But more is needed, especially regarding a more solid institutional framework to repair balance sheets in a way that limits systemic risk and avoids damage to the real economy. The Japanese experience has shown the risks created when banks’ balance sheet problems are not recognised and addressed. Weakly capitalised banks initially extended loans to insolvent firms to limit the recognition of losses in the short run. Indications of evergreening became prominent as the share of loans to the construction sector continued rising for years after the bubble had burst, despite the fact that this sector was adjusting and needed to downsize. Write-offs on non-performing loans and necessary recapitalisations were delayed and the financial sector remained highly vulnerable to shocks. But delayed recognition was also facilitated by valuation standards that did not mark non-performing loans to market, unlike much of the losses from securitised products in the recent crises. In addition, the refusal of banks to foreclose on borrowers might have reflected a different resolution culture and code of civility in Japan; namely, one that eschews the large turnover of jobs and the frequent discharging of workers and avoids inducing a humiliating “loss of face” for delinquent borrowers.8 For the real economy, the evergreening of loans implied a weakening of growth prospects.9 Potentially more efficient enterprises were denied financing, thereby hampering the natural entry and exit of firms to the market place. Indeed, with the recession in Japan at the  7  See ECB, Financial Stability Review, May 2013.
We may be more familiar with “less is more”, which is the mantra for designing friendly user interfaces or cool technology products. But new platforms in retail payments, data infrastructure and cross-border payments tend to be more successful and sustainable when they achieve widespread adoption and leading to strong network effects. 23. Just think about FPS. Would you still use it every day if your friends and family were not on the platform? From the design stage, we aimed to include more currencies and payment institutions, so as to attract a rapid build-up of users. The result is the world’s first multi-currency instant payment system connecting banks, e-wallets, and customers. With this strong network effect, FPS adoption in Hong Kong is perhaps one of the fastest in the world. We are strengthening this network effect further by introducing FPS payments for merchants and government bills. 24. Or think about why we launched CDI. Data is an essential nutrient to technological development. Currently, commercial data is scattered across isolated data islands built bilaterally between banks and individual data providers. The idea of CDI is to provide a common data infrastructure that will replace these compartmentalised, one-to-one connections with an efficient many-to-many connection. Banks will have common access to a sea of data which allows them to compete on innovation in service delivery. For this to happen, we need scale. We need to connect as many data providers, data consumers and data owners as possible in order to create the network effect. 25.