BIS Chief Calls For Regulatory Framework For Big Techs In Finance

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

Agustín Carstens, head of the BIS (Bank for International Settlements), called for a “reconsideration” of regulations for large technology firms that provide services to the financial sector.

In a speech on Wednesday (February 8), Carstens said big tech firms like these have been involved in financial services for some time, including those that provide 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 management – the large personal data possessed by big technologies can help to align products with consumer preferences and lower costs, but there are risks of price discrimination that can make consumers worse off competition – big technologies can bring greater competition, but they can quickly positions of dominance that can ultimately increase user switching costs and raise barriers to entry in certain market segments, affecting market competitiveness and financial stability of consumer welfare – large technologies gain systemic importance and can quickly become “too big to fail”, while also taking risks out of the data and technology-related interdependencies and connections with financial institutions, which have become heavily dependent on a small number of large technology firms for critical services

Carstens said the current regulatory frameworks were not designed with large technologies in mind and therefore “are not targeted at possible spillover effects across all the activities that large technologies perform, or their potential systemic relevance”.

Carstens is calling for a regulatory rethink to potentially introduce group-wide entity-based requirements for large technology firms that address financial stability risks.

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

restriction approach – prohibits big techs from engaging in regulated financial activities, an approach that would ease concerns about financial stability but would lead to the removal of the many benefits that big tech services have to finance segregation approach – requiring big techs to financial services must be segregated under a financial holding company, which will 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 will prevent large technologies from realizing synergies and economies of scale inclusion approach – making large technologies with significant financial activities subject to group-wide requirements regarding governance, business management, operational resilience and, where appropriate, financial health; it will allow big technologies with good data management to make the most efficient use of data, but is more complex and will require effective monitoring of global groups

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

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

Carstens expressed hope that the international community will find ways to address the current and upcoming challenges related to big technology regulation.

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In November 2022, Regulation Asia hosted a webinar with the authors of the October article to discuss major technology risks and regulatory approaches to address them. A recording of the webinar is available here.