Bank Specialness, Digital Finance And The Financial Safety Net: Implications Of Lessons Learned From Shadow Banking For Fintech
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BANK SPECIALNESS, DIGITAL FINANCE AND THE FINANCIAL SAFETY NET Implications of lessons learned from shadow banking for FinTech
February 2019
Rob Patalano Senior Financial Expert Directorate for Financial and Enterprise Affairs
Contents*
1. Overview - “Specialness” and Financial Safety Net 2. Lessons from Shadow Banks and the Global Financial Crisis 3. Implications for FinTechs
4. Policy Perspectives
*Content represents the presenter’s assessment and perspective, and does not represent the views of the OECD or the Committee on Financial Markets.
2
Bank specialness in the 21st century • Banks are special: – due to their functions, and place in the financial system – affording them FSN, including regulation/supervision, lender and guarantor of last resort – But are they exclusively special?
• Did banks alone receive the Financial Safety Net during periods of crisis? Is it enough? • If not, then are banks uniquely special, from a monetary and financial stability perspective? 3
Are banks really so special? Banks
Shadow banks
Deposits – withdrawal on demand at par
MMFs – seemingly a close substitute
Maturity transformation
Finance companies, ABCP, funds – wholesale funding that supported longerterm credit
Providing liquidity to banks and nonbanks
MMFs and broker-dealers also provide liquidity to banks and non-banks
Payments
Non-bank payments -- see fintech!
Monetary policy transmission
In US, broker dealers and now MMFs are direct counterparties for market operations 4
Shadow banking and the FSN – crisis response Shadow banking Deposit-like instruments Liquidity Maturity transformation Securitization
Other credit intermediation
• MMFs • Broker-dealers • ABCPs • Finance companies (e.g. GE Finance)
Federal Reserve Policy Response •
Asset-based Commercial Paper and MMF Liquidity Facility (AMLF): $145 bn
•
Term Securities Lending Facility (TSLF): >$150 bn
•
Primary Dealer Credit Facility (PDCF):>150 bn
•
Commercial Paper Funding Facility (CPFF): $330 bn
• CLOs, CMBS, consumer ABS
• Term Action Lending Facility (TALF): $1 trillion
• Institutions: Bearn Stearns, AIG, etc.
•
Maiden Lane I, II, III facilities held CDOs, subprime RMBS, CDS: $70 bn
•
Direct loans collateralized by equity: $85 bn revolving credit facility.
5
Quantitative easing – when banks are not enough • Central banks QE responses show that banks, while special, are not sufficient to transmit monetary policy during periods of crisis • Markets and non-bank market intermediaries are critical channels of transmission. QE needs portfolio rebalancing, often through intermediaries such as funds, pension funds, insurers, to be successful. Bank of England
18
Bank of Japan
European Central Bank System
Federal Reserve
USD tn
QE asset purchases, in aggregate: >$12 trillion
16
• Sovereign debt
14
• Public debt from regional and local governments
12 10
8
• Corporate debt
6
• ETFs
4
• MBS
2
0 2007 2007 2008 2008 2009 2009 2010 2010 2011 2011 2012 2012 2013 2013 2014 2014 2015 2015 2016 2016 2017 2017 2018 2018 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Federal Reserve
European Central Bank System
Bank of Japan
Bank of England
• Asset-backed securities • Covered bonds 6
Financial Safety Net “Framework” Bank specialness
Crisis FSNF
Ex Ante
Ex Post
• Liquidity, backed by high-quality collateral, to banks
• Bank and non-bank liquidity backed by broader pool of collateral, and punitive costs.
• Deposit insurance (limited)
• Additional guarantees on bank debt.
• Banks + payment systems subject to supervision
• AIG, some securities firms and finance companies supervised.
• Implicit Too Big Too Fail
• G-SIB, TLAC, resolution mechanisms, D-SIFI. • Unprecedented direct market intervention. 7
Future of FinTech and monetary policy transmission? FinTech activities
•
FinTech MMFs
•
•
e.g. Yu’ebao (world’s largest MMF)
•
Signature Bank’s new token
•
Tokenization of insured bank deposits Increasing use of crypto-assets
•
Bitcoin, Ethereum, Tether; also SME ICOs
•
launch of bank “coins”
•
JPMorgan’s Coin
• P2P lending • Short-term lending for payments
•
Ant Financial, Grab, Gojek, WeBank, Amazon Lending
Deposit-like instruments Liquidity Maturity transformation & other credit Payments
Systemically Important BigTech?
Examples
• E-payments, • Blockchain-based payments •
Potential for “BigTechs” – size, global, complexity, substitutability?
• ApplePay, Google Pay, AliPay, Tenpay, Baidu Wallet, M-Pesa, Mercado Libre •
Alibaba, Apple, Amazon, Facebook, or Microsoft? 8
FinTech: Policies and Financial Safety Net “Framework”
Ex Ante • If a bank, supervised like a bank. • If a MMF, regulate it. • Crypto-assets and ICOs – treatment varies widely. • Payments – in China, 100% reserve requirements on custodial accounts, as of January 2019 (up from 20% in 2017 and 50% in 2018).
FSNF
Ex Post? • What if crypto-assets and tokenization impact pricing and liquidity of underlying markets? • What if MMFs increasingly replace deposits due to better yields and ease of use? • What if payments become clogged? • What if peer to peer lending results in large losses? 9
Final thought – Trust, and the future of Finance • Policy-makers severely underestimated the implications of shadow banking activities and risks. The consequences were systemic, global, and undermined public trust. • Should financial consumers decide to trust non-bank and Fintech products and services more than banks*, could the exclusivity of bank specialness become functionally obsolete? • As the growth of Fintech and BigTech fundamentally change the financial landscape, is it not plausible that a future financial crisis will need a FinTech policy response?
Policy-makers can act to address the current underestimation of possible implications of FinTech for monetary policy transmission and financial stability, and the FSN.
* Example if they trust regulated MMF products holding short-term government debt more than supervised banks with deposit insurance.
10
Q&A
BANK SPECIALNESS, DIGITAL FINANCE AND THE FINANCIAL SAFETY NET Implications of lessons learned from shadow banking for FinTech
February 2019
Rob Patalano Senior Financial Expert Directorate for Financial and Enterprise Affairs
Contents*
1. Overview - “Specialness” and Financial Safety Net 2. Lessons from Shadow Banks and the Global Financial Crisis 3. Implications for FinTechs
4. Policy Perspectives
*Content represents the presenter’s assessment and perspective, and does not represent the views of the OECD or the Committee on Financial Markets.
2
Bank specialness in the 21st century • Banks are special: – due to their functions, and place in the financial system – affording them FSN, including regulation/supervision, lender and guarantor of last resort – But are they exclusively special?
• Did banks alone receive the Financial Safety Net during periods of crisis? Is it enough? • If not, then are banks uniquely special, from a monetary and financial stability perspective? 3
Are banks really so special? Banks
Shadow banks
Deposits – withdrawal on demand at par
MMFs – seemingly a close substitute
Maturity transformation
Finance companies, ABCP, funds – wholesale funding that supported longerterm credit
Providing liquidity to banks and nonbanks
MMFs and broker-dealers also provide liquidity to banks and non-banks
Payments
Non-bank payments -- see fintech!
Monetary policy transmission
In US, broker dealers and now MMFs are direct counterparties for market operations 4
Shadow banking and the FSN – crisis response Shadow banking Deposit-like instruments Liquidity Maturity transformation Securitization
Other credit intermediation
• MMFs • Broker-dealers • ABCPs • Finance companies (e.g. GE Finance)
Federal Reserve Policy Response •
Asset-based Commercial Paper and MMF Liquidity Facility (AMLF): $145 bn
•
Term Securities Lending Facility (TSLF): >$150 bn
•
Primary Dealer Credit Facility (PDCF):>150 bn
•
Commercial Paper Funding Facility (CPFF): $330 bn
• CLOs, CMBS, consumer ABS
• Term Action Lending Facility (TALF): $1 trillion
• Institutions: Bearn Stearns, AIG, etc.
•
Maiden Lane I, II, III facilities held CDOs, subprime RMBS, CDS: $70 bn
•
Direct loans collateralized by equity: $85 bn revolving credit facility.
5
Quantitative easing – when banks are not enough • Central banks QE responses show that banks, while special, are not sufficient to transmit monetary policy during periods of crisis • Markets and non-bank market intermediaries are critical channels of transmission. QE needs portfolio rebalancing, often through intermediaries such as funds, pension funds, insurers, to be successful. Bank of England
18
Bank of Japan
European Central Bank System
Federal Reserve
USD tn
QE asset purchases, in aggregate: >$12 trillion
16
• Sovereign debt
14
• Public debt from regional and local governments
12 10
8
• Corporate debt
6
• ETFs
4
• MBS
2
0 2007 2007 2008 2008 2009 2009 2010 2010 2011 2011 2012 2012 2013 2013 2014 2014 2015 2015 2016 2016 2017 2017 2018 2018 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Federal Reserve
European Central Bank System
Bank of Japan
Bank of England
• Asset-backed securities • Covered bonds 6
Financial Safety Net “Framework” Bank specialness
Crisis FSNF
Ex Ante
Ex Post
• Liquidity, backed by high-quality collateral, to banks
• Bank and non-bank liquidity backed by broader pool of collateral, and punitive costs.
• Deposit insurance (limited)
• Additional guarantees on bank debt.
• Banks + payment systems subject to supervision
• AIG, some securities firms and finance companies supervised.
• Implicit Too Big Too Fail
• G-SIB, TLAC, resolution mechanisms, D-SIFI. • Unprecedented direct market intervention. 7
Future of FinTech and monetary policy transmission? FinTech activities
•
FinTech MMFs
•
•
e.g. Yu’ebao (world’s largest MMF)
•
Signature Bank’s new token
•
Tokenization of insured bank deposits Increasing use of crypto-assets
•
Bitcoin, Ethereum, Tether; also SME ICOs
•
launch of bank “coins”
•
JPMorgan’s Coin
• P2P lending • Short-term lending for payments
•
Ant Financial, Grab, Gojek, WeBank, Amazon Lending
Deposit-like instruments Liquidity Maturity transformation & other credit Payments
Systemically Important BigTech?
Examples
• E-payments, • Blockchain-based payments •
Potential for “BigTechs” – size, global, complexity, substitutability?
• ApplePay, Google Pay, AliPay, Tenpay, Baidu Wallet, M-Pesa, Mercado Libre •
Alibaba, Apple, Amazon, Facebook, or Microsoft? 8
FinTech: Policies and Financial Safety Net “Framework”
Ex Ante • If a bank, supervised like a bank. • If a MMF, regulate it. • Crypto-assets and ICOs – treatment varies widely. • Payments – in China, 100% reserve requirements on custodial accounts, as of January 2019 (up from 20% in 2017 and 50% in 2018).
FSNF
Ex Post? • What if crypto-assets and tokenization impact pricing and liquidity of underlying markets? • What if MMFs increasingly replace deposits due to better yields and ease of use? • What if payments become clogged? • What if peer to peer lending results in large losses? 9
Final thought – Trust, and the future of Finance • Policy-makers severely underestimated the implications of shadow banking activities and risks. The consequences were systemic, global, and undermined public trust. • Should financial consumers decide to trust non-bank and Fintech products and services more than banks*, could the exclusivity of bank specialness become functionally obsolete? • As the growth of Fintech and BigTech fundamentally change the financial landscape, is it not plausible that a future financial crisis will need a FinTech policy response?
Policy-makers can act to address the current underestimation of possible implications of FinTech for monetary policy transmission and financial stability, and the FSN.
* Example if they trust regulated MMF products holding short-term government debt more than supervised banks with deposit insurance.
10
Q&A
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