Quarles zeroes in (again) on fintech, nonbank financial intermediation, ‘too big to fail’

The roles of “fintech,” nonbank financial intermediation and “too big to fail” were again key points for the chief Federal Reserve regulator for supervision, who also again pledged to look into all three as he heads the international body coordinating financial stability.

Federal Reserve Board Vice Chairman for Supervision Randal Quarles – who also serves as chair of the Financial Stability Board (FSB) – said “broad engagement” on these and other issues is essential to understanding new developments that are relevant to financial stability. Quarles made the remarks to the 2019 European Bank Executive Committee Forum in Brussels, Belgium.

“Take, for example, the ‘fintech’ trends I discussed in remarks last week, to which the FSB is dedicating significant attention,” Quarles told the group. “Claims about fintech run the gamut from the utopian to the apocalyptic–yet the mantle of fintech covers a wide range of new business models, products, and trends. Their contours and their impact also vary across national boundaries, from mobile wallets in Kenya, to online mortgages in the United States, to money market funds founded by technology companies in China.”

Quarles said understanding one of these new uses of technology is not the same as understanding all of them. On the contrary, he said, identifying the risks and opportunities they pose requires context, information, and insight – which he said can only come from a variety of stakeholders with experience developing, using, and monitoring them.

In other comments, Quarles said about:

  • Nonbank financial intermediation: “Nonbank financing has grown since the financial crisis, and it has been a source of systemic risk, often involving high leverage, maturity and liquidity mismatches, opaque structures, and concentrated holdings of risky assets. Nonbank financing can also lead to lower lending standards, bidding up the price of risky assets and sending an encouraging signal to credit underwriters. These channels played a role in the recent global financial crisis, and more recently, new forms of interconnectedness between nonbank financial firms and the banking system have emerged. In some scenarios, both domestically and internationally, such ties could amplify risks.
  • Too big to fail: “We can now begin to ask fundamental, critical questions: What have the effects of these reforms been, whether intended or unintended, salutary or adverse? Have we successfully reduced or eliminated the problem? Has there been a tradeoff, in the form of new, unintended risks or costs?”

Quarles repeated (from previous remarks) that the FSB is launching a global study with multinational policymakers to start answering questions about this issue as part of its broader effort to evaluate the effects of post-crisis reforms. “We intend to bring analytical rigor to these questions, and we recognize that the academic community has undertaken much work in this area. As a result, we will draw extensively on academic advisors during all phases of the work we are undertaking. I also encourage other experts in this field to look closely to the consultative document that will be coming from the study next year. We welcome the input as we undertake the study of this signature issue from the crisis.”

The Financial Stability Board: Beyond the Fog of Battle

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