new technologies that are out
there I think there is a huge
inclusion problem meaning there's a
large part of society that does not feel that
this is going to be good for their
future. Forget about whether it is or it
isn't or what we believe and that
therefore they feel very disenfranchised. And it's what led to Brexit, it's what
led to all of this that you've got to make it inclusive. Which means you have
to believe in some different things, I
believe, to go forward.
So you see, regulatory transparency is
changing the business model of banks
from a channel distribution of products
into a packaging mechanism of advice in
order to make sure that this is valuable
for the banks and for the clients, and we
need to change the mindset. It is
required to have a mindset shift. The US
president Abraham Lincoln in 1862,
one month before signing the Declaration
of Rights that freed the slaves, said that:
The dogmas of the quiet past, are
inadequate to the stormy present. As our
case is new so we must think anew and
act anew. Which is the reason why, after
having discussed innovation in
quantitative finance, innovation in
regulation, innovation in FinTech ... I
decided to add this piece which is
innovation in economic theory. Because
transparency is the element that can
turn change into progress. Because it
helps people to understand and creates
trusts against global uncertainty, which
is always on the rise. I was at the
European Banking Authority two days ago
discussing artificial intelligence and
the whole topic was: how we can make sure,
and we want to make sure, that the AI is
not a black box, but it is robust, it is
reliable, it is understandable, it is
ethical, it is not biased.
So this is our mission
for you in the digital economy. Thank you
Thank you very much Mr Sironi
