The regulator’s focus for 2020

I was going to write stuff about this but The Financial Stability Board did it for me. Here's where the regulator will focus in 2020:

The Financial Stability Board (FSB) published its work programme for 2020. The FSB’s work priorities for 2020 reflect the evolving nature of the global financial system and associated risks to financial stability. The FSB will reinforce its forward-looking monitoring of developments to identify, assess and address new and emerging vulnerabilities. At the same time, the FSB will continue its work to finalise and operationalise the remaining elements of post-crisis reforms; monitor and assess the implementation of reforms; and evaluate their effects in order to ensure that reforms work as intended.

Important specific FSB work programme items, which include key deliverables to the G20 Saudi Arabian Presidency, are:

• FinTech. The FSB will continue to monitor financial innovation developments and assess their potential implications for financial stability. Complementing the recent report on BigTech in finance, the FSB will report on the perspective of emerging market and developing economies on this topic. The FSB will also take stock of the range of practices on the use of RegTech and SupTech.
• Global stablecoins. The introduction of so-called global “stablecoins” could pose a host of challenges to the regulatory community, including for financial stability. At the same time, it could bring benefits to the final system and wider economy. The FSB will issue a public consultation on addressing regulatory issues of stablecoins in April.
• Cross-border payment systems. Payment systems are a central pillar of the global financial system and economy. Digital innovation could improve the efficiency and inclusiveness of cross-border payment services, which are often considered to be slow and costly. In coordination with the Committee on Payments and Market Infrastructures and other relevant international organisations and standard-setting bodies, the FSB will develop and deliver to the G20 a roadmap for how to enhance global cross-border payments.
• Interest rate benchmarks. Continued reliance of global financial markets on LIBOR poses risks to financial stability. Transition away from LIBOR by end-2021 requires significant commitment and sustained effort from both financial and non-financial firms across many jurisdictions. To improve understanding and increase awareness of the importance of ensuring timely transition, the FSB will take stock of the implementation of benchmark reforms and report on remaining challenges to benchmark transition..
• Ongoing evaluation work. The FSB will take forward its multi-year programme for evaluating the effects of reforms under its Evaluation Framework. In 2020, this includes the completion of an evaluation of the effects of TBTF reforms for banks and the launch of an evaluation of the effects of money market fund reforms.

Speaking of the FSB, did you see their take on Big Tech moving into banking? No? Well, here's a quick summation of that too:

BigTech firms – large companies with established technology platforms – are playing an increasingly prominent role in the financial system and have begun to provide financial services. Some BigTech firms have grown rapidly in the past decade and, on some measures, are comparable in size or even bigger than some of the world’s largest financial institutions. BigTech firms benefit from having large existing customer bases and from collecting and analysing their customers’ data. They can use this to achieve scale rapidly across different business lines, including in financial services. They also tend to have significant financial resources and are often able to access capital and funding at lower cost than some large financial groups.

BigTech firms differ in both the breadth of financial services they offer and in the nature of their interaction with incumbent financial institutions. In advanced economies (AEs), BigTech firms’ financial activities are generally more narrow (e.g. focussed on payments), and tend to complement the activities of existing financial institutions. In emerging markets and developing economies (EMDEs), BigTech firms provide a broader range of financial services such as lending, insurance and asset management. This variation may be due to differences in financial development, approaches to financial regulation, and the penetration of financial services across different geographies.

Various modes of interaction are emerging between BigTech firms and financial institutions. Some involve partnerships, for example where BigTech firms provide technology infrastructure to financial institutions. In some markets, BigTech firms also compete directly with existing financial firms. The overall response of incumbent financial institutions to BigTech firms’ entry in financial services and its effect on their business models is likely to vary across institutions and markets.

The activities of BigTech firms in the financial services sector have numerous benefits. These include the potential for innovation, diversification and efficiency in the provision of financial services. BigTech firms can also contribute to financial inclusion, particularly in EMDEs where they have the potential to increase access to financial services by previously unbanked populations. BigTech firms may also improve financial inclusion and facilitate access to markets that were previously untapped, a particularly important benefit for small and medium sized enterprises (SMEs) competing with incumbents in financial services. The third-party services offered by BigTech firms also may provide access to technologies like artificial intelligence and data analytics capabilities previously unavailable to the wider marketplace. BigTech firms’ activities may also pose risks to financial stability. Some risks are similar to those from financial firms more broadly (including FinTech firms), and have been the subject of previous work by the FSB.2 These include financial risks that stem from leverage, maturity transformation and liquidity mismatches, as well as operational risks including those that might arise from potential shortcomings in governance, risk and process controls.

BigTech firms engaging in financial services may also pose risks to financial stability that are different to, or more prominent than, those from FinTech firms more generally. These risks to financial stability might be greater in countries where BigTech firms become significant providers of financial services. Such risks are, by their nature, uncertain and forward looking, given that BigTechs’ provision of financial services is relatively nascent in most jurisdictions. Some potential risks stem from how BigTech firms could use their network and infrastructure to achieve scale in financial services very rapidly. Competition from BigTech firms might reduce the resilience of financial institutions, either by affecting their profitability or by reducing the stability of their funding. BigTech firms’ widespread access to valuable customer data could also be self-reinforcing via network effects.

The scale and complexity of linkages between BigTech and financial firms could also act as channels for the propagation of risk. Such linkages arise from financial institutions’ dependence on third-party services provided by some BigTech firms. Other linkages arise through BigTech firms’ partnerships with financial institutions to originate and/or distribute financial products. These risks may be particularly significant if such financial services are not readily substitutable, and if BigTech firms’ risk management and controls are less effective than those required of regulated financial institutions.

A further overarching consideration is that a small number of BigTech firms may in the future come to dominate, rather than diversify, the provision of certain financial services in some jurisdictions. If this were to occur, the failure of these firms could lead to widespread disruption. In particular, this might be a risk if BigTech firms’ activities in financial services were not accompanied by appropriate risk management and regulatory monitoring, or if BigTech firms’ customers were not able to readily switch to other providers of financial services.

These developments raise a range of issues for policymakers. The activities of BigTech firms in financial services may be subject to regulation in most jurisdictions. There is a question, however, of whether additional regulation and/or financial oversight may be warranted. Regulators and supervisors might also be mindful of the degree to which the resilience of incumbent financial institutions and the viability of their business models might be affected by their interlinkages with and competition from BigTech firms.

Finally, BigTech firms’ ability to leverage wide-ranging customer data raises considerations for authorities regarding policies governing data ownership, access and portability.