Synopsis:
Sopnendu Mohanty: Actually, you spoke about the weather, it actually represents what is happening today. So we decided to move it to the right weather to have the right conversation. You talked about the two watches, right? One for your wife, one for the work. We'll talk about the work watches now. And you also mentioned the second and third line.
All my next 20 minutes, I'll unpack that second and third line. Let me start with a question which affects central banks . Today, if you look at the new tech stack, it is very complex. Nobody understands it. In fact, I doubt any central bank actually understand what is inside that system.
And for the first time, we are seeing that software, hardware and the networks are all changing same time. It's unprecedented in that sense. And the traditional regulatory response has been restriction or principle- based policies. And lastly, there are economies around the world, especially low income, middle income countries who want this deep tech to be part of that national architecture because they see this as an opportunity to catch up. With all this happening, almost conflicting conditions, how do you think governments are doing? They're struggling to deal with this whole fast-moving tech stack. Any sense of where we see this going?
Axel Weber: So having been a former governor and having the pleasure to sit on, with my friend DPM Heng [Swee Keat] here on the Basel committee and on the Basel deliberations of the governors. I can tell you two things . We've seen in the initial reaction was there were certain bans of certain fintech solutions, there were restrictions, huge compliance costs. If you look at the SEC action against crypto firms, if you look at the EU AI Act or fines. There was a lot of concern initially, and the reaction by regulators is, "Let's regulate it like we regulated finance in the past. If you move beyond that, you are starting to see that this will cause massive fracturing."
And so what central banks usually do, if they don't understand something fully or regulators, they actually try and learn about it. And as Governor [Martin] Schlegel talked about, there is the BIS Innovation Hub. Now what they're trying to do is learn where this whole thing is going. And I think what is surprising for me is, whilst this was a small experiment in Basel, every financial institution that now talks about it, when they as regulators want to have a say and look into the future of finance and how it'll be regulated, every financial institution around the globe wants to be part of that process.
So suddenly an idea of regulators, let's understand better what is happening there and bring in people that we cannot bring into the standard regulatory departments because they're fintech people. They want to maybe work at the central bank if they work on their favorite topic, fintech – that's happening now.
And that will make central bank smarter. That will make the central bank much more able to play at the leading edge of technology. And I think, as was said by the financial counselor for the Canton of Switzerland – in the end, smart regulation requires the regulator to work with the bank.
Because I always felt when I talked about regulation with my regulators, look, the regulator wants to achieve something. Okay, fine. Give me that and let me give you two or three options how you can best achieve what you want to achieve, to the least cost and the least disruption to me as a financial institution. And it's that mutual dialogue on everything that is new. Even the companies that are in this fintech space are experimenting on a daily basis. I think you will see a lot of innovation driven almost like a private-public partnership where innovation takes place. I always say Singapore's been the greatest financial hub that I know and worked at because the MAS [Monetary Authority of Singapore] really early on and the whole network comes out of the MAS work.
Singapore had the guts to allow financial innovation in a sandbox that really flourished. And then understood, we got to regulate it when it becomes systemic or big, and we will have to determine that point together with the industry of when something small and beautiful becomes something big and challenging.
And that is, I think, the right approach to financial innovation. It will always flourish in very small corners, and you will never be able to supervise everything. The most absurd view of central banks would be I, as a regulator, need to be able to look into every corner of financial innovation and regulate it from the start. That would, in my view, really undermine innovation.
Sopnendu Mohanty: Thank you. And that's fine that as a regulator, you can respond by doing experiments, working with the private sector. But in the last six months, the problem has become far more acute. And this is when you are giving a remark, talked about technonationalism.
If you look at that, there are four foundational shifts in the whole space.
One thing is talent. Today, if you look around the world, the software, hardware, talent to drive the future architecture is largely concentrated in India and China. And I doubt, given the scale of changes, any country can even compete with them. Purely human resource, technology reserve as a human resource.
Financial infrastructure, for many reasons, are getting fragmented due to geopolitics getting politicised. The future innovation will have a fragmented outcome. You can see the chips and all these different subcomponents. Researchers are responding to a different political demand of the respective home ground.
And lastly, the tariff challenges, supply chain disruption. With all these coming on top of the existing problem, do you see that the path forward is far more complex than we seem to understand now? And there could be missteps if you do the way we have done till now.
Axel Weber: I do think it will become a lot more complicated because, I think what you have to look at when we talk about all of the areas we optimise, whether it's in commerce, whether it's in technology. The one thing that for me became pretty clear when I looked at the last six months of the new administration in the US, there's a very clear focus on China and actually it's not new in this administration.
It was there in the past administration, and whether it's geopolitics, whether it's the whole defense mechanism, everything will be geared to this future rivalry between China and the US. That means a lot of other things get pushed aside and become second order. If you look at the war in Ukraine, for example, it is very clear that the US message to Europe was, that's on your perimeters. You need to deal with that. And so you need to divorce, you need to have the resources to deal with that yourself.
That will have a massive impact on technology, on the internet. We're moving into a world where I think it is not unlikely that we will see two internets, one dominated by China, one dominated by the standard we have. And that will have massive implications.
Sopnendu Mohanty: Europe is pushing for digital sovereignty.
Axel Weber: Absolutely.
Sopnendu Mohanty: How is it gonna help? Because you will have your own tech stack, your own hardware, and I recently heard that ECB is talking about a separate payment infrastructure from Visa and Mastercard. We are actually making it much more complex.
Axel Weber: Absolutely. And I'm a globalist, so I think that the cost of fragmenting global finance and global trade is gonna be huge. And I'm very cautious about getting there. If you want to get there, that's a 20 year project. It's not a one year turnover. But policy at the moment goes into this immediate disruption. Let's just take the system down. We want a different system in place.
So nothing will happen anytime soon. If you look in Europe, I think Europe has now understood the problem. We need to be more independent from US defense. We need better technical capabilities because the Magnificent 7 had such a global run that everyone globally is dependent on them, and you try and walk away from your Microsoft or your Apple, you cannot do it. It'll take years of investment and whether we will build something that is as good as that. If we say we want a European solution to that, I'm not really sure.
Sopnendu Mohanty: But where are they going to get programmers from? Still India, China are 60% of all programmers.
Axel Weber: You need a visa, special visas. We talk to government as a fintech in Berlin. We talk to them. Look, we have exerted the Berlin market. We will not find a single guy or woman in Berlin that is able to work as a programmer. We need to bring them in. We need to have a green card specially for that. You just look in a discussion that is anti-foreign at the moment in policy, how you're going to design green cards for engineers that will come from the rest of the world. It's a very hard thing to do.
So I do think that we're kidding ourselves at the moment that I think we started to understand the problem, that we become too reliant and too much driven into a division of labour globally, that under current policy priorities, is no longer optimal. We've over-optimised global trade, global finance. But the over-optimisation is a point of view that basically, we want it all at home.
This is why I said we move from friend-shoring. If you have no more friends, it's home-shoring. If you are home-shoring, you better have the capabilities to become independent.
Sopnendu Mohanty: It's mathematically impossible, the amount of change you need to have.
Axel Weber: It's absolutely impossible.
Sopnendu Mohanty: So even talking about this makes no sense. So there has to be a quick realisation that to build an alternate stack against what we have in the US and China, you need to be more pragmatic. So you think that'll be a realisation very soon?
Axel Weber: That's exactly I think where the world is going.
If you look in and I think there was a very good report, my friend Mario Draghi wrote for Europe because there's a couple of charts in there you should look at. He looked at the future of technology—whether it's quantum computing, cloud-based computing, all of that—and he compared Europe, China, and the US. The only area where Europe is anywhere near the US and China is on green transition. On everything else, quantum computing, future of the internet, China is before the US. And what we will see is a global fight at that level between these three major jurisdictions to build everything.
I think Europe is probably in the least advantageous position to gear its own future, whether it's digital, whether it's defense, in the direction that is now required. So there will be a choice for Europe. That will be a hard choice on working with America and China in the future, because China and America will not want to work together. It's a very hard choice for Europe.
My solution is always very pragmatic. Work with America and with China where they're willing to cooperate. Where they're no longer willing to cooperate. You have to move to be able to do it yourself.
Sopnendu Mohanty: So new partnerships.
Axel Weber: New partnerships. But I think for Europe, if we are seeing a less transatlantic system in Europe because of the transatlantic choices made in the US, we have to look at Asia Pacific as the region where we will have to develop closer trade relationship.
Sopnendu Mohanty: So you think there will be a shift from Europe to be a stronger link to Asia Pacific?
Axel Weber: Absolutely. One of the things I'm seeing, I must say, I'm an investor nowadays. I built a portfolio that just to mock my American friends a bit, I call the MEGA portfolio: Make Europe Great Again. And it has two investment portfolios. There's a MEGA finance portfolio, make European finance great again. That'll be a hard one. The second one is, make European industry great again. And that means if you wanna build defense systems in the future with the likes of Thales, with the likes of Leonardo or German suppliers in that area, you better believe that you need to re-industrialise to a certain degree.
And if you're just de-industrialising, you need to fully flip back, which will have massive implications for the greening of the European economy. So don't kid yourself, this will be hard choices that policymakers will have to do. Finance is not the issue. I think finance at the moment with the recent upheavals in the US, you are starting to see financial flows of companies into the European markets and into the Asian market.
Because if you look at where two years of excellent performance of the US led us, a 60% to 80% overweight of US in all portfolios, that will not be the future. So what you're seeing now is flows out of US finance into European and Asian markets. And I think if Asia and Europe seize the opportunity of a somewhat less extreme exposure of global finance to the US market as the deepest, most liquid and most vibrant capital market, which it still is.
But if you're concerned about resilience rather than optimality of returns, then a more resilient investment is a more diversified investment focused on Europe and Asia because you've been underweight there. And as you're shifting, actually European equity markets traded a 40% discount to the US market.
So you have 40% outperformance in the US the last two years. Fantastic. But what you're seeing now is European markets show somewhat more dynamics because of these reversals or flows. I think, as always, this is a huge risk for global finance, but it's also an opportunity for Europe and Asia to find a better place at the table in the future and the rest, digital transformation, fintechs, the whole thing, that will come on the heel of it. And it will require investment in people, in talent, in infrastructure. And I think that is something that we need to do.
And I always tell my European colleagues, look at the countries like Singapore. They've done that because you always had a balanced development focused on globality and at the same time, on bringing people at home to that global frontier and enabling everyone to be part of a global economy.
And I think Europe needs to basically move in a very similar direction that we need to stay global citizens. We need to basically foster our own capabilities and at the same time, don't throw the baby out with the bath water. The US is still the most predominant power in finance. We need to work with the US and their partners there in every area they want to continue to collaborate with us, and take the rest as where you need to have your own action.
Sopnendu Mohanty: You have this portfolio publicly available, right? The strategy.
Axel Weber: Yeah, I put it on the internet just as a mocking of investors. But yeah, it's just the companies. It's 60 companies that you can invest in if you want to look at where Europe needs most investments.
Sopnendu Mohanty: We'll look at it. Now shifting the topic to cybersecurity. You spoke about it, and here is my take. In a traditional sense, you look at network and you think cybersecurity, something the central bank or the finance regulator can look at it as a standalone construct.
But that has also changed. Today, AI has become an excellent tool to attack the network. The surface area of cyber attacks has increased. Mobile phone, EV vehicles, devices, IOT, everything has gone linked. Embedded finance has got into every devices now. And then you have the quantum challenge, where people are waiting to have the right computing power to break the current encryption.
Now the question for you, as a former central bank governor, do you think the regulatory design or the organisational structure of central bank needs to rethink to deal with this?
Axel Weber: Oh I think it needs to absolutely massively change. I noticed one thing, for example, just to share that with you because you talked about AI- driven engines that attack you.
Since I started putting the portfolio out, I did nothing else than put the portfolio somewhere. I started to get impersonations of myself on Facebook that isn't me. By artificial intelligence that post daily comments on the gold market and everything else, which is totally crazy. You try and shut that down, it is really difficult.
Regulation has not really kept up with these fast moving markets because if you want to shut something down if you're in Germany, you can do that if the engine is in Germany and if it's somebody that impersonates you in Germany. You move beyond your own jurisdiction, it becomes much, much harder.
Companies are employing entire departments to deal with fraud and impersonation and wrong investment. We've seen that at Raisin where people simply rebuild images of these platforms, give wrong account numbers, try and defraud people to put money in there. We've seen it at UBS where people were constantly trying to bring wealthy clients and clients of UBS to put money into fraud schemes. So this will be a much more important, a much more important part of what banks need to do. The future of digital needs a much difference approach. If it's traditional finance, your first, second, third line, as I said, you've geared that to perfection.
If it's innovation, you don't know how to deal with that because the disruptions will be digital. You look at companies like Merck and others that have been subject to ransomware and cyber attacks. It took them to completely reinvent everything that they had as corporate infrastructure in that space in order to make it resilient.
I bet you most of the companies haven't really started to look at resilient infrastructure as opposed to optimal infrastructure. For me, if you want to have one vision that you want to leave from here is, we're used to a world of optimising returns. We're now moving to a world where we need to secure the robustness of returns, and that will come with a lack of efficiency because it requires massive investments in resilience. You suddenly have an optimisation that has a second target: return and resilient. And I think every company now needs to go back in this more hostile environment.
Sopnendu Mohanty: What does central bank have to do because the current structure is not good enough to deal with this risk?
Axel Weber: Look I think central banks have been really great institutions that they're very technical, as the governor said before, they need to completely reinvent themselves and they'll be behind the curve. There's no doubt. If you look at the financial crisis that I've dealt with, we were never able to see a financial crisis coming and prevent it.
So if your question is, can central banks prevent problems in the future? I think history tells you, even with traditional finance, they never can. But what central banks are great at is to use their tools to catch up with reality and to get ahead of the curve and manage a financial crisis and manage out of the financial crisis into something that is a post-crisis world, which is then more resilient to the types of shocks that you've just seen.
So don't have the hope that central banks can prevent it and will ever have the structure that they can do that. We're public sector institution. The one thing I learned is if you move from the public sector to the private sector, even when it comes to simple things like salaries. You basically take a discount of 25%, to 50%, to 80% by moving from the private sector to the public sector.
So moving in the other direction is very hard. You will never have the best talent in the public sector, but you have dedicated people.
Sopnendu Mohanty: Why not?
Axel Weber: Because the public sector, Singapore is slightly different. Singapore has a different structure. I know that. But in the public sector in Europe, I had discussions when I was the governor of the central bank that I learned, I had a salary that was higher than that of the German Chancellor.
And so everyone said, he's not got a responsibility that's bigger than that of the Chancellor. And then I said, yeah, but my salary is like 1/10th of the other guy that runs the German private bank. And they definitely don't have a responsibility that's bigger than the Chancellor. So look, I think salary structures are incentive structures.
If you can make a lot of money in the private sector, salaries tend to reflect that ability to earn money. I think in the future it will be much harder to focus on that because if high returns come at high risk and resilience becomes important, your regulator is going to be a key part of your resilience structure.
What I learned when I was in a room of panicky central bankers in 2007, I often felt like I was the only adult in the room because our job was to stay calm and prevent everyone doing what is optimal for their own organisation, which would've led to a catastrophic development, to do what is good for the whole system.
You are the guy with a systemic view. If everyone closes down their credit line to the other bank that has a problem, that bank's problem will become self-fulfilling. If you tell everyone, stay put, we will organise a group solution that will solve that problem, but we can only do it if everyone stays. That's where rationality enters.
And we will always have financial problems. I very much believe that the public sector who has a look at the benefit of everyone, who brings a perspective of let's take the common interest and try and solve a problem from a common interest perspective, that's ultimately gonna prevail in every crisis because in a financial crisis, everyone does what is good for him. That's very often not what we should have. And so, I have a strong belief that central banks will learn from every crisis, will organise the future in a more crisis resilient way.
That said, you will never have a situation because central banks, like generals, they always fight the last war. A lot of the post financial crisis regulation was dealing with issues in the financial crisis. I keep telling people in Europe now, just to give you two examples, if you really want Europe to invest in defense and in infrastructure, maybe a full capital underwriting of infrastructure projects which banks cannot afford anymore is not the best way to go about it.
Maybe if the paradigm changes and you now have different problems to solve. Maybe you should revisit the last regulation you've done that solved a different problem, and really see whether from that vast regulation, there are any areas that actually undermine your ability to deal with the next crisis. And that's something that regulators rarely do. I think that's where the private sector needs to have a strong voice. But in my view, you need to have this collaboration between the regulator, the central bank, and the private sector. And the private sector no longer is just large banks.
In Singapore, you see that very much. If you have the major Singaporean players, you know, the foreign banks and the large Singaporean banks around the table, that's half your financial universe there. You also need to have, as a regulator, the dialogue with the other part of your financial universe. Otherwise, your regulation will not be forward looking for the future of finance. You will regulate finance as it is now, but you will not be a pathfinder for financial institutions to produce this innovation. And I'm a firm believer that ultimately, innovative finance and decentralised finance will merge with established finance and established finance will adopt many of the solutions found there into the main framework.
Sopnendu Mohanty: That segues to the question I have for you on the future financial architecture. We spent last 10 years, I said API, digital public infrastructure, DPI, cloud; that's the story of the last 10 years. We are now switching our core architecture to a very different tech stack, AI-driven UX, asset tokenization, quantum-based encryption, and the new token transport network. Now, you repeated twice. We are trading inefficiency with resiliency. Now this new architecture, all is about efficiency. It also brings new risk. Now, the shift in the financial architecture is at a speed even most policymakers can't anticipate. When you go and look at this public domain, all the open source development, you see where they're imagining the next architecture way, way ahead than what we imagined today.
Now, how do you think regulators will align themselves with this new tech architecture. The question is, do they see this shift happening because banks, core banking systems will shift, which means a different kind of governance is required. So any insights on how do you think about governance of this new tech stack which is very different from today?
Axel Weber: Yeah. Look, I think this will be my feeling always is when something new develop, human nature is learning from mistakes. It's as simple as that. I think it'll be evolutionary. It will evolve. If you look at how it will evolve, you're most likely gonna see some issues in financial innovation. At the moment, people look at financial innovation as a small new trend. In these areas, it'll be transformative.
And when I look at the future say of client advisors in wealth management. Nowadays on the status quo, they come to their desk and their work tells me the market has moved over the last 24 hours. Here are your 10 clients you need to call today. In the future, it will not even be a client advisor that will call the clients. The client will receive a AI- driven support system that helps them to regear their investment. And they will simply have to basically tick the box and say, I agree with these changes.
The whole thing will move. We will see a world where technology will largely be what I call labour augmenting in financial institutions, which means maybe in the future you need more programmers and less bankers in finance.
Sopnendu Mohanty: Do you see where all four things will come together? At any market, do you see all this four components coming together? You see a fragment of some putting more AI into the core banking in some market. You see some experiments on the tokenization of assets. Is there any place today where you can see all the four components coming together in next five, 10 years to look at other than China, which is in a different world.
Axel Weber: The other thing I firmly believe in is habits persistence. People don't change. I never thought of the US as a sophisticated financial systems because they still send cheques around to pay their mortgages, which is the most ineffective tool. And they do it because a large part of their population likes to do that.
They're completely immune to financial innovation because it works. They're used to it. Why should I change it? So diversity will be the name of the game. I don't think there will be one form that will take over everything. People's choices will be that, yes, there will be a lot of people that will experiment and opt for the new. There will be traditionalists who will stay with the established and there will be quite a lot of outdated stuff where the outdated generation will stick with because they're used to that. So I think diversity in finance will be the name of the game.
Sopnendu Mohanty: I see. So you will see new economies, emerging market completely shifting that tech stack, does it create lack of interoperability in the market?
Axel Weber: It does. It does create interoperability. But let me tell you, you are asking the question from somebody who grows up in a place like Singapore, where the young generations are the predominant drivers of financial innovation and user financial services.
If you go to other constituencies where that is not the case, they will be behind the curve automatically. Innovation. I think if you look at financial innovations, you look at the continent of Africa, you look at the Asia Pacific region, there will be a lot more applied innovation in finance in those regions because you have the more tech savvy frontier of the technology.
When I get my new iPhone, I call my son or my daughter and say, can you fix that for me because there's so many stuff that needs adjusting. I admit I'm old fashioned, that's why I wear this second watch. So you will have a lot of people stay in the old world, and that's where I give the aged populations of Europe very little chance to be at the leadership and at the frontier of that innovative part. It will be more driven, that's why I think the future of finance is in Asia. It will be driven by the younger generations and societies that will be more innovative and willing to move to new technologies at a much faster rate than traditional economies.
And in Europe, I can tell you, Germany talk about financial innovation. The use of cash in Germany is still the largest means of payment. That's why cash cycles in Germany still play the dominant role. I haven't paid with cash for the last two years, but every time I go shopping, I see all these people with cash.
Now that's something that tells you habits persistent in finance is something that offers huge opportunities to the incumbents to make that transition gradual. It'll help them. But the frontier will not be the incumbents. It will really be the front end. It will be the new technology.
Sopnendu Mohanty: And we are running out of time, but I can't help asking this question as the CEO of GFTN. Why did you decide to join our advisory board?
Axel Weber: Look, first of all I think I've been a friend of Singapore. I actually received that honour some years ago. I've been going to Singapore regularly. For the last I would say probably 20, 25 years ever since DPM Heng and I sat in the Basel Committee together.
I'm a real friend of Singapore. I enjoy going there. I like the vibrancy. And I do think actually born out of the MAS and sitting on the advisory board for the MAS for 10 years, this was a great idea. And whilst a central bank has an innovation hub, most of them now have. The idea of commercialising it and making that journey that the MAS and Elevandi has gone through a shared experience and to put it out there for others that want to embark on the same journey, to learn from it and to take it, plug and play, and take it from there, I saw was a great idea.
And that's why, when I was asked by my friend Ravi Menon and by you, I just couldn't say no. My wife told me afterwards, which part of retirement haven't you understood? But I keep telling her, look, it's just a couple of times a year and it brings me to Singapore. So I continue to do it.
Sopnendu Mohanty: Thanks for be part of the GFTN journey. It was wonderful talking to you, and we are looking more from you as we look to work together. Thank you.
Axel Weber: Thanks for having me.