Blackrock and Rhodium are using data analytics to assess the risks of climate change to assets such as mortgage backed securities under different scenarios. We have not tapped on the full potential of new technologies. 5 / 10  BIS central bankers' speeches  Research by IBM has found that quantum computing algorithms can compute the risk of an investment portfolio near real-time. This is a significant reduction from the present Monte Carlo simulation approach which can take days. The third big opportunity that Technology offers Finance is improving cost-efficiency. This is particularly relevant for banks – saddled with the high costs of maintaining extensive branch networks and deterred from entering new markets or reaching underserved segments of the population because the cost of setting up branches is too high. Technology is changing this in two ways. First, the use of digital platforms to quickly and cheaply acquire customers. The ubiquity of the Internet combined with the proliferation of the smart phone has helped to slash the cost of acquiring a customer. According to research by Oliver Wyman, it costs about $ to acquire an online banking customer compared to $ using offline channels. Basically, the smart phone is replacing the bank branch. Non-bank players have led the way in digital banking. In the UK, we have seen a proliferation of so-called “neo-banks” – basically non-bank start-ups who have obtained licenses to do banking business without physical branches. Starling has opened 520,000 personal accounts since getting a banking license in 2016.
Credit premia also increased for other fixed income instruments, such as conventional mortgage bonds, corporate bonds and loans to emerging markets, from summer 2007, although on a far more moderate scale than for subprime-backed securities. In the last half of July, the turbulence spread to other financial market segments. The risk premium required by investors rose, and equity prices fell sharply. The contagion was due to uncertainty as to the risk subprime-backed financial products represented for the financial system, and to a lack of information about who had invested in such products. Conduits and Structured Investment Vehicles (SIVs) were among the investor groups investing in the financial products based on subprime mortgages. As a rule, these investment companies were wholly or partially owned by banks. They invested in assets with a high rating, such as the senior tranche in subprime-backed securities. These investments were debt-financed, primarily in the short-term money market through asset-backed commercial paper (ABCP). High ratings on these assets gave investment companies favourable funding rates. Due to the turbulence in the subprime market, interest rates for ABCP have risen sharply and maturities have been reduced. The flow of money to investment companies through money markets has dried up. Banks have to a large extent had to finance the investment companies themselves. However, this increases banks’ liquidity requirements. There have been examples of banks that did not have the capacity to finance their investment companies.