GM of BIS Examines Regulatory Implications of Big Tech in Finance

Mr. Carstens describes big tech firms as the large technology companies that are entering into the financial services arena. Big data is at the core of their business and this gives big tech firms the edge over competitors. The firms can exploit existing customer networks and the massive quantities of data generated by their business lines. Credit decisions of big tech firms are based on predictive algorithms and machine learning techniques while traditional banks commonly rely more on human judgment to approve or reject credit applications. However, to public policymakers, this aspect represents one of the greatest challenges. Big tech firms may improve competition and financial inclusion, put welcome pressure on incumbent financial institutions to innovate, and boost the overall efficiency of financial services. However, such firms may increase market concentration and give rise to new risks, including systemic risks due to the way they interact with the broader financial system. It is, therefore, important to understand how big tech firms fit within the current regulatory framework and how regulation should be organized.

With respect to the public policy implications and risks from the expanding role of big techs in finance, Mr. Carstens highlights that public authorities have these risks on their radar and have taken steps to address them. For instance, in China (where the big tech firms are most active), PBC and CSRC have introduced a cap on instant redemptions on money market funds. They have also increased disclosure obligations to avoid misleading forms of advertising. Additionally, PBC has recently adopted reforms for big tech firms in payments, dealing with reserve requirements and central clearing requirements. First, from January 2019, PBC will require big tech firms to keep a 100% reserve requirement on the custodial accounts. Second, since June 2018, big tech firms have had to channel payments through an authorized clearing house. The establishment of a two-tier clearing system improves transparency in the Chinese payment system and allows PBC to monitor customer funds on third-party payment platforms. GM of BIS also added that if big tech entry is driven primarily by market power, relying on exploiting regulatory loopholes and the bandwagon effects of network externalities, this could encourage banks into new forms of risk-taking. The public policy solution would be to close the regulatory loopholes. 

Another challenge is that big tech developments raise issues that go beyond the scope of prudential supervision. Cyber-threats challenge global regulators. A big tech firm that provides third-party services to many financial institutions—whether data storage, transmission or analytics—could pose a systemic risk if there is an operational failure or a cyber-attack. Overall, regulators must provide a secure and level playing field for all participants, incumbents, and new entrants. Firms providing similar services or taking similar risks cannot operate under different regulatory regimes, as this would create regulatory gaps. Mr. Carstens concludes: "Authorities worldwide have a joint interest in an open and frank discussion of public policy goals and responses and they must work together both to harness the promise of big tech and to manage its risks. Global safety and soundness will benefit from more cooperation between supervisors and more information-sharing, especially as big tech firms operate across national borders. As in most financial regulation, international coordination is the name of the game."

Related Link: Speech

Keywords: International, Banking, Regtech, Big Tech, Big Data, Systemic Risk, Cyber Risk, BIS