The Advisory Scientific Committee (ASC) of the European Systemic Risk Board (ESRB) published a report that looks at forces affecting the banking system, explores the expected impact of digitalization on provision of financial and banking services, and proposes policy measures to address the risks stemming from digitalization. The report looks at the impact of factors such as climate change, the growth of non-banks—especially the emergence of lending platforms, overbanking, and the COVID-19 pandemic. The report notes that, while the overall share of fintech lenders in lending markets is still small, in some countries, they have achieved a significant share in specific business lines. With respect to the lending business, the capacity of big tech companies to tap into a vast amount of personal data and turn soft into hard information undermines the information franchise value of banks.
The report discuses different scenarios on how the emergence of fintech and big tech companies could influence the structure of the financial system and thus the future of the current banking system. The report defines three hypothetical scenarios for the financial system in 2030 and discusses the appropriate macro-prudential policy response. In the first scenario, banks continue to dominate, retaining their central role in the areas of money creation and financial intermediation. In the second scenario, banks retrench while big tech firms capture the lending market, leading to a structural shift in the financial system. In the third scenario, the issuance of retail central bank digital currencies results, under certain specifications, in financial intermediation shifting away from banks. Critically, the regulatory response will be a key driver of which of the three scenarios materializes. The report proposes a number of policy measures to address the associated financial and non-financial risks, with some measures applying to all three scenarios and yet others being only relevant to one or two of the scenarios:
- An important consideration would be to enhance global cooperation on the regulation of the financial activities of fintech and big tech firms as well as the access of these companies to the safety net.
- A second related issue is the possible ringfencing of the financial intermediation activities developed by big tech firms, as these might be forced to be provided through a subsidiary that would fall within the regulatory perimeter. In the case of non-intermediation activities (for example advisory services), all providers should be subject to the same regulation and supervision.
- A third area for policy action would cover non-financial providers of services, which may be under a different regulatory authority (for example, telecom regulator). As the regulatory and legislative approaches toward platform companies (that is, big tech companies) change on the European Union level (driven by the Directorate General for Competition), such changes should involve close cooperation with financial sector regulators.
- The increased digitalization in financial services may also call for a change in regulatory and supervisory practices. Digitalization may bring increased importance to non-financial risks, with many of them currently under the umbrella of operational risks.
- The support framework for an orderly exit and capacity reduction of incumbent banks should be strengthened. Under the aforementioned scenarios, incumbent banks will face increased competition and the possibly of exiting the market, a process that supervisory and resolution authorities must be prepared for. This includes avoiding government support for inviable banks, but also facilitating mergers, including across borders, and easing barriers to market exit and liquidation. A premium should, therefore, be put on efforts to complete the Banking Union as a necessary condition for more cross-border bank mergers.
Keywords: Europe, EU, Banking, Regtech, Lending, Lending Marketplace, P2P Lending, Bigtech, Platform Businesses, Financial Intermediation, ESRB
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