Finance Changed, Risks Didn’t
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- Authors: YAO ZENG
- Published: September 3, 2025
Overview
- New technologies are "rewiring liquidity, payments, and economic stability."
- More than 15 years after the global financial crisis, banks are safer due to higher capital standards and stress testing, yet financial intermediation has shifted toward asset managers, tech platforms, and decentralized networks.
- Key question: "What happens when critical finance functions lie outside the regulatory framework?"
From banks to asset managers
- Asset managers now provide a growing share of day-to-day liquidity once supplied by banks.
- Open-end mutual funds and exchange-traded funds (ETFs) promise daily liquidity while holding illiquid assets such as corporate bonds—without deposit insurance, capital buffers, or access to the central bank.
- Research findings:
- Bond mutual funds "alone now supply sizable liquidity compared with the entire banking system, and this share is rising."
- More than 95 percent of ETFs track an index (examples given: S&P 500, Bloomberg US Aggregate Bond Index).
- There are now more ETFs than underlying assets; sponsors actively manage portfolios to meet flows and keep prices aligned with underlying assets.
- Bond ETF managers frequently deviate from stated benchmarks; bond ETFs "trade like liquid stocks but hold underlying illiquid bonds."
- ETF arbitrage relies on authorized participants who are also bond dealers; when dealer balance sheets tighten, arbitrage can break down, prices can drift, and liquidity can thin—leaving investors exposed to closed-end–fund–like outcomes.
AI, big data, and platform lending
- Nonbank fintech platforms use payment records and machine learning to reduce search costs, bypass collateral, speed loan approvals, and expand access.
- Empirical evidence (India):
- Small merchants with more cashless payments obtain better access to working-capital loans, pay lower interest rates, and are less likely to default.
- "Digital footprints are the new credit scores."
- Big Tech platforms (examples: Alibaba’s Ant Group, Amazon, Mercado Libre) now bundle payments, e-commerce, and credit; their consumer and small-business loan books "now exceed that of many banks."
- Risks and episodes:
- Because Big Tech sits outside traditional safety nets, capital, liquidity, and resolution rules do not yet apply.
- In 2024, Amazon discontinued its $140 billion in-house lending program to small businesses.
- Concentration and fragility concerns: platform control over checkout can steer borrowers away from banks; platform credit can vanish sharply.
Crypto, stablecoins, and instant payments
- Bitcoin (released in 2008) has not become functional money for payments; it is "slow to settle, costly to use, and highly volatile"—more akin to digital gold.
- Stablecoins:
- Designed as blockchain assets pegged to real-world currencies, usually the US dollar.
- Issuers like Circle (USDC) and Tether (USDT) hold reserves in bank deposits, Treasury securities, and corporate bonds.
- Stablecoins have become lifelines in Argentina, Türkiye, and Venezuela.
- Risks and episodes:
- 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 in the previous year.
- Research highlights a dilemma: "The more effectively they maintain stable prices, the more they resemble banks—yet without deposit insurance or a lender of last resort, making them more vulnerable to runs."
- Government-sponsored fast payment systems:
- Brazil’s Pix processes more daily transactions than cash, credit, and debit cards combined; more than 90 percent of Brazilian households and businesses have adopted it.
- India’s Unified Payments Interface followed a similar trajectory.
- Advantages: faster, more inclusive payments with preserved monetary stability.
- Trade-offs (research findings):
- Instant payment systems force banks to hold more liquid assets to meet unpredictable outflows, reduce bank lending, and can increase credit risk.
- Mechanism: convenience of fast payments reduces banks’ ability to delay and net payment flows, increasing demand for low-yielding liquid assets and encouraging yield-seeking 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—entities that mimic deposits but lack deposit insurance, lender-of-last-resort access, or systemic oversight.
- Geoeconomic rivalries may increase fragmentation and complicate global regulatory coordination.
- Accelerated capital flows:
- Real-time trading, credit-data loops, and fast payments can amplify shocks; "what once took days now happens in minutes," while liquidity backstops and market intervention tools lag.
- Misaligned policy toolkit:
- Central-bank frameworks were built for a bank-dominated system; when money resides with asset managers, on-chain transactions, or apps, traditional barometers and lender-of-last-resort tools become less effective.
- Core conclusion: "The global financial landscape has changed, yet the rules remain largely unchanged—and that mismatch may be the biggest risk of all."
Source: Finance Changed, Risks Didn’t, YAO ZENG, September 2025.
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