Financial Stability Board warns of bigtech banking risk
Google, Amazon, Facebook and Apple (GAFA) pose a risk to the stability of the financial system, according to a report from the Financial Stability Board (FSB).
The FSB report, ‘bigtech in finance: Market development and potential financial stability implications’, acknowledges that the entry of technology companies into the financial services industry does have its benefits.
It highlights in particular the potential for greater innovation, diversification and efficiency in the provision of financial services.
The FSB writes: “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-sized enterprises.”
Despite these benefits, the report also highlights the risks inherent in GAFA market entry. Among them are risks that stem from leverage, maturity transformation and liquidity mismatches. The report also underlines concerns that technology firms may have inexperience when dealing with governance, risk and process controls.
The FSB report also worries about the impact tech companies could have on the bottom line and profitability of incumbent banks.
“Increased competition – either directly from bigtech entrants or indirectly from their displacement of customer relationships – could affect the profitability of financial institutions,” it writes.
“It is not the role of authorities to protect financial institutions from competition, but regulators and supervisors should pay close attention to the impact of competition on viability of business models and the nature of the competitive response from incumbents.”
While the report recognises that financial intermediation by non-bank firms it not a new thing, it is generally performed by firms within an existing regulatory oversight framework.
“In some jurisdictions, there may arise questions of which financial regulation is applicable to bigtech firms carrying out financial activities, and the degree to which such firms are bound by financial regulation.”
GAFA companies have diverse business lines, the report warns, which means they can have complex and varied interlinkages with traditional financial institutions. From this it argues a deep source of risk could arise, and recommends that prompt and vigilant monitoring is undertaken by regulatory supervisors.