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12 maart 2021 Algemeen
Olaf Sleijpen

In his welcome remarks at the conference ‘Making sense of finance’, Olaf Sleijpen emphasized the importance of basing central bank policies on solid scientific insights.

‘For us central bankers, as guardians of financial stability, it is very important to understand how society perceives the public value of the financial sector.’… ‘Important because the financial sector is one of the few sectors in the economy where public perception is critical to its functioning.’

Datum:  12 maart 2021
Locatie: Conference ‘Making Sense of Finance’
Spreker: Olaf Sleijpen

A very warm welcome to all of you. The Dutch central bank is happy to host conferences like this one. Scientific research is important to us. In order to be effective as a central bank, our policies must be based on solid scientific insights. Your work helps people like me do a better job.

Today’s theme is as fascinating as it is important. Not only for historians but also for central banks. It is fascinating because it’s so hard to pin down. To say that the public perception of the financial sector fluctuates over time would be an understatement. One of the most extreme examples of this is the reputation of the modern banker: one year lauded on the cover of a magazine as a “master of the universe”. One year —and one financial crisis- later, in need of bodyguards because of public outrage.

It’s not only a fascinating topic. It’s also an important one. Important because the financial sector is one of the few sectors in the economy where public perception is critical to its functioning. Let me explain this by contrasting finance with baking bread. If, for some reason, public confidence in bakers collapses, maybe because they mess with the ingredients or something, that would be unpleasant. But that’s about it. New bakers will open new bakeries, attracting customers with healthy, freshly baked whole-wheat bread. They will drive out the bad bakers and everyone is happy again. Well, except for the bad bakers. But if public confidence in the financial sector breaks down, then the whole system breaks down. It stops fulfilling its essential economic and social functions, and the economy goes into free fall. This happened in the 1930s and almost happened in 2008.

The key role of public trust in the financial sector relates of course to the nature of financial contracts. Financial contracts are characterized by a very long time span, enormous amounts of money are involved, and there are important information asymmetries. If I grant you a loan, I trust you will pay it back with interest in, let’s say, three years’ time. If I take out fire insurance, I pay my monthly premiums because I trust the insurance company to pay out in case my house burns down. If it turns out that the insurer cannot meet its obligations, suddenly I am not so sure that you will pay me back my loan. The erosion of trust in the financial sector is very contagious. There’s no vaccine, which is why it is very important to uphold confidence in the system.

In response, people have devised all kinds of ways to back up confidence and stabilize public perceptions: by requiring capital and liquidity buffers, and publishing annual accounts. By setting up deposit guarantee schemes and, indeed, by establishing central banks to safeguard the stability of the national currency and financial system.

For us central bankers, as guardians of financial stability, it is very important to understand how society perceives the public value of the financial sector. How this perception fluctuates through time, and what its main drivers are.

In fact, we find it so important that we measure this public perception every year, in a survey of roughly 3,500 people. We ask them questions like: are you confident you will be able to withdraw all your money from the bank where it is deposited? We also ask them what would affect that trust. One of our more interesting recent findings is that what is most likely to cause a breach in trust would be unauthorized use of customer data, like selling it to third parties. This has nothing to do with financial solidity, but everything to do with privacy and integrity. This may be a reflection of the rise of Fintech and the recent money laundering scandals. But it could be related to much broader undercurrents in society, such as privacy concerns and erosion of trust in institutions in general.

I wish we could have started our survey back in 1813. That would have been really interesting. But since we didn’t, and because at DNB we generally are not historians ourselves, we follow this fascinating and important work you’re doing with great interest. The program looks really promising and we have some excellent speakers. So I wish you a very fruitful conference, and I look forward to your findings.