In the case of big techs, most of the risks arise from their ability to leverage on a common infrastructure – notably large amounts of client data – that helps them gain a competitive advantage in a wide variety of non-financial and financial services and create substantial network externalities.
Technological innovation in the market for financial services has
given rise to new products, new delivery channels and, most importantly,
new providers, such as big techs. These developments are the source of a
number of opportunities but may also present certain risks that need to
be addressed by appropriate policy action.
In the case of big techs, most of the risks arise from their ability
to leverage on a common infrastructure – notably large amounts of client
data – that helps them gain a competitive advantage in a wide variety
of non-financial and financial services and create substantial network
externalities. Big tech business models entail complex interdependences
between commercial and financial activities and can lead to an excessive
concentration in the provision of both financial services to the public
and technology services to financial institutions; consequently, big
techs could pose a threat to financial stability in some situations.
The challenges that this specific business model pose for society
cannot be fully addressed by the current (mostly sectoral) regulatory
requirements. Two specific regulatory approaches for big techs could
then be considered and to some extent combined. The first is
segregation, which is a structural approach that seeks to minimise risks
arising from group interdependencies between financial and
non-financial activities by imposing specific ring-fencing rules.
An alternative approach to segregation is inclusion, which consists
in creating a new regulatory category for big tech groups with
significant financial activities. Regulatory requirements would be
imposed for the group as a whole, including the big tech parent. These
group-wide requirements would not normally have a pivotal prudential (ie
minimum capital and liquidity) focus, but would introduce controls for
intragroup dependencies across financial and non-financial subsidiaries.
This could be achieved by establishing a series of requirements (which
are spelled out in the paper) that mainly relate to the governance,
conduct of business, operational resilience and, only when appropriate,
the financial soundness of the group as a whole.
While the segregation approach is arguably simpler and bolder, the
inclusion approach provides for a more tailored option to address
specific risks associated with big techs' business model. In any event
there is a clear need for the international regulatory community to
develop guidance.
full paper
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