Big Tech Banking and Financial Stability

Jorge Padilla, Senior Managing Director at Compass Lexecon, writes in the “Spring Bank of Spain´s Financial Stability magazine” about the financial stability risks caused by BigTech’s entry into retail banking. According to him this may be positive for competition and inclusion in the short term, but it may also increase financial instability and lead to even more concentrated credit markets in the long-term.

According to the author, competition authorities and regulators will have to balance pros and cons posed by the BigTech entry in banking, basically through three policy actions alternatives, each of which has its own advantages and disadvantages: 

• Eliminating regulatory asymmetries (especially in Europe), so that firms are regulated based on the activities they perform rather than according to the economic sector to which they belong and creating a level playing field with respect to data by requesting BigTechs to provide data to banks.
• To regulate the BigTech’s activities to comply with the same fiduciary and investor protection obligations than banks.
• To replace private money created by traditional banks by public money created by central banks so that loans are no longer funded by deposits, thus decoupling origination/distribution and funding and removing systemic implications.