Federal Reserve Governor Brainard has recently discussed these issues and highlighted some of the critical issues and potential trade-offs.15 For example, new entrants’ use of non-traditional data may enhance credit analysis, but this could have implications for consumer privacy and protection. As a second example, the economics of innovation may favor rapid introduction of new products to gain a first-mover advantage, but this approach may be a challenge in an industry like banking that requires trust and confidence to support a stable business model. It is imperative that risk management keep pace with financial innovation. Third, I’ll mention business conduct risk. The New York Fed has challenged the financial industry to consider and address the many factors that have contributed to recent, widespread misconduct at large financial firms.16 These incidents impose real costs in the form of fines, settlements, and the diversion of internal resources related to investigation and remediation. In addition, there are more difficult to measure costs linked to the potential loss of confidence and trust in the firm and the industry. Recurring misconduct poses a real threat to the provision of financial services if customers and counterparties were to pull away from the sector. Supervisors can help mitigate these risks by supporting the development of effective internal 5/7  BIS central bankers' speeches  governance regimes, prudent risk management policies, and strong compliance and control structures, all within a framework of effective oversight from the firm’s board of directors.
If the parent bank of a cross-border banking group defaults, it is getting more and more unrealistic to assume that the foreign subsidiaries could continue their business as usual. It would take time to establish all the necessary competence to transform such a subsidiary to an independent bank. Also, the possibilities for the host country to successfully ring-fence the assets is diminishing given the speed at which funds can be transferred across borders. When there still is a clear legal difference between branches and subsidiaries with clear consequences for supervision, the distinction becomes less important both in practical and in economic terms. Fifth, and as a consequence of this merger activity, the banking market in some countries is dominated by foreign banks. In the ten new EU member states, about 70 per cent of the banking sectors are foreign owned. In Estonia, foreign groups account for more than 90 per cent of all lending. My worry is that the next financial crisis in Europe could have serious cross-border implications and not be bounded by national borders. As a central banker, I see it as a major responsibility to be prepared for such an event, both in terms of handling the acute problem and in finding more long-term solutions. One reason why this cross-border development is more pronounced in Europe than in many other parts of the world is the long-term project of creating a single market for financial services in Europe. Let me be clear here. I strongly support this project.