Andréa M Maechler speaks about the future financial system

Interview (originally in German) with Ms Andréa M Maechler, Deputy General Manager of the BIS, in the Neue Zürcher Zeitung, conducted by Mr Thomas Fuster and Mr Peter Fischer and published on 13 May 2024.

Ms Maechler, you spent eight years on the SNB's Governing Board. Last autumn, you moved to the Bank for International Settlements. Why? 

It was a difficult decision. The SNB is a fine institution. I was able to lead forward-looking projects there. This brought me into close contact with the BIS. They were looking for a Deputy General Manager and approached me. As the first Swiss woman in this role, I can contribute my experience in monetary policy and innovation – and I still have close contact with the SNB. 

To what extent did the fact that you were not appointed to the SNB Vice-Chairmanship in May 2022 contribute to the decision? 

The three of us on the Governing Board were jointly responsible for monetary policy. It didn't matter who sat where. It was always an honour for me to head the SNB's third department. 

In other words, you felt more attracted to the BIS than pushed away by the SNB?

Absolutely. I continue to work in the world of central banks. There are so many challenges in the financial system, in the global economy, in technology. These have to be tackled nationally within the framework of the national banks, but also internationally, as here at the BIS. 

There's a football with the SNB emblem on your desk. What's it all about? 

I supported the SNB sports club. Not as a footballer, but as a swimmer. I took part in the lake crossing in Zurich several times. Now I have this memento on my desk. As you can see, I have fond memories of the SNB. 

How does the culture of the BIS differ from that of the SNB? 

Both institutions belong to the world of central banks and have a clear mandate. But the BIS is of course more international. You always have to think globally here. 

For the uninitiated: What is the BIS actually doing in this round tower block near the Basel railway station? Why is it needed? 

For three reasons. First, we are the bank for the central banks. The central banks bring their deposits to us. With our help, they can diversify their currency reserves or operate on the foreign exchange market without necessarily becoming visible. Second, we provide food for thought and create consensus. Basel gives its name to important standards in the financial system. The heads of central banks come here in person every eight weeks, whether from Sydney, Tokyo, Washington or other metropolises. They don't come for the good food, but because they can exchange ideas openly here. Central banks are relatively isolated. This makes the exchange of information all the more important. 

And the third reason?

Third, our innovation hub researches new technologies to solve problems in the financial sector, and these technologies are then often applied in practice. 

Keyword innovation. Let's take a look into the future. What will be different in the global financial system in 10 years' time than it is today? 

Let me first emphasise what we believe should remain. Regardless of the technological changes, we need the two-tier financial system, consisting of central banks on the first tier and commercial banks on the second. The central banks provide the commercial banks with central bank money, which they can use to securely settle systemically important transactions with each other. And the banks offer households and companies financial services, grant loans and create commercial bank money in the form of customer deposits. 

So that's not going to change? 

No, that must not change. Central banks are the anchor for confidence in money. Through their monetary policy, they ensure price stability. Through their function as lender of last resort, they strengthen the stability of bank deposits. They are the only ones who can offer a risk-free medium for payment transactions. This is essential for a secure financial system. But central banks do not want to take over the tasks of commercial banks. 

Won't the new technologies make banks superfluous because people will be able to exchange money directly with each other much more easily? 

Many things are changing. The private sector is very innovative – and that has to be the case. But regardless of innovation, the principle of the two-tier financial system must be preserved. Commercial banks are allowed to create money, but ultimately they have to settle their transactions in central bank money. This is the only way to ensure that a franc is always a franc, regardless of its form. 

Back to the initial question: What will change?

Technology is a driving factor, and artificial intelligence is becoming increasingly important. We know from the development of the internet: people expect everything to be faster, simpler and cheaper. Thanks to WhatsApp, you can now make free calls all over the world. The same is expected of the financial system. 

What does that mean? 

Tokenisation is coming to the fore. It has the potential to be the next phase in the trend towards the digitalisation of money. Through the digital representation of assets, tokenisation enables the exchange of assets on a digital platform. This is just as it happens with cash in the physical world, but without the long processes of messaging, clearing and settlement that take place behind the scenes. This is still futuristic. But the BIS is taking a multi-pronged approach: we are designing the future system and at the same time trying to improve the existing system.

Can you give an example? 

One aim is to make payment transactions across national borders significantly faster and cheaper. In the BIS Nexus project, for example, Asian central banks are linking their real-time payment systems with each other. 

Is technologisation making the financial system more stable or are the risks increasing?

I am paid to see risks everywhere. Two things need to be differentiated: the technology and the framework conditions. Security is ultimately a design criterion; you have to build it in directly. But even with the best technology, risks will remain. Good governance is required here, together with a solid set of rules and a legal system.

And where do you see risks?

 For innovation, the private sector needs room for creativity. But at some point, regulation may have to intervene. This is evident in the case of cryptocurrencies, ie unregulated private money. Cryptocurrencies are very insecure and volatile and represent a risk. Investors need to be aware of this.

Cryptocurrencies and tokenised intelligent contracts, so-called "smart contracts", show that innovations harbour the risk of a growing fragmentation of the financial system.

This can happen if tokenisation is not approached correctly. However, if it is designed well, diversification of platforms and technologies can strengthen the stability of the overall system. Above all, I see efficiency gains. Think about cross-border transactions. Today, every country has different regulations, tax rules, money laundering rules. In the future, all of this could be recorded electronically with smart contracts and processed faster and more cost-effectively in digital form.

Can you give an example? 

Imagine a young Swiss music streaming company. If this company wants to buy Korean pop music, things get complicated: it has to go to the bank and order a payment in Korean won. This is time-consuming and expensive, especially for smaller amounts. The BIS has launched the Agorá project with seven major central banks, including the SNB. This brings together tokenised customer deposits and tokenised central bank money on one platform. This would allow the young company to do business with Korea more quickly, easily and cheaply.

Everyone is talking about it, but little has happened yet. The digital Swiss stock exchange SDX is struggling to get transactions onto its platform.

Blockchain infrastructure, tokenised smart contracts, machine learning, artificial intelligence: it's all coming together now and will take time. The right regulatory and legal framework needs to be created. Will the new technologies prevail in the financial sector? We will see. That's for the private sector to decide. As central banks, we want to set the framework and be in a position to make central bank money available to the new platforms in tokenised form, should there be demand for it. This is already the case in the Helvetia project with the SNB and SDX.

Many central banks are not only examining digital central bank money for such interbank platforms. They also want to issue digital pounds, yuan or euros directly to consumers and companies. This would fundamentally change the two-tier system; the central banks would become banks.

 Not necessarily. Theoretically, you could develop a central bank money for everyone that does not change the two-tier system and is completely like cash. That is a question of design. Once again, technology should not be confused with the framework conditions.

Why would you need digital central bank money for everyone, so-called retail CBDC, if it wouldn't change anything?

There are countries where some people have no access to the financial system. Or where there is too little competition in the banking system or cash is hardly used at all.

If I can switch my money into retail CBDC immediately in uncertain times, that's the perfect prerequisite for a digital bank run.

Not necessarily. It's all a question of the specific design.

Some fear that the central banks want CBDC in order to gain total control over all financial transactions.

I don't see that at all. Central banks want to ensure confidence in stable money. Money is a public good and central banks don't just want to have central bank money as a means of payment – commercial bank money also plays an important role.

Cyber attacks are a growing risk. One in five of these attacks targets banks, as the International Monetary Fund recently announced. How well prepared is the financial system?

Cyber attacks are increasing rapidly, as are their costs. Investment in cyber resilience, on the other hand, is increasing less rapidly, at financial institutions or at the national or international level. More needs to be done for cyber security, including the exchange of information.

Banks often have little incentive to publicise such information because they fear a loss of reputation.

In some countries, there is an obligation to publicise cyber attacks. The fact that the data and internet revolution of the past 20 years has taken security into account only as an afterthought is now taking its toll. This must no longer happen. In future, security must be embedded in the architecture.

If banks do not attach enough importance to cyber risk, how can this be changed?

First, we need to better understand the risks. Then we need stress tests and preparations at the national and international level. Much more needs to be done.

One consequence of the digitalisation of the financial system was seen at Credit Suisse in March 2023. Observers talk about the first "digital bank run" that took place at the time. What lessons should be learnt from this?

The speed and interconnectedness of technological change has increased enormously. We need to be better prepared if a problem arises as a result. The Credit Suisse case has shown that in a crisis, central banks must be able to quickly provide liquidity not only in their home currency, but also in foreign currencies. And in future, an internationally active bank must be in a much better and faster position to provide the necessary collateral in a realisable form. This must be regularly tested operationally.

Was the BIS disappointed that CS was not restructured under the prepared too-big-to-fail regime, but sold to UBS?

It was the first systemically important bank to run into existential difficulties under the new standards. A first test is always difficult. With the chosen solution, there was no major crisis in Switzerland or abroad. The Monday morning after the crisis could have looked very different. The probability of contagion was high. In my opinion, the solution chosen was a good one. You can now ask yourself: is the glass half empty or half full?

Please tell us.

Cooperation between the international supervisory authorities has worked well, and the system was more solidly prepared than 10 years ago. Following the bank collapses here and in the United States, various weaknesses have become apparent internationally. These need to be addressed in order to be well prepared for future crises, whether through reorganisation, resolution or mergers. The bank collapses in Switzerland and the United States were sobering. They showed once again that the first line of defence remains sound risk management and corporate governance. Supervisory authorities around the world need to be strengthened and better equipped – especially when new technologies become established.

Wouldn't it be better if the banks simply had more equity?

Equity is certainly very important. Once again, it has been shown that there can be large gaps between the equity recognised for regulatory purposes and its market value. The function of hybrid equity and liquidity must become clearer.

Should central banks take on a more centralised role in protecting against financial crises? In some countries, banking supervision is formally the responsibility of the central bank, but in Switzerland this is the task of FINMA.

I don't want to comment on the specific lessons for Switzerland. I don't think there is an ideal system. The question is how the existing systems are interpreted and implemented: Does each supervisory authority have the necessary competences and instruments and can it use them? Is there political will behind it and does the cooperation between the various bodies work well? Everyone must be well prepared for their assigned task. There is still a lot to do.