{
  "title": "Fast-Moving FinTech Poses Challenge for Regulators",
  "publication": "IMF Blog, April 13, 2022",
  "sourceUrl": "https://www.imf.org/en/blogs/articles/2022/04/13/blog041322-sm2022-gfsr-ch3",
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  "summary": "Emerging firms are quickly making inroads into critical financial services, and often taking on more risk than traditional banks.",
  "sections": [
    {
      "heading": "Overview",
      "content": "- Title: Fast-Moving FinTech Poses Challenge for Regulators\n- Authors: Antonio Garcia Pascual, Fabio Natalucci\n- Date: April 13, 2022\n- Context: Summarizes key messages from the Global Financial Stability Report on rapid FinTech advances and implications for financial stability and regulation."
    },
    {
      "heading": "Adding risk",
      "content": "- Neobanks (digital banks) are growing in systemic importance in their local markets.\n- Neobanks are more exposed than traditional banks to:\n  - Consumer lending risks, which \"usually has fewer buffers against losses because it tends to be more uncollateralized.\"\n  - Higher risk-taking in their securities portfolios.\n  - Higher liquidity risks: \"liquid assets held by neobanks relative to their deposits tend to be lower than what would be held by traditional banks.\"\n- Risk-management systems and overall resilience of most neobanks remain untested in an economic downturn.\n- Competitive effects:\n  - FinTech mortgage originators in the United States have followed aggressive growth strategies during home lending expansions (for example, during the pandemic).\n  - Competitive pressure from FinTech firms has \"significantly hurt profitability of traditional banks, and this trend is set to continue.\"\n- Decentralized finance (DeFi):\n  - Described as a \"crypto-based financial network without a central intermediary.\"\n  - Offers potential benefits: \"more innovative, inclusive, and transparent financial services\" via greater efficiency and accessibility.\n  - Involves buildup of leverage and is particularly vulnerable to market, liquidity, and cyber risks.\n  - Cyberattacks can be lethal for DeFi platforms, \"stealing financial assets and undermining user trust.\"\n  - Lack of deposit insurance in DeFi increases perception that deposits are at risk; \"large customer withdrawals often follow news of cyberattacks on providers.\"\n  - Growing adoption by institutional investors has strengthened links between DeFi and traditional financial institutions.\n  - In some economies, DeFi is helping to accelerate \"cryptoization, in which residents embrace crypto assets instead of the local currency.\""
    },
    {
      "heading": "Stepped-up regulation",
      "content": "- Movement of financial-services activity from regulated banks to entities/platforms with little or no oversight shifts associated risks outside traditional regulatory perimeters.\n- FinTech and traditional banks remain intertwined, including through \"the provision of liquidity and leverage by banks to FinTechs.\"\n- Regulatory challenges:\n  - Regulatory arbitrage: firms may move or set up operations in less-regulated sectors and regions.\n  - Interconnectedness that may require supervisory and regulatory action, including better consumer and investor protection.\n- Policy guidance and recommendations:\n  - Implement policies that target both FinTech firms and traditional banks proportionately to foster opportunities while containing risks.\n  - For neobanks: impose stronger capital, liquidity, and risk-management requirements \"commensurate with their risks.\"\n  - For incumbent banks and established entities: enhance prudential supervision with greater focus on the health of less technologically advanced banks, whose existing business models \"may be less sustainable over the long term.\"\n  - For DeFi: focus regulation on entities accelerating its growth, such as stablecoin issuers and centralized crypto exchanges.\n  - Encourage robust governance in DeFi through industry codes and self-regulatory organizations to serve as conduits for regulatory oversight.\n\nSource: Fast-Moving FinTech Poses Challenge for Regulators — Antonio Garcia Pascual and Fabio Natalucci; April 13, 2022.\n\n---\n\n Content in this bundle\n\n- Chapter 3\n  - Chapter 3 (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - Chapter 3 (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\n References\n\n- https://www.imf.org/wp-content/uploads/2022/04/GFSR-CH3-FinTechs-Chart1-1.jpg\n- https://www.imf.org/wp-content/uploads/2022/04/GFSR-CH3-FinTechs-Chart2.jpg\n- cryptoization\n\nSource: https://www.imf.org/en/blogs/articles/2022/04/13/blog041322-sm2022-gfsr-ch3"
    }
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    "[Markdown version](/en/blogs/articles/2022/04/13/blog041322-sm2022-gfsr-ch3/index.md)",
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    "Authors: Antonio Garcia Pascual, Fabio Natalucci",
    "Published: April 13, 2022",
    "Title: Fast-Moving FinTech Poses Challenge for Regulators",
    "Authors: Antonio Garcia Pascual, Fabio Natalucci",
    "Date: April 13, 2022",
    "Context: Summarizes key messages from the Global Financial Stability Report on rapid FinTech advances and implications for financial stability and regulation.",
    "Neobanks (digital banks) are growing in systemic importance in their local markets.",
    "Neobanks are more exposed than traditional banks to:",
    "Risk-management systems and overall resilience of most neobanks remain untested in an economic downturn.",
    "Competitive effects:",
    "Decentralized finance (DeFi):",
    "Movement of financial-services activity from regulated banks to entities/platforms with little or no oversight shifts associated risks outside traditional regulatory perimeters.",
    "FinTech and traditional banks remain intertwined, including through \"the provision of liquidity and leverage by banks to FinTechs.\"",
    "Regulatory challenges:",
    "Policy guidance and recommendations:",
    "**Chapter 3**",
    "[https://www.imf.org/wp-content/uploads/2022/04/GFSR-CH3-FinTechs-Chart1-1.jpg](https://www.imf.org/wp-content/uploads/2022/04/GFSR-CH3-FinTechs-Chart1-1.jpg)",
    "[https://www.imf.org/wp-content/uploads/2022/04/GFSR-CH3-FinTechs-Chart2.jpg](https://www.imf.org/wp-content/uploads/2022/04/GFSR-CH3-FinTechs-Chart2.jpg)",
    "[cryptoization](https://blogs.imf.org/2021/10/01/crypto-boom-poses-new-challenges-to-financial-stability/)"
  ],
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