Remarks by Axel van Trotsenburg at the 15th Supervisory Conference, Vienna, Austria

As prepared for delivery

Thank you, Ms. Milborn, for your introductory remarks. I would also like to thank the financial supervision authority for the kind invitation, which was extended to me by Helmut Ettl and Eduard Müller.

I am pleased to participate in this year's FMA Supervision Conference.

A solid, resilient, inclusive, and diversified financial system promotes economic growth, creates opportunities, and is an essential element for sustainable job creation-and thus, in developing countries, for poverty reduction.

Our environment is changing faster and faster-due to digitalization, fintech, and other technological innovations, as well as global challenges. As a result, the risks we face have also become more challenging than ever before.

Today, I will outline the World Bank's perspective on these opportunities and challenges and discuss how we can build a financial system that contributes to prosperity during times of uncertainty.

First, let me begin with financial stability.

A strong banking system and capital markets enable funds to flow into the most productive areas and assist governments in raising investment capital. They also ensure the maintenance of financial safety nets and facilitate the safe transfer of funds across borders.

Our new World Bank report, "Finance and Prosperity," shows that financial sector risks in emerging markets are distributed along income lines. Of course, one must distinguish between low-income countries and emerging markets. In low-income developing countries, financial systems are still relatively underdeveloped and are also exposed to higher financial sector risks. These risks arise from high levels of public debt and external imbalances. In contrast, emerging markets have further developed their financial systems and have proven relatively resilient, although there is still room for improvement here.

We believe that many positive capital market reforms have been undertaken in recent years in emerging markets in Europe, Central and East Asia, Latin America, and the Pacific region. However, the outlook for the financial sector in these regions is influenced by the implementation of these reforms and by the ongoing effects of Russia's invasion of Ukraine, as well as economic and financial developments in China.

The increasing involvement of banks in government bonds in emerging and developing countries is a good thing, but it can also be a double-edged sword, particularly in low-income countries.

• On the one hand, these countries are increasingly represented in the government bond markets. Between 2012 and 2023, domestic banks in emerging markets increased their exposure to government bonds from an average of 12% to 16% of bank assets, an increase of more than 35%-this is now almost three times higher than in industrialized countries. In countries with very high public debt, exposure even rose by more than 50%, from 13% to 20%. In the ECA region, this exposure is slightly lower at 14%, but has nevertheless increased by 25% since 2012. o On the other hand, this increasing presence must align with the debt-servicing capacity of these countries. This is particularly important in low-income and heavily indebted countries.

A moderate increase in government debt held by banks can be a sign of healthy development. However, public debt in some low- and middle-income countries has reached historic highs.

If engagement in the government bond business is not firmly embedded in strong public debt management and debt sustainability analysis, these countries could face an increased risk of combined banking and public debt crises, which have historically been very costly. Analyses show, for example, that the outbreak of a banking and public debt crisis can reduce real per capita income by up to 7% on average compared to pre-crisis levels.

Second: what are the consequences that should be drawn from this first point? What should regulatory and supervisory authorities do in this context?

First and foremost, sound fiscal policies and other measures are needed to maintain public debt sustainability and macroeconomic stability. Banking regulators in emerging markets can play an important role in helping to reduce these risks by taking concrete steps to promote better risk management in banks and to strengthen the resilience of the financial sector to crises.

Another important approach would be for countries to strengthen the governance and operational independence of supervisory and regulatory authorities. In addition, standards for holding government bonds in banks' portfolios should be guided by international best practices. The principle of international best practice should also be applied to measures to deepen capital markets and to crisis prevention measures to mitigate risks to financial stability.

We consider these aspects very important. For this reason, the World Bank provides extensive technical assistance in our member countries in Central, Eastern, and Southeastern Europe to strengthen their regulatory and supervisory frameworks in line with international standards and the European Acquis.

Third: let me now turn to the topic of "sustainability in the financial system." A sustainable financial system is crucial for long-term positive economic development. In this regard, I refer to the connection between financial systems and the climate crisis.

As you know, emerging and developing countries are on the front lines of the climate crisis.

However, progress in integrating climate risks into regulatory and supervisory frameworks in these economies has been inconsistent and uneven. Climate risk assessment and disclosure practices are still in their infancy. Only 10% of all emerging markets have a taxonomy for sustainable financial systems, so-called "Sustainable Finance" taxonomies, compared to more than three-quarters of OECD economies.

These markets are also facing a significant climate finance gap. Only 14% of global climate finance flows reach these economies (excluding China). Adaptation financing measures are particularly underfunded-only 16% of climate finance flows in emerging markets (excluding China) go to adaptation finance, as opposed to mitigation finance.

This highlights the importance of capital markets. More developed capital markets can drive economic development and increase domestic climate finance. But banks must also play a key role, as they dominate the financial sector in developing countries, accounting for more than 80% of financial assets. National and multilateral development institutions, such as the World Bank and regional development banks like the Asian Development Bank and the AIIB, can play a critical role in maximizing concessional finance and mobilizing private sector investment.

Some banking supervisory authorities are pioneering innovative approaches to managing climate-related financial risks. o For example, in Eastern Europe and Central Asia, the World Bank is supporting central banks and supervisory authorities in developing strategies to address climate and ESG risks and integrate them into the broader regulatory framework for banks.

To successfully address climate change and its numerous impacts, emerging and developing countries need broader policy support and financing that goes beyond the banking sector.

Fourth: Innovation is key to achieving all of these goals, expanding access to finance, and promoting financial inclusion. Financial inclusion means access to useful and affordable financial products and services for everyone.

Innovations in the financial sector are transforming access to financial services everywhere, but especially in emerging markets.

• For consumers, fintech improves access to financial services, reduces transaction costs-especially in remittances, which are essential for many developing countries-and thus significantly increases user convenience. o A good example is fintech in India and Brazil, but also in low-income countries like Kenya, Cote d'Ivoire, and other sub-Saharan countries, where e-money has enabled remarkable progress in financial inclusion. o For banks, innovation leads to efficiency gains and better risk management. Today, 73% of global interactions with banks occur through digital channels. o Fintech-driven financial inclusion enables low-income groups to better cope with the impacts of climate change, and governments to distribute aid payments more efficiently. o The World Bank's Findex survey shows that the number of account holders worldwide has risen sharply over the past decade, from 51% of the adult global population in 2011 to 71% in 2021. This is largely due to innovations in the financial sector.

Despite significant progress, much remains to be done to overcome gender, income, educational, and geographical disparities:

• We must not forget that more than 1.5 billion adults still do not have access to banking. In 48 countries, gender gaps exceed 10 percentage points. o Only a quarter of the adult global population can access credit from formal institutions, and even fewer have access to insurance. o Small businesses, in particular, which account for more than 90% of all businesses and 70% of jobs, still face significant obstacles in accessing credit and capital.

Aside from the contribution that fintech can make to bringing more people into the financial market, fintech must also effectively manage the associated risks. There is still much that authorities can do here.

For example: untested business models, new market entrants, and emerging interdependencies can challenge financial system stability, while the anonymity of the technology poses an increased threat of money laundering and terrorism financing.

The use of data is a central component of fintech, but regulations on what data can be collected, for what purposes, and how it can be used are still very limited.

Another risk is over-indebtedness due to aggressive sales practices and the use of untested alternative data-based models.

At the World Bank, we support the, as I would like to emphasize, responsible adoption of fintech. For example, we are supporting countries in the Western Balkans in implementing faster payment systems to enable faster and cheaper domestic and cross-border interoperable digital payments. In doing so, we are promoting effective integration into the Single European Payments Area (SEPA).

Fifth, it is the absolute importance of global cooperation to promote the development of stronger financial systems. Without cooperation, this will not succeed.

The World Bank works with various partners, including international standard setters, regional organizations, national authorities, and the private sector, to share knowledge, promote the adoption of international standards, and provide technical assistance-or facilitate the exchange of experiences.

I would like to take this opportunity to express my sincere thanks to the Austrian government for supporting our Financial Sector Advisory Center. FinSAC was established in Vienna in 2011 to help countries in the region address the aftermath of the global financial crisis of 2008 and 2009. Over the past 12 years, FinSAC has carried out more than 120 technical assistance projects in 15 countries and organized around 55 conferences and workshops to promote financial stability in Europe and Central Asia.

We have also played a key role in strengthening global standards to combat money laundering and terrorist financing. Through our membership in the Financial Action Task Force, we have advocated for stricter global requirements on corporate ownership transparency and the recovery of criminal assets. We are leading efforts to appropriately tailor these standards to low-income countries.

The World Bank Group also works with the industry. For example, we recently co-organized with the IMF a private sector consultation to ensure payment transparency while maintaining financial inclusion and technological innovations.

Given the rapid changes, strong oversight, solid governance, and effective collaboration are essential. The financial sector holds immense potential to promote growth and prosperity, but we must carefully manage both the opportunities and risks that come with innovations, as well as the effects of global uncertainty on the financial sector.

It is crucial for all of you-regulators, supervisors, and industry leaders-to promote a strong and crisis-resistant financial system that supports inclusive and sustainable development. International coordination and cooperation will be essential for this, and you can count on the World Bank to play an even more active role in this regard.

Thank you very much.

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