Featured Product

    BIS Paper Contributes to Debate on Regulating NBFIs and Big Techs

    August 03, 2022

    The Financial Stability Institute (FSI) of the Bank for International Settlements recently published a paper proposing a framework for classifying financial stability regulation as either entity-based or activity-based. The framework has applicability for the regulation of banks, non-bank financial intermediaries (NBFIs), and big tech firms.

    The paper examines the differences between activity- and entity-based regulations and between micro- and macro-prudential regulations, followed by their applications to NBFIs and big tech firms. The paper notes that activity-based regulation is superior when the failure of an activity—as opposed to that of the entities performing it—can create a systemic event and this activity can be effectively regulated directly on a standalone basis. However, when financial stability requires constraining the combination of different activities within entities, authorities need to resort to entity-based measures. This is often the case because of the very nature of financial intermediation, notably in the presence of leverage and liquidity transformation, which are at the root of key financial vulnerabilities. Entity- and activity-based regulations can reinforce each other in a belt-and-braces approach (for example, loan-to-value/debt-to-income maximum ratios alongside capital requirements). The paper also notes that comparing the entity-based versus activity-based classification with the micro-prudential versus macro-prudential one yields important insights. Although activity-based measures target systemic activities, they are not necessarily macro-prudential because they may not account for the importance of individual entities for the given activity. When activity-based regulation does adopt a macro-prudential perspective, it is not necessarily consistent with a level playing field, in contrast to a common view. Notably, such regulation should impose stricter standards on entities that perform a larger share of a systemic activity, thus putting them at a competitive disadvantage, all else equal.

    Applying the framework to NBFIs and big tech firms highlights deficiencies of current approaches to achieving financial stability objectives. The key aspects of NBFI regulation are largely entity-based. A notable example is (minimum) liquidity and leverage requirements for mutual funds, which are calibrated at the level of funds’ balance sheets. Seeking to strengthen the resilience of individual funds, these measures are conceptually equivalent to regulatory requirements for banks and structured in a very similar way—and they are, in both cases, micro-prudential. In times of stress, mutual fund liquidity requirements lead to liquidity hoarding or deleveraging that exacerbates market swings, thus undermining financial stability. One reason for the mismatch between NBFI measures and financial stability objectives is that the requirements were designed for narrow investor-protection purposes. Activity-based margining requirements are another example of tools whose design could be improved to better support financial stability; despite concerns about their procyclicality, they are still calibrated largely without regard to systemic risks. By contrast, financial stability would call for a macro-prudential perspective along the time dimension. Overall, the dominance of investor-protection objectives in the investment fund sector and the  consequent focus on entities on a standalone basis result in a policy gap from a financial stability perspective.

    With respect to big tech firms, however, although their financial activities (for example, payment services) are a small part of their overall business, big tech firms may already be large players in some systemic activity, or soon could be. Activity-based regulation would be a natural starting point to ensure that big tech firms are subject to the same financial stability measures as other entities performing the same activities. In addition, macro-prudential considerations would call for imposing tighter constraints on big tech firms that dominate a specific activity. This would tilt the playing field against them. That said, an activity-based approach will generally be insufficient. Since big tech firms provide a gamut of services, the systemic repercussions could be substantial if one of these entities were to fail. Entity-based measures with macro-prudential orientation, as in the case of global systemically important banks (G-SIBs), would thus be warranted. For such regulation to be effective and efficient, notably avoiding the imposition of financial stability measures on non-financial activities, big tech firms may need to adopt a holding company structure and engage in financial activities.

     

    Related Links

    Keywords: International, Banking, Financial Stability, Entity Based Regulation, Activity Based Regulation, Bigtech, NBFI, Regtech, Lending, Systemic Risk, FSI

    Featured Experts
    Related Articles
    News

    EBA Publishes Final Regulatory Standards on STS Securitizations

    The European Banking Authority (EBA) published the final draft regulatory technical standards specifying and, where relevant, calibrating the minimum performance-related triggers for simple.

    September 20, 2022 WebPage Regulatory News
    News

    ECB Further Reviews Costs and Benefits Associated with IReF

    The European Central Bank (ECB) is undertaking the integrated reporting framework (IReF) project to integrate statistical requirements for banks into a standardized reporting framework that would be applicable across the euro area and adopted by authorities in other EU member states.

    September 15, 2022 WebPage Regulatory News
    News

    BCBS to Finalize Crypto Rules by End-2022; US to Propose Basel 3 Rules

    The Basel Committee on Banking Supervision met, shortly after a gathering of the Group of Central Bank Governors and Heads of Supervision (GHOS), the oversight body of BCBS.

    September 15, 2022 WebPage Regulatory News
    News

    IOSCO Welcomes Work on Sustainability-Related Corporate Reporting

    The International Organization of Securities Commissions (IOSCO) welcomed the work of the international audit and assurance standard setters—the International Auditing and Assurance Standards Board (IAASB)

    September 15, 2022 WebPage Regulatory News
    News

    EBA Publishes Funding Plans Report, Receives EMAS Certification

    The European Banking Authority (EBA) has been awarded the top European Standard for its environmental performance under the European Eco-Management and Audit Scheme (EMAS).

    September 15, 2022 WebPage Regulatory News
    News

    MAS Launches SaaS Solution to Simplify Listed Entity ESG Disclosures

    The Monetary Authority of Singapore (MAS) set out the Financial Services Industry Transformation Map 2025 and, in collaboration with the SGX Group, launched ESGenome.

    September 15, 2022 WebPage Regulatory News
    News

    BoE Allows One-Day Delay in Statistical Data Submissions by Banks

    The Bank of England (BoE) published a Statistical Notice (2022/18), which informs that due to the Bank Holiday granted for Her Majesty Queen Elizabeth II’s State Funeral on Monday September 19, 2022.

    September 14, 2022 WebPage Regulatory News
    News

    ACPR Amends Reporting Module Timelines Under EBA Framework 3.2

    The French Prudential Control and Resolution Authority (ACPR) announced that the European Banking Authority (EBA) has updated its filing rules and the implementation dates for certain modules of the EBA reporting framework 3.2.

    September 14, 2022 WebPage Regulatory News
    News

    ECB Paper Discusses Disclosure of Climate Risks by Credit Agencies

    The European Central Bank (ECB) published a paper that examines how credit rating agencies accepted by the Eurosystem, as part of the Eurosystem Credit Assessment Framework (ECAF)

    September 13, 2022 WebPage Regulatory News
    News

    APRA to Modernize Prudential Architecture, Reduces Liquidity Facility

    The Australian Prudential Regulation Authority (APRA) announced reduction in the aggregate Committed Liquidity Facility (CLF) for authorized deposit-taking entities to ~USD 33 billion on September 01, 2022.

    September 12, 2022 WebPage Regulatory News
    RESULTS 1 - 10 OF 8514