World leaders are gathered in Baku, Azerbaijan, for the COP 29 on Climate Change. As the conference enters its final day tomorrow, the atmosphere is charged with anticipation. Will the leaders be able to conclude discussions on critical issues?

A document released by the UN this morning hints at progress in discussions on climate finance: while the exact figure remains undisclosed, it is mentioned that it will be in trillions of dollars. The decision on trillions of dollars is a positive step, as many experts have expressed concerns that a few billion dollars will be insufficient and will fall short of necessary action to address the urgency of climate change.

By the end of COP 29 , the world will hopefully get a new number. A lot has gone into deciding this number: 12 technical consultations and three high-level ministerial meetings. The final leg of the consultations is happening in Baku. It is worthwhile to take a look at the key items that came out of the draft document on finance today and the discussions that led to those decisions. Much of this document can be expected to feed into the final decision that comes out of COP 29.

A Decision On Trillions Of Dollars – The Quantum

What is a good number for a finance goal? Should the number be in billions or trillions? The draft text released today mentions that the amount will be in trillions. Although the exact number is unspecified.

One of the key outcomes expected from this year’s COP is this exact number which will become the new collective quantified goal, popularly referred to as NCQG. There is a high expectation that countries will be able to reach a consensus on a quantified number, which can be the North star to mobilize funds to address the urgency of climate change. It was during the COP in Copenhagen in 2009 that the earlier goal of mobilizing 100 billion per year was decied– an amount pledged by developed countries to support developing countries in addressing climate change by 2020. There are questions about whether that target was successfully met, with views from some countries that it was not met. The decision that came out today relfects this disagreement.

A few billion dollars would be unacceptable, according to Illiari Aragon, a specialist in UN Climate Negotiations, who has closely followed NCQG negotiations since they started. Many developing countries would be unsatisfied if a number of billions were proposed. In earlier talks, some numbers in billions were also floating around. Most estimations however point towards trillions. A number of at least 5 trillion, was estimated as being needed based on the Standard Committee of Finance of the United Nations as part of an assessment of needs proposed by countries in their Nationally Determined Contribution.

A Decision On The Contributor Base And Mandatory Obligations

Another key topic of discussion has been who contributes to the financial goal that comes out of COP 29. Some developed countries suggested expanding the donor base to also include countries like China and India. However, that was an unacceptable proposition, with media from India, based on interviews with experts, particularly reporting it would be unacceptable.

The new text released today goes away from the mandatory approach and adds flexibility to better reflect needs of developed and developing countries. The text states that it invites developing country Parties willing to contribute to the support mobilized to developing countries to do so voluntarily, with the condition that this voluntary contribution will not be included in the NCQG.

The document released today also states that it has been decided that there will be minimum allocation floors for the Least Developing Countries and Small Island developing countries of at least USD 220 billion and at least USD 39 billion, respectively. Deciding such a minimum allocation floor is a big step as these countries are particularly vulnerable to the extreme impacts of climate change. In March 2023, Malawi, in the African continent, was devastated by a tropical cyclone. Africa, according to some estimates, contributes to only 4% of global warming, but is particularly vulnerable to climate cahnge.

Some Decisions On Structure- What should be included?

The question regarding what types of finance will be classified as finance has been a key topic of discussion. The type of finance is crucial because it determines what kind of finance can really be aggregated to reach the big quantum goal.

In the negotiations so far, some countries suggested requiring funds to be channeled from the private sector as well. However, some parties questioned whether the private sector could be obligated to contribute to a goal and be made accountable for this goal. There were also discussion on grants versus loans. Many countries called for more grants and financing with higher concessional rates, reducing the repayment burden.

The document that came out today clarified both the above concerns. It states that the new collective quantified goal on climate finance will be mobilized through various sources, including public, private, innovative and alternative sources, noting the significant role of public funds. The decision to include the private sector is a significant step, as it provides an entry door for the private sector to be more actively involved in climate action. On grants and loans, the decision text states that a reasonable amount will be fixed in grants to developing countries, with significant progression in the provision. The decision on this allocation floor for grants, is also an essential consideration as it helps these countries to avoid being tied up in debt.

The decisions on climate finance published today during COP 29, which will act feed into the final decisions from COP 29, can add significant momentum to what is available for climate finance and action. They can also help build trust among many vulnerable countries in the power of multilateral decision-making process, showing that the world is indeed united in addressing global warming.

Emerging technologies like big data, AI and blockchain are reshaping finance. New products, such as platform finance, peer-to-peer lending and robo-advisory services, are examples of this transformation. These developments raise important questions: How concerned should traditional financial institutions be? What strategies can fintech and “techfin” (technology companies that move into financial services) disruptors adopt to secure their place in this evolving landscape?

There are two main threats to the traditional finance industry. The first comes from fintech companies. These firms offer specialised services, such as cryptocurrency-trading platforms like Robinhood or currency exchange services like Wise. Their strength lies in solving problems that traditional banks and wealth managers have yet to address or have chosen not to address given their cost and risk implications.

The second threat comes from techfin giants like Alibaba, Tencent and Google. These companies already have vast ecosystems of clients. They aren’t just offering new technology – they are providing financial services that compete directly with traditional banks. By leveraging their existing customer bases, they are gaining ground in the financial sector.

A common problem for traditional players is their belief that technology is simply a tool for improving efficiency. Banks often adopt digital solutions to compete with fintech and techfin firms, thinking that faster or cheaper services will suffice. However, this approach is flawed. It’s like putting an old product in new packaging. These disruptors aren’t just offering faster services – they’re solving needs that traditional banks are overlooking.

Evolving client expectations

One area where traditional players have fallen short is meeting the needs of investors who can’t afford the high entry costs set by banks. Fintech and techfin companies have successfully targeted these overlooked groups.

A prime example is Alibaba’s Yu’e Bao. It revolutionised stock market participation for millions of retail investors in China. Traditional banks set high transaction thresholds, effectively shutting out smaller investors. Yu’e Bao, however, saw the potential of pooling the contributions of millions of small investors. This approach allowed them to create a massive fund that allowed these individuals to access the markets. Traditional banks had missed this opportunity. The equivalent of Alibaba’s Yu’e Bao in a decentralised ecosystem is robo-advisors, which create financial inclusion for otherwise neglected retail investors. 

These examples show that disruptors aren’t just using new technologies. They are changing the game entirely. By rethinking how financial services are delivered, fintech and techfin firms are offering access, flexibility and affordability in ways traditional institutions have not.

What can traditional players do?

For traditional financial institutions to remain competitive, they need to change their strategies. First, they should consider slimming down. The era of universal banks that try to do everything is over. Customers no longer want one-stop-shops – they seek tailored solutions.

Second, instead of offering only their own products, banks could bundle them with those of other providers. By acting more as advisors than product pushers, they can add value to clients. Rather than compete directly with fintech or techfin firms, banks could collaborate with them. Offering a diverse range of solutions would build trust with clients. 

Finally, banks must stop demanding exclusivity from clients. Today’s customers prefer a multi-channel approach. They want the freedom to select from a variety of services across different platforms. Banks need to stop “locking in” clients with high exit fees and transaction costs. Instead, they should retain clients by offering real value. When clients feel free to come and go, they are more likely to stay because they know they’re receiving unbiased advice and products that meet their needs.

This would require taking an “open-platform” approach that focuses more on pulling customers in because they are attracted by the benefits of the ecosystem than locking them in or gating their exit. It is akin to Microsoft’s switch from a closed-source to an open-source model.

Do fintech and techfin have the winning formula?

While traditional players face their own challenges, fintech and techfin companies must also stay sharp. Though they excel at creating niche services, these disruptors often lack a broader understanding of the financial ecosystem. Many fintech and techfin firms are highly specialised. They know their products well, but they may not fully understand their competition or how to position themselves in the larger market.

For these disruptors, the key to long-term success lies in collaboration. By learning more about traditional players – and even partnering with them – fintech and techfin companies can position themselves for sustainable growth. Whether through alliances or by filling service gaps in traditional banks, fintech and techfin firms can benefit from a better understanding of their competitors and partners.

Learning from disruption

In a world of rapid technological change, financial professionals are seeking structured ways to navigate this evolving landscape. Programmes like INSEAD’s Strategic Management in Banking (SMB) offer a mix of theory and practical experience, helping participants understand current trends in the industry.

For example, SMB includes simulations that reflect real-world challenges. In one, participants work through a risk-management scenario using quantitative tools. In another, they engage in a leadership simulation that focuses on asking the right questions and understanding the numbers behind a buy-over deal. These experiences help bridge the gap between theoretical knowledge and practical application.

Equally important are the networks built through such programmes. With participants coming from traditional banks, fintech and techfin firms, the environment encourages collaboration and mutual understanding – both of which are crucial in today’s interconnected financial world.

The next big wave in finance

Looking ahead, the next wave of disruption is unlikely to come from more advanced technology. Instead, it will likely stem from changing relationships between banks and their clients. The competitive advantage of traditional institutions will not come from technology alone. While price efficiencies are necessary, they are not enough.

What will set successful banks apart is their ability to connect with clients on a deeper level. Technology may speed up transactions, but it cannot replace the trust and human connection that are central to financial services. As behavioural finance continues to grow in importance, banks can move beyond managing money to managing client behaviour. Helping clients overcome biases that hinder their financial decisions will be key.

In the end, it’s not just about how fast or how efficient your services are. The future of finance lies in blending innovation with the timeless principles of trust, advice and human insight. Both traditional players and disruptors will need to find that balance if they hope to thrive in this new era.

If the incoming Trump Administration picks up where it left off, the last unfinished business of the 2008 financial crisis may soon be addressed. That business? Reforming a housing finance system that has been stuck in a sort of high-functioning limbo for more than 16 years.

Housing received considerable attention in the recent election, but that focus was on increasing supply, lowering prices, and providing downpayment help. Absent was a discussion about the federal agencies and programs that ensure ready access to loans for homeownership.

The U.S. housing finance system has largely recovered from the 2008 financial crisis, when the housing market collapsed. Contributing factors in the years leading up to the crisis included unsustainable home price increases, relaxed lending requirements, and an influx of subprime mortgages. Loosened lending was enabled by an increasingly sophisticated set of finance tools—mortgage-backed securities and related derivative products—used by lenders and Wall Street firms. That dynamic led to an expansion of mortgage availability that drove unsustainable house price increases.^[1]

Rising prices led to a belief they would continue to rise, further inflating prices. All was well until prices peaked, and then declined, as high-risk borrowers found it difficult to refinance or sell to settle mortgage debts. Falling prices accelerated as default-driven homes for sale flooded the market. Weakened mortgage lenders then began defaulting on their own lines of credit. Wall Street quickly lost its appetite for risky mortgages and credit markets began to freeze. By late 2008, the seismic impacts of the U.S. housing downturn were being felt across the global economy.

In Washington D.C., policymakers authorized and executed on a series of legislative, regulatory, and operational reforms—often intended as triage-like treatments to stabilize the system—to ensure continued strong mortgage market liquidity. A complete market meltdown was prevented.

Since then, however, the system has progressed without a cohesive and comprehensive reconsideration. Instead, mortgage guarantee agencies and government-sponsored enterprises (GSEs) have adapted their operations and processes to meet evolving market circumstances, but only on the margin. That could change if the incoming administration decides to continue efforts the first Trump Administration initiated in 2019 to overhaul the system.

Beyond addressing housing finance, there is also a need to expand the supply and affordability of housing by making it easier to provide more types of housing in places where people want to live. A common thread through the nation’s housing affordability crisis is the fact that the supply of homes built has been insufficient to keep up with demand. While a healthy finance system is critical, that alone is insufficient to expand the nation’s supply of housing to meet current and future needs. That said, the rest of this essay focuses on housing finance.

Is A Bigger FHA Here To Stay?

Many of the stabilization measures enacted in response to the 2008 crisis (such as the Troubled Assets Relief Program) were wound down as the economy recovered. But that was not the case at the Federal Housing Administration, the main U.S. agency that guarantees loans made by lenders to homebuyers. FHA dramatically expanded its role as private lending rapidly receded, precisely the countercyclical role envisioned for the agency at its founding in 1934. In fact, FHA’s market share jumped from less than 4% in 2006 to a quarter of all home purchases during the crisis.

Today, the agency continues to back mortgages at elevated, though moderated, levels. Its portfolio of loan guaranties continues to grow and, according to a 2023 report issued by Arnold Ventures (which I authored), rose 171% in inflation-adjusted terms from 2007 to 2023. While a growing portfolio poses potential risks to taxpayers, loans originated since the crisis have performed much better than those made previously. FHA has improved its lending guidelines and adopted improvements such as risk-based underwriting.

Budgetarily, FHA’s single family mortgage insurance programs were projected to result in savings each year from 2000 to 2009. Premium revenues were forecast to far exceed payments on claims. However, after the 2008 crisis, it became clear loans made in those years cost (rather than saved) billions of dollars. Making matters worse, those savings that never materialized were spent elsewhere (showing the danger of mixing cash and accrual budgeting concepts).

Since then, and even with substantial increases in lending volumes, performance has been more in line with forecasts and has, at times, exceeded expectations. Based on supplemental data contained in the 2025 Budget, increasingly reliable forecasts have reflected more in savings than were realized before the crisis. Nevertheless, risks remain that could impact taxpayers in a significant economic downturn.

But FHA’s role in the housing finance system has proven beneficial during and after the financial crisis. While there is no compelling need for reform, legislative efforts to refresh the GSEs could pull FHA (and its sister agency Ginnie Mae) into the fray to ensure roles are harmonized.

Will Fannie/Freddie Conservatorship End?

The primary function of the GSEs, Fannie Mae and Freddie Mac, is to facilitate liquidity in the U.S. mortgage finance system. They purchase home loans made by banks and other lenders—known as conforming loans since they must meet strict size and underwriting standards— and pool those loans into mortgage-backed securities, which are then sold to investors. Those securities are favored because the GSEs guarantee full principal even if the underlying mortgages default. The GSEs typically finance more than half of all mortgages originated.

The GSEs are private companies created by the U.S. government. During the financial crisis, Fannie and Freddie were placed into conservatorship by their then-newly created regulator, the Federal Housing Finance Agency. While not at that point insolvent, their earnings and capital were deteriorating as house prices fell and their capacity to absorb further losses was in doubt. A driving concern was that if they failed due to substantial defaults on their insured mortgage portfolios or an inability to issue debt to finance themselves, the crisis would have escalated dramatically.

Conservatorship is an odd legal place for any organization to reside for an extended period—with a third party (in this case FHFA) in operational control. Conservatorship was expected to last only a short time. Then-Treasury Secretary Henry Paulson dubbed the move a “time out” to give policymakers an interval to decide their future. But the GSEs have remained there for more than 16 years, with occasional changes to conservatorship terms. In recent years, the Biden Administration has shown little interest in resolving the matter.

If actions during the first Trump presidency are any indicator, the incoming administration will be more assertive in tackling the issue. A memorandum issued by President Trump on March 27, 2019, stated that “The lack of comprehensive housing finance reform since the financial crisis of 2008 has left taxpayers potentially exposed to future bailouts, and has left the Federal housing finance programs at the Department of Housing and Urban Development potentially overexposed to risk and with outdated operations.” The memo goes on to point out that reforms are needed “to reduce taxpayer risks, expand the private sector’s role, modernize government housing programs, and make sustainable home ownership for American families our benchmark of success.”

The Treasury Secretary was directed to develop a plan to end the conservatorship, facilitate competition in housing finance, operate the GSEs in a safe and sound manner, and ensure the government is properly compensated for any backing. Under the direction of then-Secretary Steven Mnuchin, Treasury published such a plan in September 2019 proposing both legislative and administrative reforms. FHFA and Treasury then began carrying out the parts of the plan that could be done administratively.

Former FHFA Director Mark Calabria wrote about those actions in his 2023 book Shelter from the Storm. Plans were being made “to bring the conservatorships to an end, restructure the balance sheets, and end the illegal line of credit, while preserving stability in the mortgage market.” But those plans were pushed until after the election to avoid any market disruptions that might occur, particularly given risks posed to the economy by the COVID-19 pandemic.

Consequently, some key actions were completed while others remained on the drawing board. The GSEs were allowed to build capital by retaining earnings and, in a related move, FHFA established a post-conservatorship minimum capital rule. The outgoing administration left a blueprint for reform to end the conservatorship, compensate taxpayers, and allow the GSEs to raise third-party capital.^[2]

The Need For Congressional Action

While the new administration can take steps to reform and release the GSEs from conservatorship, a transformed and well-coordinated housing finance system will require legislative action as well. The activities of housing finance agencies like FHA and the GSEs should complement each other. Roles need to be clearly defined, overlap avoided, and taxpayer risks minimized.

The new Congress and incoming administration must explicitly determine those roles. While objectionable levels of risk have accrued in the past, the housing finance system has operated much more soundly in recent years. Legislation should be structured to lock in the operational and financial improvements since the financial crisis and to codify reforms to further strengthen the system.

The nation’s housing market depends on a robust and dynamic housing finance system. While maintaining the status quo follows a path of least political resistance, it will be interesting to see if a second Trump Administrations picks up its past pursuit of comprehensive reform.

[1] For a fuller explanation of the conditions that led to the crisis, see Subprime Mortgage Crisis, by John V. Duca, Federal Reserve Bank of Dallas, November 22, 2013.

[2] For a detailed explanation of events during and after conservatorship see: The GSE Conservatorships: Fifteen Years Old, With No End in Sight, by former Freddie Mac CEO Donald H. Layton, September 5, 2023.