The International Monetary Fund (IMF) has called for new policies that ‘proportionately target’ both FinTech firms and traditional banks.

Authors of the organisation’s Global Financial Stability Report, Antonio Garcia Pascual, deputy chief in the global markets analysis division at the organisation, and Fabio M. Natalucci, deputy director of the monetary and capital markets department, warned that emerging firms are often taking on more risk than traditional banks.

They suggest that by introducing new, proportionate regulation, the opportunities of FinTechs can be fostered whilst containing risks.

Pascual and Natalucci say that for neobanks – which they said are more exposed to risks from consumer lending and involved in higher risk-taking in their securities portfolio - this would mean “stronger capital, liquidity, and risk-management requirements commensurate with their risks”.

Incumbent banks, they explained, might need prudential supervision with a greater focus on the “health of less technologically advanced banks,” as their existing business models may be less sustainable over the long term.

“Not only do FinTech firms take on more risks themselves, they also exert pressure on long-established industry rivals,” wrote the IMF executives. “Look for instance at the United States, where FinTech mortgage originators follow an aggressive growth strategy in periods when home lending is expanding, such as during the pandemic.”

They warned that competitive pressure from FinTech firms has significantly impacted the profitability of traditional banks, predicting that this trend is “set to continue”.

Regulation of DeFi

The report points out that DeFi, which is a type of decentralised finance with a crypto-based financial network and no central intermediary, has grown rapidly in the past two years and has the potential to deliver “innovative, inclusive, and transparent” financial services, it also involves the “build-up of leverage, and is particularly vulnerable to market, liquidity, and cyber risks”.

It reveals that cyber-attacks, where financial assets are stolen, are often “lethal” for these kinds of platforms. At the weekend, decentralised credit-based stablecoin Beanstalk fell victim to a theft which resulted in the loss of $76 million in non-Beanstalk user assets.

The report authors said that a lack of deposit insurance in DeFi adds to the perception of all deposits being at risk with large customer withdrawals often following news of cyber-attacks on providers.

“The absence of governing entities mean DeFi is a challenge for effective regulation and supervision,” they wrote. “Here, regulation should focus on the entities that are accelerating the rapid growth of DeFi, such as stablecoin issuers and centralised crypto exchanges.”
They call for supervisory authorities to encourage robust governance, including industry codes and self-regulatory organisations.

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