Monthly BIS Update

Below is the monthly update from the Bank for International Settlements. We featured the video discussion on the policy response to the COVID-19 pandemic in an earlier article.

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August 2020

Cross-border bank lending jumps Global cross-border bank claims surged by $2.6 trillion in the first quarter of 2020, with a particularly strong rise in lending to borrowers in advanced economies.

Improving cross-border payments The Committee on Payments and Market Infrastructures sets out building blocks towards a roadmap to improving cross-border payments. Credit risk framework The Basel Committee has published a new credit valuation adjustment risk framework for derivatives and securities financing transactions.

The economic policy response to Covid-19 Agustín Carstens joins Ben Bernanke, Tharman Shanmugaratnam and Janet Yellen to discuss the economic policy response to Covid-19 at a virtual seminar organised by the Yale Program on Financial Stability.

Swap lines and dollar funding  Swap lines have met the short-term dollar funding needs of non-US banks, but corporate dollar funding needs loom large.

More BIS publications  FSI Occasional Paper: Managing bank failures The European framework for bank failure management requires amendment to adequately deal with mid-sized banks. Irving Fisher Committee Publication: Enhancing fintech statistics The Irving Fisher Committee sets out a map to enhance the statistical measurement of fintech. BIS Bulletin: Covid-19 drives inflation risks Inflation risks – downside, upside, or both – have increased almost everywhere as a result of the pandemic.

Robert Bell of KlickEx Comments on Monetary System Reform

Readers here know that we have featured New Zealand based KlickEx on the blog several times in the past. KlickEx is on the front lines of innovative technology for cross border payments systems and for technologies that can be used by central banks.

KlickEx Founder Robert Bell is recognized globally as an expert in payments technology and for creative ideas on how to promote financial inclusion in places where it is needed the most (such as the islands of the South Pacific). Robert has also been a great mentor, willing to share his knowledge and experience on the issues we cover here over the past few years.

Robert kindly agreed to do a Q&A style interview for readers here discussing his thoughts on the current status of monetary system reform and its potential for the future. He works with central banks and banks around the world, specializing in real time cross border payments that help promote financial inclusion. 

Last fall he announced a partnership with IBM and Stellar to implement what he described as the first institutional scale payments system to run on a blockchain platform (which we covered here). So he brings us an inside perspective on the latest information available regarding what is happening in Fintech and the potential for monetary system reform globally.

Robert Bell - KlickEx

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Q: After the 2008 financial crisis, many people felt that some kind of major reform to the existing US dollar based monetary system was close at hand. In fact, that was the very reason this blog was launched. Why do you think we have not seen any major reform to the global monetary system so far at this point in time?

A: Wow. This is a great question. I was one of the people who wanted to see the reform - very much - as I was inside banking at the time, and was more convinced than most, that banking as we knew it, wasn't as important as people inside the industry believed it was (as it stood then). 

In my opinion, at that time, central banks were sitting on their hands, believing in a set of financial theories that were very incomplete, and as a result,  what we saw was an utter embarrassment to the establishment. The bit I think was worst, was called the Capital Asset Pricing Model, and it had an extremely stupid assumption: That the market knows best. It allowed mathematical proofs to be built on this, and as we know, the market doesn't always know. It's the best we have, but it's almost never correct, otherwise it wouldn't change so much every day.

The danger of this is a complete lack of inherent responsibility to disclose what you know of what you sell. A lack of good faith. And CAPM eventually leads bankers to believe that something is of merit, if someone else will buy it, no matter how bad it is, no questions asked. And others buy things, because math tells them too. It's very dangerous. That led to what was primarily a greed and stupidity crisis. And it was potentially unbounded in scale. It wasn't really anything to do with the structural functioning of the system, but the human institutions that run it, in the back rooms, and the ethics involved on risk and honesty when things are bought and sold. 

When it all fell down, the people managing billions and trillions of dollars of assets allocation based on assumptions that profit alone, and worse still, short term profit, was the sole important measure of virtue, were at fault. A new system of any sort, doesn't change this. A Blockchain doesn't either. People will still find their way in - or worse - sell rubbish claiming to be gold. And that's the problem with "the system": People's desire to short change others as quickly and as comprehensively as they can get away with. And that's nothing to do with computer science.


Q: KlickEx has been at the forefront of Fintech innovation in payments systems as proven by your recent partnership with IBM and Stellar. Do you think that cross border payments system technology will eventually be adapted for use by central banks in reforming the overall monetary system?

A: Yes and no. The systems will be put in place, but it's unlikely that central banks will run it. The issues central banks face here are primarily around jurisdiction; and how to manage conflicts of interest between factions of a super-national governance body is a large body of work that has to be established and maintained. It's what happened in Europe with the  Sovereign Debt Crisis, and it's what happens when Bitcoin Exchanges fail. But countries cannot fail, we don't have that luxury in Developed Markets; else they'd be emerging markets...! 

So the systems end up being owned by banks and then become narrowly focused on providing tools to the biggest banks (SWIFT, CLS), excluding smaller ones. The ones owned by government (FedACH, SEPA) are slow and inefficient and end up ineptly serving the lowest common denominator. The ones in the NGO (non governmental organization) sector lack drive and are often berated by Bank and Government competitors, to the point where good initiatives get lost (e. g. Gates Foundation's MojaLoop) in the same way Government ones do. Exceptions are Visa and Master Card, and China Union Pay, vs American Express. 

To answer the second part of the question, the system isn't necessarily broken, it's just slow. The technology for real time payments has existed for a long time. The technology, like military technology, often takes a decade or more to test and prove and deploy - and can be 30 years old before it goes live, unless in wartime. Banking is similar - it's not about how fast you can go when the trajectory is upwards and exciting, but about how slowly you go downward when the trajectory is negative and terrifying.                                             (note: I added the underline for emphasis)

Q: Do you see a future for private blockchain based cryptocurrencies to evolve into a viable and sustainable alternative to the current monetary system?

A: The key there is cryptocurrency. Blockchain is just another database system, that is almost free to adopt, but increasingly expensive to maintain. We know, a bank will spend a billion dollars on a system that promises to be nearly free in the long term. Blockchain is the opposite. Which makes it perfect for startups. It's brilliantly free to copy, clone or fork, but try and make it run at a billion transactions per second for under a cent per instance, and it is a monumental failure on a scale that the world has never seen (compared to the claims made). It's just lucky that cryptocurrencies have no scale, otherwise the colossal impossibility would be a realised failure. 

The entire market cap of cryptocurrencies, is less than about an hour of what banks transact over morning coffee, day in and day out. Banks have capacity to process more than 10 Quadrillion transactions per year. Cryptocurrencies have so many flaws, that most people don't have the skills to acknowledge or even recognize that...

They just know it's cheap to start, and easy to raise money for it.  That's not to say it's all doom and gloom, but just like any technology, and just like the Blockchain solution we've seen in the Pacific, it's not really what technology is used, but who is using it that is most important. As you've seen with IBM, Stellar, and KlickEx, knowledge over enthusiasm will steer the direction of change in the monetary system going forward, I believe.


Q: Five years from now, do you think the global monetary system will look very different from what it is now or pretty much the same?

A: Very similar. Just faster. There will be less change than moving from Windows95 to Windows2000 - or from Skype to WhatsApp, for the younger generation. Or perhaps a similar difference between the special effects in Hollywood movies between the movies Terminator and Terminator 2. What will noticeably vary is what can be done on top of the existing infrastructure. 

Today's infrastructure is very efficient if you are a large bank. But those efficiencies don't filter down to people (end users). And people are getting a bit sick of being excluded from efficiency. This is our experience - and what we've been working on in the Pacific: taking the long-standing abilities of banks to price and trade foreign exchange, millions of times per second, at fractions of a percent per time, and sharing that with more people.

Q: What else would you like to say to our audience about the future of the global monetary system?

A: Have some faith. Be noisy with your frustrations. When we (KlickEx) started, banks would lobby with all their might, saying that nobody cared about real time payments - and that payments were risky (when the source of risk is actually the customer initiating the payments). 

They battled with all their hearts - because of colossal benefits to banks of status quo - but eventually fell to inevitable modernisation with the pressures of competition. The system is better now, than it's ever been. And it's still better than any alternative. However, everything can improve. It it's not free and instant, it can be improved. So watch this space!                                                                                          (note: I added the underline for emphasis)


Thank you for your time and willingness to share your knowledge and real world experience. I am struck by your comments about how much the current banking system likes the status quo and how long it takes new technology to be tested and deployed. This is very much in line with what we have been reporting here on this blog. Things tend to move slowly unless some kind of crisis (like war in your analogy to military technology above) speeds things up.

Before we finish up, I noticed that recently you announced the news that the KlickEx Foundation will be active in a number of interesting projects to improve lives and living conditions in the South Pacific. Could you share a bit of that news with us and your level of excitement about taking on this project?

A: Thanks for asking! We have done a huge amount of good work already, seeking to advance the interests of our communities though monetary technology and instrument innovation. They may not seem like overlapping spheres of influence - but we have learned that they really are. We've channeled more than a billion dollars of direct private aid into almost 70% of the households in our markets in the Pacific - and have been cited by the UN for lifting household income by over 20% of GDP per capita.

We have a huge range of additional programs going too, from nutritional programs that have become the highest rated TV Series in our market, to our ocean filters that promise to remove the equivalent of millions of plastic bags worth of micro-waste per week. We have robotic farming and renewable energy programs, combined with micro-nutrient organic agriculture and Industrial scale environmental carbon reclamation harvesting. All of these projects are funded from monetary services that are saving families millions of dollars per week in one of the most underpopulated, but ecologically significant regions in the world. So yes, we're not only talking about the work were doing in banking, where there is much more to be done, but also in the physical environments where our stakeholders live. It's a big challenge - but scale isn't something we've shied away from yet.

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My added comments: I really appreciate Robert taking time from a very busy schedule to share these thoughts with readers here. As you can see, Robert is a creative problem solver working in a sector that traditionally prefers the status quo and moves very slowly and cautiously towards any significant change. I found this comment about Robert on the KlickEx web site attributed to Jesse Lund of IBM who is partnered with Robert and KlickEx in the Pacific region (see what our clients say):

"In over two decades working in financial services, fintech, and technology, I have never encountered a more gifted financial professional than Rob. His ingenuity and creativity is rivaled only by his integrity"  ---------  Jesse Lund - Blockchain and Digital Currencies at IBM

I would second that statement. Having known Robert now for a few years and with lots of email exchanges over that time to discuss events and issues, I am struck by his incredible perseverance and desire to not only build a world class company, but to do what he can to make the world a better place along the way within his sphere of influence. We need more people in the private sector like this doing more things like this.

The KlickEx Foundation is the fulfillment of his deep desire to give back to the community in tangible and practical ways that really impact people's lives. I don't know very many people who would invest a considerable portion of their profits and give up significant personal time (while managing a very busy schedule) to attack a growing problem like the proliferation of plastic in the oceans. Everyone agrees this is genuine problem. Robert is doing what he does. He is not complaining about the problem or the causes of it, he is trying to help be a part of fixing the problem. 

I hope any readers here who have an interest in the problem of plastic buildup in the oceans or other projects that the KlickEx Foundation is tackling will visit their web site and take a look at the work being done. If you find the projects of interest, you might consider helping them out. Anyone can help with a donation (any size is appreciated) if you are able. 

You can also help out just by making others aware of the Foundation and it's web site link. You never know who might want to help out if they only knew of the work being done. Any form of help is meaningful and much appreciated! If you have questions about the Foundation or its projects, there is a contact form available here.

Added news note 6pm 8-12-18: Robert Bell advised me today that at the moment his thoughts are focused on the people of Vanuatu as they deal with a volcanic eruption that is forcing the evacuation of thousands of people off the tiny island of Ambae. So we hope that efforts to keep everyone safe will be successful and the aid needed there will be able to get through to those who need it.

Added note: For the record, I do not have any financial affiliation with KlickEx or the KlickEx Foundation. I included the information above related to the Foundation simply because I was impressed with their work and goals. Robert did not ask me to promote the KlickEx Foundation in any way. 

I view Robert as a global expert in Fintech and cover his views as news related to the potential for monetary system reform from someone who is on the front lines of what is happening currently in the real world on a daily basis. Because of this, I will add this article to our marketplace of ideas for monetary reform page.

IMF: Fintech and Cross Border Payments

We have covered quite a bit of fintech news lately because that topic has emerged as the most likely to impact the overall monetary system whether because of private virtual currencies challenging the various legal tender currencies around the world or because a number of central banks are looking at implementing some kind of central bank digitial currency (CBDC).

The IMF has made it clear that they are also following all this closely to see where things may be headed. Here we have a recent speech by IMF Deputy Director Dong He on the topic of Fintech and Cross Border Payments. Below are a few excerpts.

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"It’s a pleasure to join you here today, at Ripple’s “Central Bank Summit,” as we explore some of the key issues facing central banks raised by the current acceleration of progress in “fintech.”

The IMF has been carefully studying the trends in fintech, and my colleagues and I have gathered some initial thoughts about the way that the financial realm is likely to change. We’ve also been weighing how financial regulation and central banking will need to respond."

. . . . 

"In my remarks here today—focusing on implications of fintech for cross-border payments, I'll explore three broad areas:

• First, a sketch of the economic framework on how fintech applications will affect financial services and the market structure.
• Second, the current landscape of cross-border payments, and the possible evolution of cross-border payment systems; and
• Third, the role of central banks, themselves, and the possible reasons for them to issue their own digital currencies."

..........

Central Bank Digital Currencies

"Let me now turn to a second possible avenue for DLT application to be used as a means of payment: Central banks could offer their own digital currencies.

A “Central Bank Digital Currency—let’s call it, in shorthand, a “CBDC”—would not be a parallel currency. It would merely be a digital form of central bank money that can be exchanged in a decentralized manner. In other words, it can be transferred or exchanged peer-to-peer, directly from payer to payee without the need for an intermediary.

Such a CBDC would be exchanged at par with the central bank’s other liabilities (its cash and reserves)—either through banks or directly at the central bank."

Why Issue a Central Bank Digital Currency?

. . . . . . 

Please click here to read the full article and see the answer to this question

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My added comments: I publish this kind of information not only to give readers a look at what the IMF and others are saying on these issues, but also to try and illustrate how these changes are unfolding very gradually and the outcome is by no means certain or predetermined. I see a lot of speculation that "China is about to replace the US dollar with a gold backed yuan" or "China will endorse a gold backed SDR to replace the US dollar" all the time. Many articles suggest that these kinds of major changes to the existing monetary system are about to happen any time now. 

Of course, I can't possibly know for sure what is going to happen in the future or when something major might change in the global monetary system. We have listed many potential triggers for that kind of change that really do exist and are pretty much present all the time despite the fact that no such changes have taken place so far. 

Also, there is no doubt that both Russia and China (and probably a number of other nations) are working towards the day when the US dollar does not hold its place at the primary global reserve currency. We see obvious proof of this all the time in both statements of officials and actions taken by those officials in those nations.

However, if you take the time to read what the various central banks, the IMF, and the BIS have released publicly on all this, you do not see any indication at all that they are moving rapidly to towards any major changes in the current monetary system dominated by the US dollar as global reserve currency. 

There is a lot of talk, a lot of studies, and a lot of various new technologies being introduced and tested that could lead to some big changes, but none of them appear to be leading towards a major global change in the near future as best I can tell. It feels like a universal technology standard formed by consensus (of the banks and central banks) needs to emerge first and we seem to be in the process of working through that now with a variety of concepts being tested. I view it as somewhat like the old BetaMax vs. VHS battle for standard universal adoption for video players back in the day (more on that in an article next week).

It appears that a slow and steady gradual movement towards change is underway driven by innovative new technologies. But the process will probably take some time to unfold at the current pace without some kind of major trigger (like a global crisis that took out the current monetary system). The best evidence I have from what I consider to be excellent and very high credibility sources is that we might expect to see a few central banks test out a central bank digital currency by next year. If that goes well, then others may follow and some of the bigger central banks might be tempted to test that out as well. If it does not go well, expect major central banks to be very cautious about making any big changes. My guess is that the IMF will sit back and watch all this to see how things turn out and which technology gains consensus widescale adoption in the banking system (or if any of the new technologies are able to obtain that status).

While I can't be sure what China and/or Russia might do of course, I don't expect them to try and force some kind major change to the existing global monetary system before all parties who would have to be involved in that are ready to agree on that. I don't find any public evidence that anything like that is anywhere on the near horizon despite articles I see constantly that speculate along those lines. The US seems to view efforts to undermine the US dollar globally somewhat along the same lines as a declaration of war (here is an alternative media view on that idea). I always remain open to evidence to the contrary should it arise.

As always, an unexpected crisis event can change things quickly. The most probable known event that could be in that category would be if the US is unable to resolve its problems with North Korea without a major shooting war taking place (Jim Rickards latest analysis is still 70% chance for war). The could certainly be a trigger for a major disruption of the current monetary system so we will continue to monitor that situation until it is resolved one way or another. (added note - see Jim Rickards Twitter comment on North Korea here)

By mid 2018, I feel like it will be pretty clear if any of this will lead to the kind of major monetary system change we watch for here and if further regular articles are really needed. It may be that I can just go into "monitor" mode and only produce an article if something that is significant in terms of monetary change surfaces.