If a shock is sufficiently large, the financial network may consequently act as a conduit for transmitting rather than absorbing risk. So the flip side of greater integration is that it may have lowered the frequency but increased the magnitude of potential financial crises. 1 3 Improving the toolkit for financial stability analysis is consequently a very high priority for public authorities and for major financial institutions. Enhancing the capability to model the financial system under stress is the key challenge. 4 In recent years, many central banks and supervisory agencies, charged with the public policy goal of supporting the maintenance of financial stability, have sought to develop a socalled “top down” or “macro” stress-testing capability. Utilising information on balance sheet exposures, the authorities draw on macroeconomic and financial models to try to assess the impact of adverse shocks on the financial system. Several inter-related high level objectives can perhaps be set for an “ideal” stress test: •  To assess the vulnerability of the financial system to extreme but plausible shocks  •  To improve the understanding of the transmission of shocks through the financial system (and, in a worst case, the potential propagation of financial crises)  •  To identify “weak spots” in the financial system, to guide risk reduction priorities and crisis management planning  1  Systemic risk in modern financial systems: analytics and policy design by Prasanna Gai, Nigel Jenkinson and Sujit Kapadia, Journal of Risk Finance Vol8, No2, 2007.
I should stress that, when undertaking this transformation, banks have most significant starting strengths. Despite all the reputation problems, people continue to trust their bank, much more than any other service-providing company. Personal relationships with customers continue to be very important, particularly in certain segments and age groups. According to the latest Funcas financial innovation barometer, in January this year, customer ties to their main financial institution remained very strong. Close to 90% of banking activity is conducted with the main institution. Also notable is the fact that customers’ perception of quality of innovation and their degree of satisfaction with their institution is high; higher, indeed, that what the managers of institutions themselves think. 12/15  While the proportion is growing, still less than half of Spanish bank customers (4 out of 10) would be prepared to use exclusively digital channels to take out traditional financial products. Assuming a change in institution, traditional banks remain the first option (71%) for moving an account from one institution to another. Fully digital banks would be chosen by 24%, while FinTech are an option for only 3%. Lastly, only the 2% remaining would change their bank for a technological or telecommunications company that offered these services. This starting position, which is a relatively good one from a “defensive” standpoint, should not have us forget that the tendency towards the use of alternative channels is on the rise.