Regulation of fintech will get tighter if systemic risks to financial stability emerge from innovation, says Carney

Speaking at the Deutsche Bundesbank G20 conference in Germany (14-page / 727KB PDF) on Wednesday, Carney said the Financial Stability Board (FSB) is currently "considering the most important financial stability issues associated with new financial technologies and … assessing the extent to which these risks are addressed by existing regulatory frameworks".

The FSB will report back on its findings in July, he said.

Among the issues Carney said the FSB was looking into is whether some "fintech activities constitute traditional banking activities by another name and should be regulated as such", and whether there are any fintech activities that could become "systemic" and "merit higher standards of operational risk oversight" as a result.

The FSB is also looking into whether consistent regulation should be applied to "credit intermediation", regardless of the delivery mechanism or credit algorithm firms use, Carney said.

The impact of fintech on the "safety and soundness of existing regulated firms" is also being considered by the FSB, Carney said, as are "the implications for the aggregate level of cyber and operational risk in the financial system" brought about by the emergence of new fintech companies.

Carney said the potential for a "new single point of failure" to arise were banks to "rely on common hosts of online banking or providers of cloud computing services" is one particular cyber risk of which the FSB is wary.

He said the FSB is conducting a review of "existing cybersecurity regulation, as a basis for developing best practices in the medium-term".

Carney is chair of the FSB, which monitors and assesses vulnerabilities affecting the global financial system and makes recommendations to address those issues. The FSB is made up of members from the G20 countries as well as policy makers from Hong Kong, Singapore, Spain and Switzerland.

In his speech, Carney said "the true promise" of fintech is that it can "unbundle banking into its core functions of: settling payments, performing maturity transformation, sharing risk and allocating capital". However, he said that "systemic risks will evolve" as firms adopt new technology to perform those activities better.

Carney said: "Changes to customer loyalties could influence the stability of bank funding. New underwriting models could impact credit quality and even macroeconomic dynamics. New investing and risk management paradigms could affect market functioning. A host of applications and new infrastructure could reduce costs, probably improve capital efficiency and possibly create new critical economic functions. The challenge for policymakers is to ensure that fintech develops in a way that maximises the opportunities and minimises the risks for society."

There will be tighter regulation of fintech if it presents a threat to financial stability, Carney said.

"In order for fintech’s potential to be realised, authorities must manage its impact on financial stability," Carney said. "On the positive side, fintech could reduce systemic risks by delivering a more diverse and resilient system where incumbents and new entrants compete along the value chain. At the same time, some innovations could generate systemic risks through increased interconnectedness and complexity, greater herding and liquidity risks, more intense operational risk and opportunities for regulatory arbitrage."

"As those risks emerge, authorities can be expected to pursue a more intense focus on the regulatory perimeter, more dynamic settings of prudential requirements, a broader commitment to resolution regimes, and a more disciplined management of operational and cyber risks. And we will be alert to potential impacts on the existing core of the system, including through business model analysis and market impact assessments," he said.