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September 29, 2017

The IMF Managing Director Christine Lagarde spoke at the Bank of England Conference in London. She examined the ways in which fintech will change central banking over the next generation, while considering the possible impact of three innovations—virtual currencies, new models of financial intermediation, and artificial intelligence.

Ms. Lagarde discussed the potential for virtual currencies to provide better value and better payment services, the transformative effect of developments in artificial intelligence, and the regulatory implications of new models of financial intermediation. She highlighted that central banks typically affect asset prices through primary dealers, or big banks. However, if these banks were to become less relevant in the new financial world and if demand for central bank balances were to diminish, the “central banks may well have to increase the number of counterparties to their operations. The Bank of England is already leading the way by including large broker-dealers and central counterparty clearing houses.” These factors have regulatory implications. More counterparties imply more firms falling under the central bank’s regulatory umbrella. In this context, regulating shadow banks looks all the more pressing and FSB has already made progress in this area, she added.

She opines that “We may also see a shift in regulatory practices,” as a result. “The regulators will likely have to further expand their focus, from financial entities to financial activities—while possibly also becoming experts in assessing the soundness and security of algorithms.” To facilitate this, international cooperation is necessary, along with dialog between experienced regulators and those regulators that are just beginning to tackle fintech. Dialog is also important among policymakers, investors, and financial services firms. “Reaching across borders will be critical as the focus of regulation widens—from national entities to borderless activities, from your local bank branch to quantum-encrypted global transactions. Because of our global membership of 189 countries, the IMF is an ideal platform for these discussions. I am convinced that the IMF has a strong role to play in this respect. But the Fund will also have to be open to change, from bringing new parties to the table, to considering a role for a digital version of the SDR,” said Ms. Lagarde.

 

Related Link: Speech

Keywords: International, Banking, Fintech, Regtech, Central Banks, Financial Intermediation, IMF

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