Big Tech might need bank rules, but not with a heavy hand, regulators say

Banks fear the likes of Google, Apple and other big tech players are encroaching on their territory — and regulators aren’t sure how to deal with the invaders.

Pleas for them to turn their scrutiny from banks to those behaving like banks fall on deaf ears. But worries remain about big tech companies competing unfairly, exploiting regulatory loopholes, or generating new risks for financial stability.

US-based tech companies face a significant advantage in entering markets such as payments, or insurance. The vast quantities of data they hold could help them assess, for example, how likely a person is to pay back a loan.

More worryingly, for European financial incumbents, they may also escape regulation. Banks must meet capital requirements to ensure they can weather a financial storm; insurers must cleave to the EU’s Solvency II directive. Both worry that online platforms merely dabbling in one or the other can fly under the radar.

Remarks at a Basel conference* this week make plain that regulators seem unimpressed with that argument — but they are concerned that new market entrants might be opening up cracks in the financial system, just at a time when post-crisis rule tightening has cut risks from more conventional sources.

“I don’t think we can intervene directly on Big Tech per se,” said the Bank of Italy's governor, Ignazio Visco. “[But we must] be careful on the services that are provided and ensure that these services do not provide instability in the system.”

His comments echo a suggestion made by a number of European banks that the entry of Silicon Valley tech players might signal a need for a wholesale change in regulators’ approach. With new kids on the block, they say, supervisors should look not at entities, but on the services and activities offered, such as the provision of loans.

But that suggested change has met resistance from the authorities for two reasons.

First, it’s hard to do. Stopping mis-selling or imposing fair-competition rules is one thing. Applying prudential rules designed for the likes of Visa or Barclays to Google or Amazon, or even to a portion of their business, is less than straightforward. In the words of Mario Marcel, governor of Chile’s central bank, it's “easier said than done.”

Second, regulators are not convinced the shakeup is needed: They argue that financial institutions matter greatly and should continue to command most of their attention. Google or Amazon may offer some payment services, but wouldn’t face a bank run, for example.

“The same activities may entail different risks depending on the nature of the entities performing it, and in particular whether or not they are deposit takers,” Agustín Carstens, general manager at the Bank for International Settlements, a grouping of the world’s central banks, told the conference yesterday.

“Activity-based regulation seems to be more a complement than a substitute for traditional entity-based regulation,” Carstens said, suggesting that the system needed a patch rather than a redesign.

He received strong support from Germany, where the century-old approach of licensing banks to protect financial stability is seen as having shown its worth. “We should absolutely never give up the entity-based approach,” said Felix Hufeld, president of Germany’s financial supervisor, BaFin, adding warily that bankers' calls for an overhaul “sound like a call for deregulation.”

Nonetheless, a digital transformation of the sector could still raise new risks, meaning the authorities might need to start looking more widely, he said. Banks could end up outsourcing functions such as payments or data storage to more technologically advanced companies, with just a small front end remaining visible to customers and facing financial rules.

If the same few cloud-computing companies were providing key functions in banks’ value chains, that could lead to a stability risk, and for that reason, Hufeld said, he wants to see activity-based regulation extended. “At the very least, we need to know about” such a concentration of activities, he said. “We have to have some very basic abilities to do supervision.”

European Central Bank guidance from 2018 treads the path that financial-technology companies carrying out core banking activities should be licensed as such, but acknowledges that those providing more limited services, such as payments on the side, could get a slimmed-down treatment.

Elsewhere, regulators are battling with the implications for bank competition, and hope to see both incumbents and new entrants play by fair rules. For some, the current changes, including the takeup of technology such as artificial intelligence, is reminiscent of the pre-2008 pace of financial innovation.

“Developments are going so fast . . . the banks are changing more rapidly than the business model of the banks did before the crisis,” said Nout Wellink, former Dutch central banker and former chair of the Basel Committee on Banking Supervision. Regulators should “be aware of the consequences for the financial system” of galloping fintech innovation, Wellink said.

That warning should sound alarm bells, coming from someone who was on the frontline of efforts to tackle the global financial crisis. The question is: how far to go in heeding the warning?

* “A cross-sectoral reflection on the past, and looking ahead to the future,” Financial Stability Institute 20th anniversary conference, Basel, Switzerland, March 12-13, 2019