By Ryan Weeks on 3rd July 2017
Online lending features in FSB report on the financial stability implications of fintech.
Speaking in his role as head of the Financial Stability Board (FSB), Bank of England governor Mark Carney said this morning that the body is actively studying the implications of the rapid growth of the fintech sector. His comments follow on from a report that was released by the FSB last week.
The wide-ranging report, which encompassed all things fintech, honed in on certain areas of online lending as potentially harmful. In section 3.2.1, “Microfinancial risks (vulnerabilities)", the report identified maturity mismatch, liquidity mismatch and leverage as three areas that warrant attention.
“FinTech lending is the main FinTech activity for which maturity mismatch is relevant,” it said. It goes on to state that maturity mismatches “could arise through securitisation or if lending platforms were to start using their own balance sheet to intermediate funds”.
Maturity transformation has long been a point of debate within the UK’s marketplace lending sector. Lord Turner, former boss of the City regulator and once a renowned industry detractor, made a spectacular about-turn at last year’s LendIt Europe conference, at which he stated that peer-to-peer/marketplace lenders in fact assess risk “as well or better than” the banks.
However, he also warned companies against over-complexity, with specific reference to avoiding maturity transformation. “Keep it simple, and keep it transparent,” he advised.
The FSB report concluded that most fintech credit platforms do not perform liquidity transformation. It also said that leverage is not typically associated with fintech activities, but that there are some cases where it could arise temporarily.
“For example, in some cases, FinTech business and consumer lending or equity crowdfunding platforms may borrow funds in order to finance temporary holdings (or “warehousing”) of bond or equity issuance. A small proportion of FinTech credit platforms engage in leverage when they use their own balance sheet to fund loans.”
Regulatory arbitrage – another common regulatory bugbear (one that has featured prominently in the FCA’s ongoing review of loan-based crowdfunding rules in the UK) – also surfaced in the FSB report:
"To the extent that FinTech firms structure their activities in fundamentally the same fashion as banks, FinTech credit platforms could be considered to be benefiting from regulatory arbitrage."
A wide range of macro-economic considerations relating to fintech were also listed within the report, both positive and negative. These included cyber-risks and the risk of reputational contagion.
Among the potentially positive aspects listed in the report was the capacity of fintech to support financial stability through greater efficiency and better use of data. The potential for fintech to expand access to financial services for both households and businesses was also highlighted:
“There is some evidence that some financial innovations have already led to increased access of households and businesses to financial services, particularly in emerging markets, through innovations like mobile payments.”