Technological Development and Competition in Banking

A great pleasure to talk with Fernando Restoy, Chairman of the Financial Stability Institute at the Bank for International Settlements, about technology, supervision and, regulation – during the Banking Meeting at IESE Business School.

Strong technological development has enabled the entry of new competitors: big techs, and powerful fintechs in payment spaces; it has also enabled the emergence of new products: crypto assets, and digital currencies. Finally, technological advances have led to massive changes in the internal production processes of banks.

Three big ideas were discussed: 

1. Regulating BigTechs. Basel supports the application of entity-level regulation, i.e. to the totality of BigTech activities, rather than just to the specific financial activity of its subsidiaries.

There will be no dilution regarding prudential banking regulation. So far, the European Commission has been active with initiatives focused on the competition side (DMA) and business continuity (DORA). The additional prudential regulation will require efforts in global coordination – a dimension that will slow down its implementation.

2. Risks and opportunities of Crypto-Assets. It is important to differentiate between the retail and wholesale debate.

A big risk is that payment systems are set up with their own stable-coin, autonomously. That could translate in a loss of monetary sovereignty.

In the wholesale world: crypto-assets can be a good tool to facilitate wholesale cross-border transactions. The most interesting element is tokenized deposits that would allow for transfers between banks and, in return, you would have digital currency. A fully digitized structure that will translate into great efficiency gains.

3. Supervision in the near-future. We will see a more qualitative supervision, that is identifying problems and putting remedies, rather than the shortcut of requesting more capital.

Technological risks have to do with 1. the sustainability of the business model. 2. Operational Risks for banks. These types of risks are examples for which capital might not be the most effective instrument. How much capital is needed to make an entity more viable? Or to ensure it can guarantee the regularity of the services it provides to the public?

The solution is to implement a more qualitative supervision: one that challenges the assumptions of the p&l and the balance sheet and stresses it under different scenarios to ensure its robustness.