Month: May 2017

Why Didn’t Bank Regulators Prevent the Financial Crisis?

The St. Louis Fed On The Economy Blog had an interesting article today, looking at why the GFC happened, and how the Dodd-Frank Act has addressed the issues in the US (yes, the one which may be repealed if Trump gets his way).

But, look at the issues in the Australian context and score for yourself to what extent we currently have the same issues here as they did in the US then. Its scary!

A number of observers have questioned whether bank regulators could have prevented the financial crisis of 2008. While many market participants recognized the exuberance of the housing market, other factors contributing to the crisis led to a “perfect storm” that made it difficult for many stakeholders, including regulators, to foresee the impending meltdown.

Excessive Mortgage Debt

Poor assessment of ability to repay and inadequate down payments doomed many mortgages. Insufficient consumer protections resulted in many consumers not understanding the risks of the mortgage products offered.

Dominance of Variable Rate and Hybrid Subprime Mortgages

The spread of variable rate and hybrid subprime mortgages in a low-rate environment created excessive risks when interest rates rose.

Overheated Housing Market

Rapidly increasing house prices encouraged speculation, which further drove up prices. The availability of easy credit caused many borrowers to take on levels of debt they could not afford.

Lack of Market Discipline in Mortgage-Backed Securities Market

Growth in the private mortgage-backed securities market was fueled by lax standards in assigning credit ratings, which hid building systemic risk.

Safety and Soundness Problems at Large Banks

Many large banking firms had insufficient levels of high-quality capital, excessive amounts of short-term wholesale funding and too few high-quality liquid assets. These problems were frequently compounded by inadequate internal risk measurement and management systems.

Risky Behavior by Nonregulated Financial Firms

Sometimes referred to as the “shadow banking system,” this collection of financial firms included insurance companies and captive finance companies, among others. These firms engaged in activities that increased risks inherent in the financial system as a whole without any meaningful regulatory oversight.

Lack of Broad Oversight

Finally, while various regulators oversaw parts of the financial system, there was no one regulator responsible for the consolidated supervision of systemically important financial firms. Moreover, no authority was assigned the responsibility of overseeing systemic risk.

Industry bodies join forces against EDR scheme

From Investor Daily.

A number of membership associations from across the financial services spectrum have combined efforts to oppose the government’s single dispute resolution scheme as recommended in the Ramsay report.

A statement arguing against the proposed external dispute resolution (EDR) scheme has been signed off and jointly released by a consortium including the Mortgage and Finance Association of Australia, Customer Owned Banking Association, Australian Collectors & Debt Buyers Association, Association of Securities and Derivatives Advisers of Australia, Australian Timeshare and Holiday Ownership Council and Association of Independently Owned Financial Professionals.

Jointly these bodies claim to represent “80 per cent of all financial firms in the Australian market”, including those that are members of FOS and of the Credit and Investments Ombudsman.

The joint statement takes issue with the single EDR scheme outlined in the federal budget, and argues that the government embarked on insufficient consultation with key stakeholders.

“The associations are also disappointed in the way the Ramsay review was conducted,” the statement said.

“The panel only held two public consultations with industry, during which it refused to articulate the reasons for proposing a single monopoly scheme and failed to engage with the credible arguments put forward by the associations.

“The associations believe the ‘one-stop shop’ will undermine the fabric of external dispute resolution in the financial services sector because, as the weight of evidence submitted by industry suggests, the continued and separate existence of FOS, CIO and the SCT is vital in ensuring accountability, innovation and cost control in EDR.”

The statement suggests that “large financial firms” will be the beneficiary of the government’s proposed scheme, while “smaller and more innovative financial firms” will be disadvantaged.

It calls on the government to “abandon” its plan to establish a single “monopoly” scheme.

The statement comes as Prime Minister Malcolm Turnbull has strongly defended the EDR scheme, telling Parliament yesterday that this policy, alongside the levy on big banks, is proof the government is providing “real action” and not just talk when it comes to ensuring financial institutions act in a more pro-consumer manner.

The bank levy is suddenly an even better idea

From The New Daily.

The planned $6.2 billion bank levy was a good idea on budget night, and two weeks later it looks like an even better one.

That’s because of a decision by ratings agency S&P Global to downgrade the outlook for Australian banks.

In its latest ‘banking industry country risk analysis’, S&P changed its assessment of Australia’s economic imbalances from ‘high risk’ to ‘very high risk’, due to “strong growth in private sector debt and residential property prices in the past four years”.

The move will cause an increase in the cost of longer-term funding for smaller banks and credit unions, but does not affect the big four banks or Macquarie Bank – the corporations in the frame to pay the bank levy.

For the smaller banks and credit unions, such as Teachers Mutual Bank, Police Bank, Credit Union Australia, Bank Australia and ME Bank, longer-term funding costs are expected to increase by 10 to 20 basis points.

One senior market economist told me on Tuesday that was a “fairly hefty hike”, which will manifest as either lower profits for those banks or higher interest rates charged to their customers.

A skewed market

The smaller banks and other ‘authorised deposit-taking institutions’ have long complained that the big-four banks have an uncompetitive advantage.

That’s because of the ‘four pillars’ policy, which Paul Keating set up in 1990s to keep at least some semblance of competition in the banking market, has left us with a handful of banks that are ‘too big to fail’.

The government is therefore in a position where it must bail out any of the majors during a crisis.

That means that when fund managers or other large investors buy bank bonds from the majors, they don’t demand as high a rate of return because there is effectively no risk.

Conversely, when they buy the bonds issued by the likes of Bendigo & Adelaide Bank, or Bank of Queensland, the small banks have to pay more for the privilege.

Banking writer and former RBA economist Chris Joye recently calculated the majors are saving about $5 billion a year thanks to the implicit guarantee offered by the government.

And that’s before you take into account the way negative gearing and the capital gains tax discount have acted to artificially expand their mortgage portfolios in recent years.

Ironically, the government-backed oligopoly is seen by some as a ‘free market’ not to be messed with.

One property adviser recently complained, for instance, that “I do feel like we’re living a communist society with the rules that are being imposed on a free market”.

Quite the opposite is true, in fact.

As long as government maintains the current settings, it’s the big banks that resemble the protected government-sponsored enterprises seen in communist China.

The national interest

It is true, as critics argue, that the money raised by the bank levy won’t come out of thin air.

The banks will either pass the cost onto borrowers or take a hit to profits, and therefore have to reduce shareholder dividends.

But there are two reasons why that argument runs against the interests of everyday Australians – even if they are shareholders or mortgage holders.

The first is that by protecting the big banks, the government gives the oligopoly its strong pricing power.

Their tight grip on the market means their profits constantly exceed reasonable returns on the capital they deploy – a fancy way of saying they cream off massive profits because they can.

Shareholders have been doing well for years at the expense of mortgage holders.

Secondly, if the big banks calmly pass on all the levy to borrowers, there will be an increased incentive for mortgage holders to seek a better deal from a smaller banks.

The bank levy is a way of returning some market power to the smaller players, to boost competition.

And as those smaller banks have just received yet another blow via the S&P downgrade, now is the perfect time to do it.

The real debate, if the politicians were brave enough to have it, is not whether the levy is needed – but whether it should be larger.

ABC The Business Does Bank Re-Rating

The Business looked at the impact of S&P’s down grades on 23 smaller banks in Australia, and highlighted the impact on funding and competition, especially in the longer term. It will more than offset the bank levy the big banks will have to wear!

They also looked a funding costs and explained why mortgage rates may rise and the potential adverse impact on household debt.

Sydney and Melbourne Home Price Slide

Latest data from CoreLogic shows a continued slide in the major markets  this month. Brisbane (inc. Gold Coast) are the only positive markets.

Still too soon to know whether this is significant, (there were changes made to their index last year which may impact the results), but the annual changes are still strong in the two largest markets.

 

APRA Tweaks New Mortgage Reporting Requirements

APRA has delayed the commencement of new mortgage reporting standards, and watered down some requirements. On the other hand they are seeking to introduced the requirement for lenders to report on debt-to-income ratios for the first time, or at least looking at the cost benefit.  Some would say, about time too, but many would not be able to comply, so do not hold your breath! Meantime, APRA says ad hoc requests will continue.

APRA received six submissions to their proposals to revise residential mortgage lending requirements. No submissions objected to the proposals, but some did raise concerns with timelines, data availability and specific definitions.

So APRA has revised the requirements.

Specifically, the start date has been delayed.  APRA has deferred the first reporting period for the new reporting requirements to: for ADIs that currently report on ARF 320.8, the period ending 31 March 2018; and for ADIs that do not report on ARF 320.8, the period ending 30 September 2018.

APRA will accept data submitted for the first two reporting periods from these dates on a best endeavours basis. However, APRA expects ADIs will be able to provide accurate, reliable information from the first reporting period. All information provided on ARF 223.0 must be subject to processes and controls developed by the ADI for the internal review and authorisation of that information. These systems, processes and controls are to assure the completeness and reliability of the information provided.

The requirements to classify owner-occupied and investor loans based on security, and to report loans to household trusts has been removed.

Based on feedback, APRA believes the costs of reporting loans to household trusts outweighs the benefits, and has removed the concept.

APRA says it expects that a prudent ADI with material exposures to residential mortgage lending would invest in management information systems that allow for appropriate assessment of residential mortgage lending risk exposures.

They warn that as part of its supervisory monitoring, APRA requests information from ADIs regarding residential mortgage lending on an ad hoc basis. Four submissions to the consultation asked if these requests will continue. ARF 223.0 is designed to replace these data requests, and APRA intends to either significantly reduce or cease the regular requests for individual ADIs once reporting on ARF 223.0 commences. However, given the risks identified in the housing market, ad hoc requests will continue to be a necessary part of APRA’s prudential supervision from time to time.

On the upside (in terms of reporting), in March 2017, APRA noted heightened industry risks relating to residential mortgage lending, and the need to monitor residential mortgage lending more generally. APRA therefore proposes including additional data items to ARF 223.0 regarding:

  • borrower’s debt-to-income ratios;
  • additional information on increases in lending; and
  • lending to private unincorporated business.

These items are highlighted on the updated ARF 223.0. To improve the quality of regulation, the Australian Government requires all proposals to undergo a preliminary assessment to establish whether it is likely that there will be business compliance costs. In order to perform a comprehensive cost-benefit analysis, APRA welcomes information from interested parties.

 

 

 

Bitcoin Reaches For The Stars

The digital currency Bitcoin has now breached the US$2,100 mark thanks to continuing strong demand from Japan and China. Japan accounted for nearly 55 percent of trade volumes recently, where Bitcoin is now recognised as legal currency.

But to highlight the volatility, after hitting a fresh record-high of US$2,230 in US trade, it tumbled over 10% to as low as US$2,001 before rebounding yet again. Now it is up again at US$2,143 having added over 5% in just the past couple of hours.

The longer term trend is clear.

Bitcoin had already lifted to USD$1,900 last week when reports of possible political scandal in the U.S. and Brazil drove traders to safe commodities so Gold futures rose more than 2 percent. But some are now suggesting that Bitcoin may soon be seen as a competitor for gold in a flight to safety.

In addition, Bitcoin traded on the Hong Kong-based Bitfinex will soon be easily converted to U.S. dollars and this has the potential to narrow spreads and lift volumes further.

Some are also suggesting that the US Securities & Exchange Commission (SEC) may reverse its earlier decision to block the creation of a Bitcoin Exchange Traded Fund (ETF) is also impacting the market.

Remarkable to think that this highly volatile digital currency may be seen in the same category as gold!

These suburbs could be underwater in just decades

From The New Daily.

Some of Australia’s most densely populated suburbs, major cities and crucial pieces of infrastructure, such as Sydney airport, could be underwater in just decades, according to an alarming new prediction.

A newly developed map of Australia, based on data from National Oceanic and Atmospheric Association (NOAA) in the US, shows places like Port Melbourne, Sydney’s Double Bay, the Gold Coast, Cairns and Byron Bay, are at risk of becoming uninhabitable in a matter of decades.

Sydney, Brisbane and Hobart airports are also in danger of being swamped, according to the predictions.

In a new report, NOAA projected the global sea level to rise a maximum of two metres by the year 2100, if greenhouse gas emissions continue at “business as usual” levels.

Melbourne’s southern and western suburbs and CBD will be worst affected. Photo: Coastalrisk.com.au

Map creator Nathan Eaton said the fresh information revealed that the estimated worst case scenario, predicted in a 2013 report, is now the most likely outcome.

In that report, the maximum rise was predicted at 74 centimetres.

“We want to give people a chance to prepare and having this information available is the first step to becoming aware of what challenges their community might have to face,” Mr Eaton said.

The map, made available on the website Coastal Risk Australia, shows the estimates from 2013 layered against the new information at a high tide scenario.

The year 2100 might seem too distant to worry about; but Mr Eaton said he wanted to showcase a year that would see a heavy blow.

“The current generation that’s being born will have to deal with this, so it’s actually not that far away if you think about it,” he said.

The prediction for the Gold Coast is dire. Photo: Coastalrisk.com.au

Action is already being taken.

The Gold Coast, for instance, has already begun building a seawall to strengthen the city’s defences against erosive wave action and wild weather.

Australian Coastal Councils Association executive director Alan Stokes said the map reinforced that all levels of government needed to start taking sea level risks seriously.

“Anybody in their right mind would have to be worried about what impact that sort of inundation is likely to have,” Mr Stokes said, adding that he is frustrated that the Federal government neglected to address emissions levels in the latest budget.

Around 85 per cent of Australia’s population live near the coast.

Mr Stokes said those looking to buy in these areas, should proceed with “open eyes” and to take all factors into account.

“It’d be difficult to ignore the potential risk for people buying into these coastal suburbs. You really need to do your research, have a look at the maps and know what the risk is,” he said.

If unmitigated greenhouse gas emissions continue, a two-metre rise in sea levels is not a matter of if, but when, according to University of New South Wales Climate Change Research Centre’s Professor, John Church.

A major reduction in the world’s carbon emissions would “substantially reduce what level we’re likely to get to”, he said.

Newcastle and the NSW Central Coast will be inundated. Photo: Coastalrisk.com.au

‘Map doesn’t go far enough’

The map, however, does not take into account local conditions.

Australian National University ocean and climate change expert, Professor Eelco Rohling, said while the map was a useful tool to communicate the threat of climate change, it is too simplified to be used effectively by city planners.

“The general public wants to be shown, but not told, the details,” Professor Rohling said.

“The danger is that you’re under-informing people. I find that a bit of a shame.”

He adds that two main factors influencing the rate of sea level rise should have been taken into account when putting the map together: glacial isostatic adjustment (when the Earth’s crust bounces back from the weight of a glacier after it has melted) and the different scenarios of melting in Greenland and Antarctica.

Professor Rohling said these two factors could change the local sea level rise by tens of centimetres.

Aggregators to ‘audit’ and number brokers under ASIC regime

From The Adviser.

ASIC’s remuneration review could see lenders and aggregators increase their scrutiny of mortgage brokers, who would be identified using a “unique number”.

The sixth proposal of ASIC’s review of mortgage broker remuneration states that lenders and aggregators should improve their oversight of brokers and broker businesses.

ASIC expects aggregators to actively monitor the consumer outcomes being obtained at a broker and broker business level, including those relating to loan pricing, features, clawbacks, refinancing and default rates, and distribution of loans among lenders. Aggregators are expected to retain this information and provide it to ASIC as the regulator looks to continually monitor outcomes across the third-party channel.

“The aggregators will need to gather more information on their brokers, where their loans are going and what type of loans they are writing. Aggregators will need tools to audit and ensure brokers are doing the right thing by the consumer,” Outsource Financial CEO Tanya Sale told The Adviser.

“ASIC will be asking the aggregators what processes they have in place to ensure that the consumer outcomes are being met,” Ms Sale said.

While this creates additional work for aggregators, it could also have a significant impact on the way brokers run their businesses. However, Ms Sale believes brokers should embrace change and consider the opportunities.

“Don’t look at the glass half empty. Realise we are going to make an even bigger impact now. We will have even further information and processes to help us better understand the wants and needs of consumers,” she said.

ASIC has also recommended that lenders increase their oversight of aggregation groups. Lenders are expected to provide consistent reporting to aggregators to allow adequate oversight of brokers.

If implemented by Treasury, these recommendations will mean lenders, aggregators and brokers will need to implement new reporting processes to meet the new regime. This was highlighted in ASIC’s review, where the regulator states that “a consistent process” must be used by lenders to identify each broker or broker business. The regulator suggested using a “unique number” provided by the aggregator to identify each broker.

Ms Sale believes the provision of “good consumer outcomes” must include educating clients.

“How can we provide good consumer outcomes if the consumers don’t understand the lending process?” she said, adding that aggregators have “a big part to play” in providing the tools to their members to be able to educate their clients.

Rapid growth in FinTech credit carries opportunities and risks

A new report from the Financial Stability Board overviews the development of FinTech platforms and looks at potential risks such activity brings. The report highlights that the growth is strong in certain markets, but the business models and partnering models vary widely.  In volume terms China, US and UK lead the way.

There is diversity in Fintech target borrowers. In some markets, they are primarily consumers, in others, small business. Loans can be unsecured, or secured. A growing trend is the partnering with incumbent banks.

Although FinTech credit markets are currently small in size relative to traditional credit markets, they are growing at a fast pace. In some markets, the share of lending is sufficient to impact financial stability, and as growth continues, more measures may be required.

“A bigger share of FinTech credit in the financial system could have both financial stability benefits and risks,” says CGFS chairman William C Dudley (President, Federal Reserve Bank of New York).

Potential benefits include increased access to alternative funding sources in the economy and efficiency pressures on incumbent banks. At the same time, risks may arise, including weaker lending standards and more procyclical credit provision.

“The emergence of FinTech credit markets poses challenges for policymakers in terms of how they monitor and regulate such activity. Having good-quality data will be key as these markets develop,” said chairman of the FSB Standing Committee on Assessment of Vulnerabilities Klaas Knot (President, De Nederlandsche Bank).

Size and structure of FinTech credit markets

Academic survey data on lending volumes in 2015 show considerable dispersion in FinTech credit market size across jurisdictions. In absolute terms, the largest FinTech credit market is China (USD 99.7 billion in 2015), followed at a distance by the United States (USD 34.3 billion) and the United Kingdom (USD 4.1 billion). In each of these three markets, new FinTech credit volumes were USD 60–110 per capita in 2015. Lending volumes were very small in other countries. It is noteworthy that the survey data for China are judged to have a lower platform coverage than other large markets; activity in China may therefore be underrepresented in a relative sense.

The composition of FinTech credit activity by borrower sector has varied noticeably across jurisdictions. In the United States, more than 80% of lending activity in 2015 was to the consumer sector (including student loans), while high shares of consumer lending were also evident in several other countries, such as Germany, Korea and New Zealand. In contrast, in Australia, Japan and the Netherlands, FinTech credit was almost entirely directed to the business sector as measured to include invoice trading (a non-loan typeof business credit). FinTech credit in the United Kingdom was also mostly extended to the business sector, with a significant portion of this in the form of secured real estate lending.

The FinTech credit market structure also varies across those jurisdictions for which data are available. The Chinese market has by far the highest number of FinTech lending platforms. In the United Kingdom, there are 21 platforms that have full regulatory authorisation, but a further 66 are being assessed for authorisation, of which 32 have interim permission to undertake activity. France also has a relatively high number of platforms, with a significant number of entrants after FinTech-specific legislation was introduced in 2014. In most jurisdictions, FinTech credit market activity appears to be reasonably concentrated among the five largest platforms, with the most notable exception being the Chinese market.

FinTech credit can be primarily segmented into private consumer loans and business loans. Debt refinancing or debt consolidation appears to be the most common purpose of FinTech consumer loans (including for student loans in the United States). To a lesser extent, consumer
loans are also taken out for vehicle purchase or home improvement in Australia, France and Italy. The US P2P consumer loan market is split between unsecured consumer lending and student lending. Platforms target prime and near-prime customers for the former, and higher quality
borrowers with limited credit history for student lending. The available data suggest that, in most jurisdictions, average FinTech consumer loans are typically in the range of USD 5,000–25,000, with the United States at the top end of that range (Graph 10). Average borrowing amounts are much larger in China, at more than USD 50,000.

Business loans in the United States are typically for small and medium-sized enterprises (SMEs). Platforms offer both secured and unsecured loans. The small business lending segment comprises nearly one quarter of overall FinTech lending, and the borrowers are more heterogeneous than consumer loan borrowers. In the United Kingdom, the majority of P2P business lending appears to be extended to small businesses. AltFi data suggest that around two thirds of P2P business lending is on a secured basis, mostly real estate but also non-property collateral.

Platforms in the Americas and Europe appear to be more domestically focused in their lending than in their capital or fund-raising activities, with only around 10–12% of platforms lending more than 10% to borrowers abroad. There is more cross-border lending in the Asia-Pacific region (around 40% of platforms lending more than 10% abroad), and the pattern of cross-border flows appears broadly similar for both lending and raising debt.

Scandals at FinTech platforms

Over the past 18 months, there have been a number of scandals in the FinTech lending sector.

While the fallout from these incidents has been limited, each one has raised concerns about performance and has attracted the attention of regulators to a less regulated industry.

Lending Club (United States): In May 2016, Lending Club, the largest US marketplace lending platform and one of only a few that are publicly listed, announced that the company had repurchased USD 22 million of near-prime personal loans previously sold to a single investor. Lending Club stated that the repurchased loans did not conform to the requirements of the buyer, and an internal review revealed evidence of data manipulation on certain noncredit fields. Concurrently, Lending Club announced that it had discovered a previously undisclosed ownership interest of senior executives in a fund designed to invest in marketplace loans. These disclosures resulted in the resignation of the CEO and several other senior executives.

While spillover effects to other platforms were relatively limited, this incident has prompted greater regulatory and investor scrutiny. Market participants reported that investors were subsequently seeking greater transparency in deals and underwriting practices.

TrustBuddy (Sweden): TrustBuddy was a P2P lending platform based in Stockholm. Launched in 2009, the platform originally specialised in payday loans, but was expanding into more conventional consumer loans. In August 2015, after reporting significant losses and as part of a transition to a broader focus on consumer lending, TrustBuddy brought in a new management team. The new team found evidence of misconduct, and an internal investigation revealed that the platform owed significantly more to investors than it held in assets. It appeared that TrustBuddy had been allocating new lender capital to cover bad debts, and using capital to make loans to borrowers without assigning the loans to a lender.

TrustBuddy reported the situation to the Swedish Financial Services Authority, which ordered TrustBuddy to cease its operations immediately. Trading in TrustBuddy shares was also suspended, and the platform filed for bankruptcy several days later.

While direct market reaction to this platform failure was muted, the incident raised questions about the safety of FinTech lending, and has prompted further regulatory scrutiny.

Ezubao (China): Ezubao, a Chinese FinTech lender purportedly active in small business lending, experienced the largest financial fraud in Chinese history. Ezubao unexpectedly stopped operating in December 2015, and ongoing customer investor complaints spurred a police investigation. In early 2016, it was revealed that Ezubao was a massive Ponzi scheme, in which more than 900,000 individual investors were defrauded of USD 7.6 billion. The platform, founded in 2014, was a relative newcomer to the market, but came under investigation for suspected illegal business practices early on. Most of the products offered by Ezubao were discovered to be fake, and the company was nothing more than a vehicle used to enrich top executives.

The FinTech lending industry in China is large and very fragmented. While the stock price of another large Chinese P2P lender, Yirendai, dropped precipitously around the time of the Ezubao announcement, it rebounded quickly. Other platforms do not appear to have been affected by the negative headlines.

Financial stability implications of FinTech credit

At this stage, the small size of FinTech credit relative to credit extended by traditional intermediaries limits the direct impact on financial stability across major jurisdictions.

However, a significantly larger share of FinTech-facilitated credit in the financial system could present a mix of financial stability benefits and risks in the future. Among potential benefits are effects associated with financial inclusion, more diversity in credit provision and efficiency pressures on incumbents. Among the risks are a potential deterioration of lending standards, increased procyclicality of credit provision, and a disorderly impact on traditional banks, for example through revenue erosion or additional risk-taking. FinTech credit also may pose
challenges for regulators in relation to the regulatory perimeter and monitoring of credit activity.

It is important to emphasise that FinTech credit is currently very small in nearly all jurisdictions. Perhaps only in the UK does P2P lending appear to be a significant source of credit to a particular segment – it accounted for nearly 14% of equivalent gross bank lending flows to small businesses in 2015. Reflecting the current small overall size of the sector, much of the analysis in this section is based on the assumption that FinTech credit continues to expand at a fast pace and that it becomes a significant share of credit activity. This analysis does not attempt to assess the likelihood of such an outcome.

Bearing in mind the pace of innovation and the rapid development of the industry, this section considers the implications for financial stability – both benefits and risks – of FinTech platforms becoming material providers of credit. It also considers the implications of the use
of securitisation to fund FinTech credit provision and the possible response from incumbent banks to the growth of FinTech credit.

The emergence of FinTech platforms has led to, and will continue to lead to, responses from the traditional banking sector. Specifically, banks may: (i) seek to acquire, or set up their own, FinTech credit platforms; (ii) make use of similar technologies for the traditional on-balance sheet lending business, such as those for credit assessment, either by developing them in-house or by partnering with FinTech credit platforms; (iii) invest directly in the loans of FinTech credit platforms; or (iv) retreat from market segments where FinTech credit platforms have a growing competitive advantage. The financial stability implications differ by scenario, but a few general trends may be surmised.

The growing adoption of online platforms and competitive pressures may lead to the greater efficiency of incumbent banks. By acquiring new online and data-based technologies, banks may “leapfrog” some current challenges in legacy IT systems. Similarly, successful partnerships between banks and FinTech platforms could create an opportunity to improve risk analysis or offer a better service to a particular segment of the market (such as the small loans segment). According to a UBS survey, around 22% of developed market banks have a partnership with a P2P lending platform. No emerging market banks surveyed reported having a partnership, but 23% intend to form a partnership in the future.