Excerpts from speech by Randal Quarles, vice chair for Supervision, Board of Governors of the Federal Reserve System, and chair Financial Stability Board, at Joint Conference of the European Central Bank and the Journal of Money, Credit, and Banking, Frankfurt, March 28 2019
We are already seeing significant changes to how many people around the world obtain financial services. For example, in Kenya, a mobile payments technology [M-pesa] has introduced mobile wallets to millions of people, many of whom never had a bank account. In the United States, the largest mortgage provider is an online lender. In China, a technology firm started the world’s largest money market fund [Alibaba’s four-year-old Yu’e Bao fund].
The Financial Stability Board monitors and analyzes the financial stability implications of financial innovation as part of our mandate to identify and address vulnerabilities in the global financial system. Let me outline two areas that we have started to examine in greater detail: the potential effects from the entry of large technology firms into financial services and the potential effects from the growth in decentralized financial technologies.
Over the last decade, the world has witnessed an explosion of large technology firms that are weaving themselves into our daily lives: for example, Facebook, Amazon, Apple, Tencent, and Baidu. Some of these firms are increasingly providing some financial services, such as payments, credit, insurance, and asset management. Their involvement can support financial services broadly.
For example, their technology may increase speed and efficiency, and the ubiquity of their presence in our lives may allow them to offer financial services in a more convenient way or at lower cost to consumers. Further, as they are only dipping their toes into the edges of the financial services water, the effects they have on the provision of financial services could grow enormously if they were to dive in.
Looking at the technologies that underlie some of the recent innovative financial products, we see a move toward decentralization–that is, a movement toward technologies that connect financial market participants directly without an intermediary. The potential areas of impact are broad: settling interbank payments; verifying and reconciling trade finance invoices; executing, enforcing and verifying the performance of contracts; and keeping an audit trail to deter money laundering. Both the potential entry of large, established technology companies into financial services and the ability of technology to decentralize financial transactions raise a number of issues, some of which may touch on financial stability.
Technological innovation offers the promise of a substantially more efficient financial system. But new systems, processes, and types of businesses will bring with them novel fragilities. We continue to be responsible for ensuring that the financial system be sufficiently resilient that businesses and households worldwide need not fear the collapse of the system that serves their needs. These are open questions that need to be addressed, and because they touch on issues of financial stability, the FSB is putting significant resources into understanding these potentially important developments. To be clear, we are not trying to oppose innovation, because innovation, including fintech, offers the world many potential benefits.
As the group charged with ensuring financial stability, however, we have to work to ensure that we can reap the benefits offered by these new technologies without harming financial stability. We hope to offer some answers to these questions in the coming years and to do so in line with the principles I outlined earlier. We will address the questions with discipline and analytical rigor in a way that incorporates the views of the public and key stakeholders and that results in answers that are practical and intelligible.