Conversations on Central Banking: Finance As Information [Webinar Recap]
Conversations on Central Banking: Finance As Information [Webinar Recap]
Asia School of Business, established in 2015 by Bank Negara Malaysia and MIT Sloan School of Management, is a leading school of management with a mission of developing transformative and principled leaders who will contribute to a better future and the advancement of the emerging world. ASB offers a Master of Central Banking program, a rigorous residential program offering a uniquely central banking-focused curriculum designed to equip central bankers for the challenges of the future.
The financial sector has always been information-hungry and an avid adopter of technology. Timely information has always given traders an edge in buying and selling assets, from the time financial institutions first adopted early telegraph and satellite images to gain an information advantage. With the evolution of technology, tools providing critical information have expanded to include artificial intelligence, machine learning, and blockchain technology.
Recently, ASB hosted a webinar as part of its “Conversations on Central Banking” series, focusing on the fast-changing world of #digitaldata, and the promise it holds in creating financial markets that are profoundly better informed. This information revolution is especially exciting when it supports new financial instruments and wider access to financial markets. Two eminent panelists, Robert Merton and Agustin Carstens, discussed how they see the financial markets changing and the role central banks may play in the process.
This article recaps the conversations by highlighting key takeaways from the discussion on how big techs impact financial regulation, comprehensive public policy, competition policy, and data privacy across the market.
We had two distinguished panelists discussing the impact of digital data on financial markets and financial intermediation:
Panelist Robert Merton, School of Management Distinguished Professor of Finance, MIT Sloan and co-chair, Asia School of Business
As a Nobel Memorial Prize winner in Economic Sciences and the co-chair of Asia School of Business’ Master of Central Bank Advisory Council, Merton’s research focuses on finance theory, including lifecycle and retirement finance, optimal portfolio selection, capital asset pricing, pricing of derivative securities, credit risk, loan guarantees, financial innovation, the dynamics of institutional change, and improving the methods of measuring and managing macro-financial systemic risk. He earned his Bachelor of Science in Engineering Mathematics from Columbia University, Master of Science from the California Institute of Technology, and a doctorate in economics from MIT, which he later joined as a faculty member. Merton taught at Harvard University and then rejoined MIT when he became Emeritus.
Panelist Agustin Carstens, General Manager, BIS and Former Governor, Bank of Mexico
An economist, Carstens previously served as the governor of the Bank of Mexico and presently, as the Bank of International Settlements manager since 2017. He previously served as the managing director of the International Monetary Fund, the secretary of finance in Felipe Calderon’s cabinet, and the treasurer of the Bank of Mexico. He is part of Bloomberg’s 2011 50 Most Influential list.
Eli Remolona, Professor of Finance and Director of Central Banking at the Asia School of Business moderated the webinar.
Let’s look at the key takeaways from the hour-long discussion.
Understanding the DNA of Big Techs
In his opening remarks, Agustin Carstens discussed how big tech companies like Amazon, Facebook (now Meta), Google, Alibaba, and Tencent have business models enabling direct interactions among many e-commerce platform users, social media, and search engine users. He spoke about the main features of a big tech business model, including data analytics, network externalities, and interwoven activities (also called “DNA”).
He gave a strong example citing how payment services generate transaction-related data that can be analyzed; network externalities facilitate interaction among users, which helps drive other services such as providing credit, attracting more users. More users provide the critical mass of customers to offer a wider range of activities, which yield even more data.
Considering that the DNA of big techs pose huge security and other risks, regulation needs to address these risks and mitigate distortions in the competitive framework between banks and big techs. The DNA concept allows comparison between banks and big tech business models, which can be powerful in enhancing efficiencies, financial instruments, and financial inclusion. For example, detailed user data from other businesses may have the ability to reduce costly loan collaterals. At the same time, this DNA loop carries several risks associated with privacy, consumer protection, market, and financial instability, therefore requiring specific regulations to govern such entities.
Presently, big techs hold licenses that allow them to carry out specific activities such as providing credit, managing wealth, making payments, etc. However, akin to banks’ prudential requirements, these are not subject to entity-based rules. The objective of incorporating a new regulatory framework is to ensure efficiency and fair competition, financial stability, market integrity, and consumer protection by promoting a level playing field between big techs and commercial banks.
Gaining Ground Across Jurisdictions
Recent regulatory developments already hint at elements of an entity-based approach for big tech firms, particularly the US House of Representatives Subcommittee, which published a list of recommendations in October 2020 to regulate big techs in terms of Antitrust, Commercial, and Administrative Laws. In November 2020, the Chinese administration for market regulation published a set of guidelines for internet companies for consultation. In December 2020, the European Commission also published proposals towards the Digital Services Act and Digital Markets Act.
Using Market Information & Prices
In the next part of the conversation, Robert Merton focused on two areas of financial information:
(i) The role of markets in producing information
(ii) The digitization of financial services and the role of information there
Merton stated that the manifest function of major financial markets is transactions, which has a critical latent function of providing information. He highlighted that information depends on both the quality and the nature of its aggregation, depending on the number of resources spent by an organization or entity to gather information, especially exclusive information, and transform it into actions in the form of market prices. “If information is more institutionally dominated, then its value is weighted by the size of transactions in general. That would suggest that the quality of the information reflected in that extraordinary aggregation is fairly high.”
He stressed the importance of looking at markets as an exogenous source of information instead of an endogenous reflection. The idea is to make optimal forecasts using market information and private information. He concluded that tech is mainly focused on scraping data from existing markets. Still, innovative companies are now taking advantage of technological advancements to better analyze the existing markets and discover new markets.
The webinar included a lively discussion with listeners who asked questions about the impact of information aggregation, how central banks and regulators use such information to set regulations and policies, and how this can lead to an alteration of the overall information content.
This webinar was one of many in the “Conversations on Central Banking” series, featuring a global lineup of central banking experts, professionals, and practitioners who discuss and share their views on emerging trends and issues in finance and central banking.
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