Featured Product

    FSB Examines Financial Stability Aspects of Bigtech and Cloud Services

    December 09, 2019

    FSB published two reports that consider the financial stability implications from the offering of financial services by bigtech firms and the adoption of cloud computing and data services across a range of functions at financial institutions. The report on bigtech in finance highlights that range of issues arise for policymakers, including with respect to additional financial regulation and oversight. The report on third-party dependencies in cloud services concludes that there do not appear to be immediate financial stability risks stemming from the use of cloud services by financial institutions. However, further discussion among authorities to assess the adequacy of regulatory standards and supervisory practices for outsourcing arrangements may be beneficial.

    Key highlights of report on bigtech in finance

    The report considers the financial stability implications of bigtech firms as they expand into offering financial services. Their entry into finance has numerous benefits, including the potential for greater innovation, diversification, and efficiency in the provision of financial services. They can also contribute to financial inclusion, particularly in emerging markets and developing economies, and may facilitate access to financial markets for small and medium-size enterprises. However, bigtech firms may also pose risks to financial stability. Some risks are similar to those from financial firms more broadly, stemming from leverage, maturity transformation and liquidity mismatches, and operational risks.

    A range of issues arise for policymakers, including with respect to additional financial regulation and oversight. Regulators and supervisors need to be mindful of the resilience and the viability of the business models of incumbent firms, given interlinkages with, and competition from, bigtech firms. The report highlights that three particular issues may be worthy of further consideration by policymakers: 

    • The first relates to the scope for bigtech firms to provide financial services from outside the traditional financial sector. In some jurisdictions, questions may arise questions on which financial regulation is applicable to bigtech firms carrying out financial activities and the degree to which such firms are bound by financial regulation. The presence of bigtech firms in financial services may also highlight the need to complement an entity-based approach with an activity-based approach to regulation. The regulatory authorities may wish to consider the relative size and risk of both large bigtech and smaller fintech firms.
    • Second, the diverse business lines of bigtech firms, coupled with their complex and varied interlinkages with traditional financial institutions, may be a source of risk and prompt vigilant monitoring. In some jurisdictions, there may also be a need to coordinate supervision of the financial activities of bigtech firms with the supervision of financial institutions’ use of third-party services from the same firms.
    • Third, bigtech firms’ ability to leverage customer data may raise the question of how financial authorities should approach data rights, particularly in the wider context of data protection regulations. Regulatory obligations for banks to share relevant data with new entrants (such as that embodied in open banking regulations) may enhance competition but may also pose new risks. Financial authorities may also benefit from close engagement with other regulatory agencies (for example, competition authorities and those involved with data protection).

    Key highlights of report on third-party dependencies in cloud services

    The report begins by describing the types of third-party dependencies and the features of cloud services markets and models. It then outlines the potential benefits and risks associated with cloud services, before moving on to take stock of the international guidelines that cover standards and practices with respect to outsourcing and third-party relationships. Finally, the report discusses the policy implications of this analysis and outlines the current and future work on outsourcing, third-party relationships, and cloud services at the international level. Going forward, a discussion among supervisory and regulatory authorities on approaches to these issues would be constructive. The report concludes that the following three areas could benefit from further work on:

    • Existing regulatory standards and supervisory practices for outsourcing arrangement and whether there is a need to further assess the systemic dimension of risks in financial institutions using public cloud services and, if appropriate, for standard-setting bodies to update current frameworks
    • Exploration of possibilities for better coordination and cooperation and information-sharing among authorities when considering cloud services used by financial institutions
    • Standardization efforts to ensure interoperability and data portability in cloud environments and the role authorities could have in relation to this ongoing work

    With respect to the ongoing work in this area at the international level, FSB is working on developing effective practices related to a financial institution’s response to, and recovery from, a cyber incident, including relations of a firm with third-party service providers. IAIS is working on the supervision of control functions with respect to insurers, which might include issues related to outsourcing of control functions. IAIS is also considering work on a best practices paper related to reliance of insurers on, and exposure to, specialist technology providers, in which cloud providers might be included. Furthermore, the IOSCO Board has approved a mandate for work on the risks associated with the use of third-party service providers and for updating the IOSCO principles on outsourcing in light of recent developments.

     

    Related Links

    Keywords: International, Banking, Insurance, Securities, Financial Stability, Bigtech, Cloud Service Providers, Third-Party Service Providers, FSB

    Related Articles
    News

    PRA Consults on Implementation of Certain Provisions of CRD5

    PRA, via the consultation paper CP12/20, proposed changes to its rules, supervisory statements, and statements of policy to implement certain elements of the Capital Requirements Directive (CRD5).

    July 31, 2020 WebPage Regulatory News
    News

    EIOPA Report Identifies Key Financial Stability Risks for Insurers

    EIOPA published the financial stability report that provides detailed quantitative and qualitative assessment of the key risks identified for the insurance and occupational pensions sectors in the European Economic Area.

    July 30, 2020 WebPage Regulatory News
    News

    EBA Publishes Risk Dashboard for First Quarter of 2020

    EBA published its risk dashboard for the first quarter of 2020 together with the results of the risk assessment questionnaire.

    July 30, 2020 WebPage Regulatory News
    News

    EBA Issues Updates on Stress Test Exercise for Banks in EU

    EBA announced that the next stress testing exercise is expected to be launched at the end of January 2021 and its results are to be published at the end of July 2021.

    July 30, 2020 WebPage Regulatory News
    News

    PRA Proposes Guidance Related to Matching Adjustment under Solvency II

    PRA published the consultation paper CP11/20 that sets out its expectations and guidance related to auditors’ work on the matching adjustment under Solvency II.

    July 30, 2020 WebPage Regulatory News
    News

    MAS Issues Guidance on Dividend Distributions by Banks

    MAS published a statement guidance on dividend distribution by banks.

    July 30, 2020 WebPage Regulatory News
    News

    APRA Updates Guidance on Capital Management for Banks

    APRA updated its capital management guidance for banks, particularly easing restrictions around paying dividends as institutions continue to manage the disruption caused by COVID-19 pandemic.

    July 29, 2020 WebPage Regulatory News
    News

    FSB Report Reviews Macro-Prudential Framework and Tools in Germany

    FSB published a report that reviews the progress on data collection for macro-prudential analysis and the availability and use of macro-prudential tools in Germany.

    July 29, 2020 WebPage Regulatory News
    News

    EBA Urges Firms to Finalize Preparations for End of Brexit Transition

    EBA issued a statement reminding financial institutions that the transition period between EU and UK will expire on December 31, 2020; this will end the possibility for the UK-based financial institutions to offer financial services to EU customers on a cross-border basis via passporting.

    July 29, 2020 WebPage Regulatory News
    News

    SRB on Operational Continuity in Resolution and FMI Contingency Plans

    SRB published guidance on operational continuity in resolution and financial market infrastructure (FMI) contingency plans.

    July 29, 2020 WebPage Regulatory News
    RESULTS 1 - 10 OF 5604