Agustín Carstens, the General Manager (GM) of BIS, during the keynote address at the FT Banking Summit in London, spoke about new challenges and policy implications of big tech in finance. He examined the trends and potential drivers of big tech activities in financial services worldwide, also analyzing the possible effects of big tech on financial intermediation and the new conceptual and practical challenges that big tech poses for regulators.
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
Previous ArticleHKMA Publishes Policy Modules Under Banking Exposure Limit Rules
The Australian Prudential Regulation Authority (APRA) published a new set of frequently asked questions (FAQs) to clarify the regulatory capital treatment of investments in the overseas deposit-taking and insurance subsidiaries.
The Prudential Regulation Authority (PRA) issued the policy statement PS20/21, which contains final rules for the application of existing consolidated prudential requirements to financial holding companies and mixed financial holding companies.
The European Banking Authority (EBA) published the final report on the guidelines specifying the criteria to assess the exceptional cases when institutions exceed the large exposure limits and the time and measures needed for institutions to return to compliance.
The European Banking Authority (EBA) revised the guidelines on stress tests to be conducted by the national deposit guarantee schemes under the Deposit Guarantee Schemes Directive (DGSD).
The Hong Kong Monetary Authority (HKMA) issued a circular, for all authorized institutions, to confirm its support of an information note that sets out various options available in the loan market for replacing USD LIBOR with the Secured Overnight Financing Rate (SOFR).
The Office of the Comptroller of the Currency (OCC) issued a new "Problem Bank Supervision" booklet of the Comptroller's Handbook. The booklet covers information on timely identification and rehabilitation of problem banks and their advanced supervision, enforcement, and resolution when conditions warrant.
The Monetary Authority of Singapore (MAS) launched a consultation on the standards for market risk capital and the associated reporting requirements for banks incorporated in Singapore.
The tech lab of the Federal Deposit Insurance Corporation (FDIC) selected three winning teams in a tech sprint designed to explore new technologies and techniques to help banks meet the needs of unbanked consumers.
PRA published a "Dear CEO" letter that sets out findings of a review on the reliability of regulatory reporting and reiterates the supervisory expectations on regulatory reporting.
The Australian Prudential Regulation Authority (APRA) confirmed that its new data collection solution APRA Connect will go live on September 13, 2021.