BIS Chief Calls for Regulatory Framework for Big Techs in Finance

Agustín Carstens says big techs involved in financial services are gaining systemic importance and may quickly become “too big to fail”.

BIS (Bank for International Settlements) chief Agustín Carstens has called for a “re-think” of regulations for big tech firms that provide services to the financial sector.

In a speech on Wednesday (8 February), Carstens said big tech firms such have been involved in financial services for some time, including those providing cloud computing to run key banking services.

Carstens outlined three key areas of concern for policymakers when it comes to big tech firms and the services they provide:-

  • data governance – the vast personal data big techs hold may help align products with consumer preferences and lower costs, but there are risks of price discrimination which could make consumers worse off
  • competition – big techs can bring greater competition, but they can quickly build positions of dominance which may ultimately increase user switching costs and raise entry barriers in certain market segments, impacting market contestability and consumer welfare
  • financial stability – big techs are gaining systemic importance and may quickly become “too big to fail”, while also presenting risks from the data-and-technology-related interdependencies and connections with financial institutions, which have come to heavily depend on a small number of big tech firms for critical services

Carstens said current regulatory frameworks were not designed with big techs in mind and are therefore “not geared towards possible spillover effects across all the activities big techs perform, or their potential systemic relevance”.

Carstens calls for a regulatory re-think to potentially introduce group-wide entity-based requirements for big tech firms that address financial stability risks.

Drawing from a BIS paper issued in October, he outlined three regulatory approaches that could serve as a basis for a new regulatory framework for big techs in finance:-

  • restriction approach – prohibiting big techs from engaging in regulated financial activities, an approach that would alleviate financial stability concerns but result in the removal of the numerous benefits big tech services bring to finance
  • segregation approach – requiring big techs’ financial services to be ring-fenced under a financial holding company, which would have to meet prudential and other requirements, and not be allowed to use common group-wide technological platforms or share data between financial and non-financial businesses; this approach is conceptually simple and increases transparency, but would prevent big techs from realising synergies and economies of scale
  • inclusion approach – making big techs with significant financial activities subject to group-wide requirements on governance, conduct of business, operational resilience and, when appropriate, financial soundness; this would allow big techs with sound data governance to make the most efficient use of data, but is more complex and would require effective monitoring of global groups

Carstens says some combination of the segregation and inclusion approaches may be desirable to create a “holistic approach” that would avoid efficiency losses in the use of data while still safeguarding financial stability.

Still, there would be questions around how to ensure effective cooperation and information-sharing between financial, data and competition  authorities at the local and cross-border level, the expertise of lead supervisors of global, enforcement and extraterritoriality, and political considerations.

Carstens expressed hope that the international community will find ways to address the current and coming challenges associated with big tech regulation.

In November 2022, Regulation Asia hosted a webinar with the authors of the October paper to discuss big tech risks and regulatory approaches for addressing them. A recording of the webinar is available here.

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