The Financial Stability Board (FSB) published two reports that consider the financial stability implications from an increasing offering of financial services by BigTech firms, and the adoption of cloud computing and data services across a range of functions at financial institutions.
The FSB is an international body that monitors and makes recommendations about the global financial system. FSB coordinates at the international level the work of national financial authorities and international standard-setting bodies and develops and promotes the implementation of regulatory, supervisory, and other financial sector policies in the interest of financial stability.
The organization identifies that the entry of BigTech firms into finance has numerous benefits, including the potential for greater innovation, diversification and efficiency in the provision of financial services.
However, FSB recognizes that BigTech firms may also pose risks to financial stability. "Some risks are similar to those from financial firms more broadly, stemming from leverage, maturity transformation and liquidity mismatches, as well as operational risks," FSB says.
The financial services offerings of BigTech firms "could grow quickly given their significant resources and widespread access to customer data, which could be self-reinforcing via network effects," according to the reports. "An overarching consideration is that a small number of BigTech firms may in the future come to dominate, rather than diversify, the provision of certain financial services in some jurisdictions."
The FSB said players including Microsoft, Amazon, eBay, Baidu, Apple, Facebook and Tencent, have massive databases, while some offer asset management, payments and lending.
Many Big Tech firms like Amazon, Facebook, eBay, Alipay and Google have acquired payments-related licenses in European Union countries including Luxembourg, Ireland and Lithuania, although most have not yet built up any big volumes.
The report identifies a range of issues that arise for policymakers, including with respect to additional financial regulation and/or oversight. "Regulators and supervisors also need to be mindful of the resilience and the viability of the business models of incumbent firms given interlinkages with, and competition from, BigTech firms."
Financial institutions have used a range of third-party services for decades, and many jurisdictions have in place supervisory policies around such services. Yet recently, the adoption of cloud computing and data services across a range of functions at financial institutions raises new financial stability implications, according to FSB.
Despite the benefits that the cloud services present -- security, resilience, flexible operation, FSB says that there could be issues for financial institutions that use third-party service providers due to operational, governance and oversight considerations, particularly in a cross-border context and linked to the potential concentration of those providers. "This may result in a reduction in the ability of financial institutions and authorities to assess whether a service is being delivered in line with legal and regulatory obligations," the FSB said.
The report concludes that "there do not appear to be immediate financial stability risks stemming from the use of cloud services by financial institutions."
According to the reports, there may be merit in further discussion among authorities to assess: (i) the adequacy of regulatory standards and supervisory practices for outsourcing arrangements; (ii) the ability to coordinate and cooperate, and possibly share information among them when considering cloud services used by financial institutions; and (iii) the current standardisation efforts to ensure interoperability and data portability in cloud environments.