## Finance changed, risks didn’t

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**Canonical URL:** [Finance changed, risks didn’t](https://www.imf.org/-/media/files/publications/fandd/article/2025/09/zeng.pdf)

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### Overview
- More than 15 years after the global financial crisis, the banking and financial system looks safer due to higher capital standards and new supervisory tools such as stress testing, but financial intermediation has evolved in ways that shift liquidity, credit, and payments away from banks and toward asset managers, tech platforms, and decentralized networks.
- Key question: What happens when critical finance functions lie outside the regulatory framework and traditional stabilizers (deposit insurance, capital buffers, central-bank backstops) are absent?

### From banks to asset managers
- Finding: Non-bank asset management funds now contribute a growing share of the system’s day-to-day liquidity to households and investors.
- Exact observations:
  - Open-end mutual funds and exchange-traded funds (ETFs) let investors redeem money on demand while holding illiquid assets such as corporate bonds.
  - "More than 95 percent" of ETFs track an index.
  - There are now more ETFs than underlying assets.
- Risks:
  - Bond mutual funds now supply sizable liquidity compared with the entire banking system, and this share is rising.
  - Mutual funds can amplify shocks: when markets turn volatile they may be forced to sell illiquid assets in a falling market, deepening stress.
  - Bond ETFs frequently deviate from stated benchmarks and trade like liquid stocks while holding illiquid bonds, relying on authorized participants (also bond dealers) to arbitrage price discrepancies. When dealer balance sheets tighten, ETF arbitrage can break down, prices can drift, and liquidity can thin.
- Net effect: A more market-based and broader liquidity ecosystem that is potentially cheaper but subject to different and concentrated failure modes compared with the bank-centered model.

### AI and big data in lending
- Finding: Lending increasingly relies on AI and big data via fintech platforms that use payment records and machine learning to reduce search costs, bypass collateral requirements, speed approvals, and reach borrowers traditional banks overlook.
- Empirical point (India):
  - Small merchants relying more on cashless payments with detailed and traceable paper trails get better access to working-capital loans, pay lower interest rates, and are less likely to default — "digital footprints are the new credit scores."
- Concentration and fragility:
  - Big Tech platforms bundle payments, e-commerce, and credit; the size of their consumer and small-business loan books now exceeds that of many banks.
  - Example: In 2024, Amazon abruptly discontinued its $140 billion in-house lending program to small businesses, illustrating how platform credit can vanish when firms need it most.
  - Because Big Tech sits outside traditional safety nets, traditional capital, liquidity, and resolution rules do not yet apply.

### Crypto, stablecoins, and instant payments
- Crypto observations:
  - Bitcoin remains slow to settle, costly to use, and highly volatile; it functions more like speculative "digital gold" than money for payments.
  - Stablecoins are blockchain assets pegged to real-world currencies (usually the US dollar) and held in reserves of bank deposits, Treasury securities, and corporate bonds.
  - Stablecoins have become lifelines in Argentina, Türkiye, and Venezuela, and are moving into mainstream payment flows.
- Risks for stablecoins:
  - Stablecoins lack deposit insurance and direct access to central-bank support.
  - In March 2023, Circle’s USDC temporarily lost its peg after losing access to reserves.
  - The collapse of Terra’s algorithmic stablecoin triggered widespread losses the previous year.
  - "The more effectively they maintain stable prices, the more they resemble banks—yet without deposit insurance or a lender of last resort."
- Fast payment systems:
  - Government-sponsored fast payment systems (example: Brazil’s Pix; India’s Unified Payments Interface) deliver faster, more inclusive payments without the disruption of crypto.
  - Adoption statistic: "More than 90 percent of Brazilian households and businesses have adopted" Pix.
  - Research finding: Fast payment systems force banks to hold more liquid assets to meet unpredictable outflows, reduce bank lending, and may increase credit risk by pushing banks toward yield-seeking in riskier loans.

### Macro-financial implications
- Fragmentation:
  - Key functions (payments, credit, liquidity) have shifted outside the regulatory perimeter to mutual funds, ETFs, stablecoins, robots, and platforms that mimic deposits but operate without deposit insurance, lender-of-last-resort access, or systemic oversight.
  - Geoeconomic rivalries and fragmentation raise challenges for global regulatory coordination.
- Speed and amplification:
  - Capital flows have accelerated; real-time trading, credit-data loops, and fast payments can amplify shocks that previously unfolded over days but now occur in minutes, while liquidity backstops and intervention tools lag behind.
- Policy-tool misalignment:
  - Central-bank frameworks built for a bank-dominated system may be less effective when money resides with asset managers, on-chain transactions, or within apps, making it harder to measure systemic risk and to deploy traditional stabilizers.

### Policy-relevant considerations and implications
- Regulatory perimeter and oversight:
  - There is a need to address critical finance functions that now sit outside traditional regulation (mutual funds, ETFs, stablecoins, Big Tech credit platforms).
- Liquidity and backstops:
  - Faster plumbing requires updated liquidity backstops and market-intervention tools that match the speed and fragmentation of modern intermediation.
- Competition and concentration:
  - The rise of large platform lenders raises competition concerns and questions about too-big-to-fail dynamics for tech monopolies that control checkout and data gateways.
- Payment-system trade-offs:
  - Policymakers should weigh the inclusion and efficiency gains from fast payments against potential effects on banks’ balance-sheet composition and systemic credit risk.
- Stablecoins and shadow-deposit risks:
  - Because stablecoins can replicate deposit-like functions without deposit insurance or central-bank liquidity access, policymakers must consider whether and how to extend safeguards or create tailored regulation.

*Source: F&D Frontiers of Finance — "Finance changed, risks didn’t" (Yao Zeng), September 2025*

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_Source: https://www.imf.org/-/media/files/publications/fandd/article/2025/09/zeng.pdf_