5 June, 2017
Growth in lending by financial technology (fintech) companies has the potential to both benefit and pose risks to financial stability, according to a new report.
The Financial Stability Board (FSB) and the Committee on the Global Financial System (CGFS) issued the report (48-page / 755KB PDF) after identifying the fact that fintechs such as peer-to-peer lenders and crowdfundung platforms have been increasing their share of the credit market in recent times.
The FSB monitors and assesses vulnerabilities affecting the global financial system and makes recommendations to address those issues. The CGFS identifies and assesses potential sources of stress in global financial markets and makes recommendations to improve market stability.
"For financial stability, fintech credit activity could present a range of benefits and risks should it grow to account for a significant share of overall credit," the FSB and CGFS report said. "Among potential benefits are access to alternative funding sources in the economy. A lower concentration of credit in the traditional banking system could be helpful in the event there are idiosyncratic problems at banks. Fintech platforms may also pressure incumbent banks to be more efficient in their credit provision."
"At the same time, if fintech credit achieves a significant share of credit markets, it may give rise to systemic risk concerns. Some factors that contribute to increased financial inclusion associated with fintech credit could also lower lending standards in countries where credit markets are already deep," it said.
"Moreover, fintech credit provision could be relatively procyclical; most notably, there is the potential for a pullback in credit to certain parts of the economy because of a loss of investor confidence during times of stress. Incumbent banks might take on more credit risk in response to increased lending competition, while an abrupt erosion of their profitability could generate broader difficulties for the financial system, given banks’ provision of a range of systemically important services. Lastly, fintech credit poses challenges to the regulatory perimeter and authorities’ monitoring of credit activity," the report said.
For further information, please contact:
Ian Laing, Partner, Pinsent Masons
ian.laing@pinsentmasons.com
