The Reserve Bank of Australia issued last October the Global Environment Analysis of the Financing system and presented among others the risks to the current financial services caused by the entry into the Fintech and Bigtech markets.
The Global Financial Environment
International financial developments can affect financial stability in Australia through financial and economic channels. Close attention is therefore paid to economies that have significant direct or indirect financial or trade links with Australia.
These include the United States, Europe, China, Japan and New Zealand. Some risks are idiosyncratic to those economies, while others are more global. Global financial vulnerabilities remain elevated, reflecting high asset prices, high debt levels and a range of country-specific factors.
Banks in some jurisdictions remain a source of vulnerability. Bank profitability is low in Europe and Japan, with many banks facing declining margins and some European banks also still grappling with high non-performing loans (NPLs). Signs of stress have also emerged among some smaller banks in China, and a few have needed government support in recent months.
While vulnerabilities are generally little changed, a number of factors that could act on them to cause a financial disruption have become more prominent. In particular, global economic growth has slowed further and downside risks to growth have increased.
A number of longer-term global challenges are emerging
A number of longer-term trends, with origins outside the financial system, are challenging financial institutions and regulators and will continue to do so into the future.
Information technology-related operational risks have become more prominent over time. This reflects the financial system having become more reliant on technology, more interconnected and more complex, with more frequent and sophisticated cyber attacks.
Cyber attacks could undermine financial stability by causing financial losses, reputational damage and service disruptions – all of which can threaten the operations and viability of individual institutions, their counterparties and financial market infrastructures.
Financial institutions and regulatory bodies are increasing their efforts to monitor and enhance cyber security. The entry of financial technology (‘fintech’) firms and large technology companies (‘bigtech’) into financial services may also alter risks. While these firms can enhance financial inclusion and have other benefits, they may also increase risks tot he system.
The risk management of new entrants may be less well developed than existing regulated providers, and new techniques – such as alternative forms of credit assessment – have yet to be tested through a full cycle. Interlinkages with banks could introduce additional operational (including cyber) risks.
Regulators have recently been considering whether ‘stablecoins’ and associated services might give rise to risks in a number of areas, including consumer and data protection, money laundering and terrorism financing, financial and operational risks, and interactions with the banking system.
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Source: Reserve Bank of Australia