Growing fintech may risk financial stability without proper rules, warns Carney
The Governor of the Bank of England has warned that burgeoning fintech could put financial stability at risk without proper regulation.
Mark Carney said bank profit could suffer if fintech firms start siphoning off "stable" retail income, and cautioned that the reliability of peer-to-peer lending through business cycles has yet to be proven.
He also explained that algorithms used in wholesale banking and market trading can lead to excess volatility in financial markets.
Mr Carney added that distributed ledgers - like those using Blockchain technologies - need to meet the highest standards of privacy and reliability.
While none of these poses systemic risks on their own, he said regulators need to address emerging vulnerabilities.
"On the positive side, fintech could reduce systemic risks by delivering a more diverse and resilient system where incumbents and new entrants compete along the value chain," said Mr Carney.
"At the same time, some innovations could generate systemic risks through increased interconnectedness and complexity, greater herding and liquidity risks, more intense operational risk and opportunities for regulatory arbitrage."
Mr Carney delivered his warning in a speech at the Deutsche Bundesbank G20 conference in Wiesbaden, Germany.
Badly managed automated computer trading platforms came into the spotlight late in 2016, having played a part in the sterling "flash crash" last autumn.
An investigation by the Bank for International Settlements (BIS) found that stop-loss orders - where retail and institutional investors leave orders on automated computer platforms to sell quickly to limit losses when sterling's value changes - helped drive the pound to lows of 1.18 against the US dollar in early October.
"The challenge for policymakers is to ensure that fintech develops in a way that maximises the opportunities and minimises the risks for society," Mr Carney said.
"After all, the history of financial innovation is littered with examples that led to early booms, growing unintended consequences, and eventual busts."
Both financial firms and regulators need to be aware of the cyber threats, especially if companies start relying on common hosts for online banking or cloud computing servers.
A more interconnected financial market will face challenges around data protection and system integrity, he said.
The Bank of England Governor also heads the G20 Financial Stability Board, which is assessing whether a new set of regulations are needed to manage emerging fintech.
The board is expected to report its findings at the G20 summit in July.