Nicola Medicoff from St Paul’s Girls School, Hammersmith is the runner up in the Bank of England/Financial Times schools blogging competition. In her post, she looks at how fintech might reshape the banking industry…
Six years after setting up shop in London, ride-hailing app Uber has a fleet of 40,000 drivers doing battle with Black cabs, upsetting an industry that has seen little change since Hackney carriages started in the 1650s. Banks are bracing themselves for a similar assault, in their case from small fintech start-ups and large technology groups. Are the banks’ fears justified?
Walter Heller famously said that an economist is someone who sees something in practice and wonders if it would work in theory. Economic theory says banks exist because they channel loanable funds more efficiently than individual savers and investors pairing up bilaterally. Those informational, diversification and maturity transformation considerations imply that banks should be able to out-compete peer to peer (P2P) lenders. The stylised fact that few P2P platforms have made a profit to date is in line with this theory. If so, then P2P lenders face a difficult future and they may need to become more like traditional banks in order to survive. Either way, that makes them much less disruptive than they first appear.
Ben Dyson and Jack Meaning
A “Central Bank Digital Currency” (CBDC) may sound like it’s from the future, but it’s something that many central banks are researching today, including those in Sweden, Canada, Denmark, China, and the European Central Bank and Bank of International Settlements (BIS). In a new working paper, we set aside questions about the technological, regulatory and legal aspects of central bank digital currency, and instead explore the underlying economics. Could the existence of a CBDC make it easier or harder for central banks to guide the economy through monetary policy? And could the existence of CBDC make the monetary transmission mechanism (MTM) faster or slower, stronger or weaker?
Clare Noone and Michael Kumhof
Does the introduction of a central bank digital currency (CBDC) crowd out bank funding? Does it open the door to runs on the aggregate banking system? In a recent Staff Working Paper we provide insights on these questions. We find that some of the major risks to financial stability posed by CBDC can be addressed by a set of four core design principles for a CBDC system. Implementing these principles, however, is non-trivial and risks would remain.
Anna Orlovskaya and Conor Sewell
Peer to Peer (P2P) lending is a hot topic at Fintech events and has received a lot of attention from academia, journalists, various international bodies and regulators. Following the Financial Crisis, P2P platforms saw an opportunity to fill a gap in the market by offering finance to customers and businesses struggling to get loans from banks. Whilst some argue they will one day revolutionise the whole banking landscape, many platforms have not yet turned a profit. So before asking if they are the future, we should first ask if they have a future at all. Problems such as a higher cost of funds, or limited ability to scale the business, may mean the only viable path is to become more like traditional banks.
Does macroprudential regulation spillover to foreign financial systems through inter-bank linkages? This question has received a lot of attention in recent years given the discord between the international nature of the global financial system and its regulation and supervision by national jurisdictions (e.g. this article). For example, subsidiaries of Spanish banks issue almost half of all credit issued by commercial banks in Mexico. These subsidiaries are also fully owned by their parent banks headquartered in Spain. Therefore, it is quite natural to ask whether macroprudential regulations in Spain can have unintended consequences on the Mexican financial system and the Mexican economy in general. While Mexican subsidiaries of Spanish banks are de-jure ring-fenced from regulations in Spain, does this hold de-facto?
Oliver Brenman, Frank Eich, and Jumana Saleheen
The conventional wisdom amongst financial market observers, academics, and journalists is that a steeper yield curve should be good news for bank profitability. The argument goes that because banks borrow short and lend long, a steeper yield curve would raise the wedge between rates paid on liabilities and received on assets – the so-called “net interest margin” (or NIM). In this post, we present cross-country evidence that challenges this view. Our results suggest that it is the level of long-term interest rates, rather than the slope of the yield curve, that drives banks’ NIMs.
Michael Anson, David Bholat, Miao Kang and Ryland Thomas
Imagine if you could peek inside the Bank’s historical ledgers and see the array of interest rates the Bank has charged for emergency loans in the past. If you could get the inside scoop on how many of these loans were never repaid, and how that impacted the Bank’s bottom line? Now you can. We have transcribed the Bank’s daily transactional ledgers and put them into an Excel workbook for you to explore. These ledgers contain a wealth of information on everyone who asked the Bank for a loan during the 1847, 1857 and 1866 crises.
Misa Tanaka and John Thanassoulis
In the 2007-8 global financial crisis, a number of banks were bailed out by taxpayers while their most senior employees were paid extraordinary bonuses up to that point (E.g. here, here and here). The resulting public outcry led to new regulations allowing clawback of bonuses earned on the back of decisions that subsequently damage their banks and the wider economy. But will these rules work? Our theoretical research shows that sophisticated banks can game clawback regulations by altering pay contracts so as to incentivise bankers to take risks that benefit shareholders but that are excessive for society. The entire pay package matters, and so, understanding how it shapes risk-taking incentives is as important as monitoring compliance with clawback rules.
What type of technology would you use if you wanted to create a central bank digital currency (CBDC) i.e. a national currency denominated, electronic, liability of the central bank? It is often assumed that blockchain, or distributed ledger technology (DLT), would be required; but although this could have some benefits (as well as challenges), it may not be necessary. It could be sensible to approach this issue the same way you would any IT systems development problem – starting with an analysis of requirements, before thinking about the solution that best meets these.