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    BIS Quarterly Review Discusses Developments in Fintech and ESG Space

    September 20, 2021

    BIS published the September issue of the Quarterly Review, which contains special features that analyze the rapid rise in equity funding for financial technology firms, the effectiveness of policy measures in response to pandemic, and the evolution of international banking. The review also contains a chapter on recent financial market developments with two notably relevant information boxes: one on the booming demand for investment products with environmental, social, and governance (ESG) benefits and the other on the dynamics of European money market fund flows during the March 2020 turbulence.

    The special feature on fintech firms examines trends in equity funding and the underlying country-specific drivers. It first provides an overview of investment in fintech firms across time, regions, market segments, and investment stages. The special feature then analyzes which factors are associated with differences in fintech firms' capital-raising activity across countries. This is among the first studies to address whether targeted policy measures, in particular regulatory sandboxes, improve fintech firms' access to finance. The Quarterly Review special feature highlights that fintech firms have raised over USD 1 trillion in equity globally since 2010. While the investment landscape was initially quite concentrated, it has become more diverse, both geographically and across market segments. Equity funding for fintech firms is higher in countries with more innovation capacity and better regulatory quality; the funding also increases after the introduction of regulatory sandboxes. Early-stage venture capital investment is higher after merger and acquisition activity by large banks, but not after such activity by big tech firms. Market segments such as "cryptocurrency and blockchain" and "big data, artificial intelligence (AI) and machine learning" dominate the funding landscape, though smaller segments are gaining ground.

    The special feature on COVID-19 policy measures to support bank lending informs the discussion on the way these policy measures supported the flow of bank credit via two main mechanisms—by enhancing bank lending capacity and by providing incentives for banks to lend. Evidence shows that both types of measures contributed to lending growth. Some measures strengthened the lending capacity of banks by preserving their capital and encouraging flexibility in loss accounting; others, such as state-backed loan guarantees or funding for lending programs, incentivized banks to use their available capacity. Strong banks with ample balance sheet capacity could accommodate the large drawdown of corporate credit lines in the first months of the pandemic. Policy support appeared to foster further lending. Banks that increased their lending capacity increased their lending more than other banks. More generous guarantee programs were associated with banks reporting looser lending standards and higher lending growth. Benefiting from such programs, small and medium-size enterprises expanded their borrowing, especially those in sectors hit hard by the pandemic. To phase-out the support measures, the sequence, timing, and speed of withdrawing these policy measures are the keys. 

    Within a box on the market developments in sustainable finance, the review notes that the demand for investment products classified as delivering ESG benefits is booming. While growth in ESG assets shows no signs of abating, lack of standardization and the ensuing classification issues make it difficult to pin down precise amounts. One set of industry estimates relies on a broad definition that includes various approaches to integrating ESG criteria as well as "thematic," "impact," and "community" investing. On this basis, some estimates indicate that ESG assets rose by nearly one third between 2016 and 2020 to USD 35 trillion, or no less than 36% of total professionally managed assets. Another set of estimates—based on a narrower definition and including only mutual funds and exchange-traded funds (ETFs) that self-report as having ESG or socially responsible investment (SRI) mandates—shows even faster growth but at lower levels. The assets managed by these funds have soared over the past five years, more than tenfold, and now stand at approximately USD 2 trillion. However, limited disclosure requirements result in an incomplete picture of which investors hold ESG assets, especially equity instruments. The review also notes that there are signs that ESG assets' valuations may be stretched and that these, along with certain other, considerations suggest developments in the ESG market should be closely monitored.

     

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    Keywords: International, Banking, Quarterly Review, Sustainable Finance, ESG, COVID-19, Fintech, Credit Risk, Lending, Regtech, BIS

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