But let’s look at these four banking systems for a moment, – Canada, Australia, Hong Kong and Singapore. They share two characteristics in common. (i) They are anchored by a handful of banks with a significant share of the domestic market. (ii) These “anchor” banks are closely supervised and regulated. Several economies, including some in emerging countries, which had completely opened up their banking systems and left themselves without local anchors, have now found themselves to be vulnerable. Banking systems need strong anchor players, who are well regulated and diligently supervised, and are able to take the long-view, enabling their interests to be closely aligned with that of the economy. In a crisis too, strong anchor banks may be needed to acquire distressed financial institutions whose failure could otherwise have a systemic impact. But having anchors with a substantial share of the domestic market is not sufficient to ensure resilience. Without adequate competition, they will earn what the economists call oligopolistic rent, rather than serve the needs of an economy by innovating and introducing efficient services. Anchor banks have to be competitive. This is why we have progressively opened up Singapore’s domestic banking sector since 1999. We have allowed greater competition, particularly in wholesale banking where local players are not protected, and increasingly in retail banking too. It has involved some risks. We took a risk. But the result is now widely acknowledged to be stronger and more dynamic local banks, with much improved systems of management, risk controls, technology and expertise.
Second, stress testing could be used to profile the size of the skews from climate change to the returns of various businesses. 30 This is another area where insurers are at the cutting edge. Your capital requirements are based on evaluating the impact of severe but plausible scenarios. You peer into the future, building your defences against a world where extreme events become the norm. This stress-testing technology is well-suited to analysing tail risks likely to grow fatter with time, casting light on the future implications of environmental exposures embedded in a wide range of firms and investments. Stress testing, built off better disclosure and a price corridor, could act as a time machine, shining a light not just on today’s risks, but on those that may otherwise lurk in the darkness for years to come. Conclusion Our societies face a series of profound environmental and social challenges. The combination of the weight of scientific evidence and the dynamics of the financial system suggest that, in the fullness of time, climate change will threaten financial resilience and longerterm prosperity. While there is still time to act, the window of opportunity is finite and shrinking. 31 Others will need to learn from Lloyd’s example in combining data, technology and expert judgment to measure and manage risks. The December meetings in Paris will work towards plans to curb carbon emissions and encourage the funding of new technologies.