Transcript of Question & Answer Session Geopolitics and the Financial System: Some Echoes From History

Firstly, it’s a real pleasure to be presenting this Q&A with you because I’ve seen firsthand so much of the work you have been doing to address the issues that you’ve spoken about today in payments, innovation and beyond. And I completely agree with that clear message that these are really important issues to identify, understand and effectively manage. We’re seeing those issues in practice every day at the moment. And the historical context is really important as well, to understand both the present and the collective efforts that we need to face this uncertain future together. Reminds me a bit of Churchill. The further, the longer you can look back, the farther you can look forward. So with that a few questions, if I may. Just to pick up where you ended, how has the rise of geopolitical and operational risk changed? How industry should be thinking about the risk to their operations and financial instability more generally?

I think there’s probably three significant differences. The first is these risks transcend neat risk buckets and neat organisational silos. They don’t respect silos. They cut across institutions and, in fact, the issues actually cut across the economy and society in really complex ways, and that brings to the fore some pretty significant coordination challenges. So that’s the first. The second is they potentially give rise to the possibility of multiple shocks occurring simultaneously and with great speed and ferocity. And I think the third is they really behoove us all to think much more deeply about dependencies, including the dependencies we have on infrastructure that sits on or outside the perimeter of the financial system, which is not a mode of thinking that many of us have really had to lean into up until relatively recently.

That makes sense. And on those dependencies outside of the individual banks in the room, you focused quite a bit of time on the importance of payment system or our payment system being robust to disruptions domestically and internationally. Can you expand on that a bit?

Yeah. This has been a major focus for the Payments System Board for quite some time now, as indeed it is for the Council of Financial Regulators. Payments are the lifeblood of the Australian economy. Just to give you some sense of orders of magnitude, we have more than $300 billion each day just going across our rails at the RBA. And so the IRI, the Industry Resilience Initiative, is critically important to ensuring that our payment system is able to maintain continuity of service across a range of stress events. There are big coordination challenges here because, as those who work in the industry well know, it’s a very diverse ecosystem. The different set of challenges for retail payments vis-à-vis wholesale payments and also physical cash distribution. So it’s a vast area, but we have been leaning into this space pretty hard and will continue to do so. We very much encourage industry to join us on that journey. We also know that from the country’s experience with national disasters, that disruptions to the payment system can very quickly mutate from just being an issue for the financial system to having much broader implications for social cohesion. And so this is really a very important piece of work.

And those volumes are remarkable, as you say, across RITS, across the swift messaging system, as well as international payments through CLS, so they really warrant consideration. So then when we think internationally, how do you think the Australian financial system is positioned compared to others internationally to absorb these types of shocks you’ve been speaking about?

Yes, I can begin by echoing a point that John made which was the initial conditions in the Australian financial system are strong. That’s important to recognise. There’s a but coming. The but is the nature of the external environment, the rate of deterioration in the external environment is such that there really is no room for complacency. And so that’s why it’s really the subtext to my remarks today and John’s earlier this morning. I think there’s some areas where Australia is on or very close to the frontier, in terms of resilience, and there’s some other areas where we’re not quite there. I think the really important point to recognise here is our system is only as strong as the weakest link. The financial system almost uniquely hangs together by trust and confidence. And so it’s important not just to have the very largest institutions highly resilient, but we need to, over time, shrink the gap between the most and least resilient, and that’s a very important message that I and my colleagues on the CFR would like industry to hear.

Trust takes a long time to build, very easy for it to be lost quickly, and we have such volatile markets at the moment. You’ve spoken a lot about innovation and resilience being able to coexist in our markets. How do you think about those concepts of the interaction between innovation and resilience in this context that we’re talking about?

Yeah. Look, clearly the world’s a scary place, but the solution is not for us to all hide under a rock. I think historically there has been a bit of a tendency to think about there being a trade-off between resilience and innovation. I’m less convinced of that. Actually I think innovation is foundational and critical to our ability to maintain resilience for the foreseeable future. You almost think about it like the old Venn diagram, the space in the middle where innovation can reinforce resilience is a space where I and my colleagues are very interested in exploring and working with industry. We see this in areas in the payment system. The development of new functionality under the IRI is helping to make our system more resilient. We see it in the types of defensive AI capabilities that are being developed. We see it in the types of behavioural analytical techniques that are being used to spot insider threats. So the solution here really is to fight fire with fire and to not recoil at all from innovating. I would maybe just finish on this note. I think in the relatively frictionless world of recent decades, industry tended to compete overwhelmingly on efficiency. The world that I’ve sort of sketched out today, and that we heard from John this morning, I think speaks to an opportunity where industry can compete on resilience going forward. I think the value that not just regulators but, in fact, Australians will place on having strong resilient infrastructure, strong resilient capabilities, is going to be paramount and over time may well be – industry may well view that type of resilience as a source of comparative advantage, as distinct from it just being a cost that gets in the way.

As you say that balance between our efficiency, security, resilience, that’ll be really interesting for each institution here to deal with. So I think we’re conscious of time. Thank you very much to Dr Brad Jones for your comments today. We really appreciate them. It’s been very clear. So thank you very much.

Thanks, Max. Thank you.