FinTech Sound Practices by the Basel Committee
A hope, a prayer, or just a scary bedtime story for bankers & supervisors?
Fintech has not only grabbed the attention of venture capitalists and bitcoin miners, but it has also become a top line on the agenda of bank regulators. The challenges posed by fintech for regulators and the banks they supervise are profound. Some of these challenges have been laid out by a consultative document released by the Basel Committee for Banking Supervision (BCBS) in August, the same authority responsible for the renowned Basel banking regulations.
Primarily, this consultative document did two things. It first told scary stories and then made ambitious recommendations. With regards to the former, the report laid out a set of forward looking scenarios for the future of banking ranging from mild, such as banks adopting fintech technology, to extremely bleak, envisioning total disintermediation of incumbents in the financial sector with tech taking over all customer relationships. The magnitude of these scenarios as well as the wording peppered with doomsday warnings such as it will be “increasingly difficult to maintain current operating models”, should have been enough to persuade banks and supervisors to heed the list of ten observations and recommendations, summarized below. But alas, they may be exceedingly difficult to put into practice.
BCBS Fintech Observations and Recommendations
Considering the context of the BCBS just releasing what is lovingly referred to as Basel IV (actually entitled Basel III: Finalizing post-crisis reforms), after years of deliberation and calibration, the Fintech Sound Practices seem more aspirational than practical.
No one would disagree with the first recommendation to “balance safety and soundness with innovation.” However, even in the last crisis where arguably the pace of innovation was slower, the BCBS has only now with the finalization of Basel III come to a consensus in response, such as combating risk manipulation through changes to Risk Weighted Asset calculations, and reliance on internal bank models. Even so, these changes will not be fully phased in until 2027 — some 20 years after the crisis occurred.
Likewise, while the BCBS concedes that fintech may result in “unintended regulatory gaps”, it appears disconnected with the pace of change needed to combat this. While emergency meetings are being called in South Korea to deal with a bitcoin bubble, the Fintech Sound Practices report notes that it “too early to draw firm conclusions” regarding supervisory approaches and practices given that “most of the initiatives were set up in the past two years” — an eternity in fintech time.
By the same token, its call for international supervisory collaboration in light of wholesale payment expansion is theoretically hopeful, but practically, a tall order. Even within geographies such as the United States, regulatory bodies have trouble drawing lines on fintech supervisory scope, as evidenced by the Office of the Comptroller of the Currency (OCC) being sued by state regulators for its attempt to create a National Fintech Charter for Nonbanks.
Nevertheless, despite the shortcomings of the Sound Practices document, the scenarios laid out do offer food for thought in terms of the scope and variety of changes that could occur given fintech adoption. Additionally, the recommendations provide a glistening, albeit illusive, beacon towards which the supervisory and banking community can orient themselves as they navigate this unknown territory. In the face of the potentially serious threats posed by fintech for banks and supervisors alike, with the BCBS citing a potential 10–40% of bank revenue at risk, current recommendations will need to be iterated into more practical guidance — on a timeline much shorter than 20 years.
