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While You Were Working – August 7

Complexity abounds for fintech regulation, Earnest looks to sell itself, and what has the global financial system learned a decade after the kickoff of the crisis?

4 min read

Modern Money

Bank for International Settlements

Bank for International Settlements weighs the future of fintech. (Fabrice Coffrini/Getty Images)

The promise of fintech is complex

A new working paper from The Bank for International Settlements explores the myriad of ways fintech stands to re-shape the financial services industry. The paper spends a good amount of time analyzing the relationship between fintech and regulation. The paper, written by Thomas Philippon, outlines four principles that should be embraced by regulators:

  1. Encourage entry and beware of a narrow approach to level-playing-field
  2. Promote low leverage from the beginning
  3. Keep incumbents in check with high equity ratios and be mindful of acquisitions
  4. Perfect is the enemy of good

I am not long on regulation being able to keep pace with fintech innovation.

Part of the problem for regulators is that they don’t always have a clear line of sight on what is actually being developed. The concept of fintech “sandboxes” is a positive development, but one that will only entice participation from a small portion of innovators.

Look at how firms objected to the concept of sharing their algorithmic trading codes with the Commodity Futures Trading Commission. Those firms were justified in their objections for a whole lot of reasons, chief among them that the CFTC is notorious for its poor in-house technology. Would you share your proprietary algorithm with the CFTC when you had little confidence in it could secure said algorithm from hackers?

Regulators will also have a tough time preventing the kinds of acquisitions that have already consolidated the fintech market. Are regulators really going to tell some Silicon Valley startup that it can’t sell itself to a big bank?

And finally, how should regulators address industry collaboration? For example, most of the cutting edge innovation having to do with distributed ledger technology is being conducted by consortiums of financial services firms. Those firms obviously intend to keep whatever they develop, so how will regulators prevent collaboration from creating silos of have-mores, haves and have-nots?

Complexities abound, indeed.

Speaking of Fintech…

It kinda makes sense that custodian banks are diving head-long into fintech. After all, back-office jobs were always the ones most destined to be replaced by technology.

10 years later, what have we fixed?

For the next year or so, there is going to be a wave of 10th anniversary analyses of various moments in the Great Financial Crisis: 10 years since Bear Stearns foundered, 10 years since Lehman Brothers collapsed, 10 years since TARP was approved, etc.

This analysis in the FT is one of the better big-picture views of where the global financial system stands now; 10 years after the beginning of the credit crunch.

Policymakers in the US never seem to get enough credit – from the industry or anyone else – about how their speedy actions set American banks on a path to recovery and growth that was/is well ahead of banks in other regions of the world. Just look at how many Europeans banks still struggle with the aftershocks of the initial crisis.

Coordinated central bank policies help put out the fire that was the financial crisis, but a lack of coordination on monetary policy has since created regional disconnects.

Banks themselves are doing a better job of managing risk, but they are far from perfect. For all the “tempest in a teapot” jokes pundits enjoyed making about JPMorgan and its London Whale fiasco, did that loss really hurt JPMorgan’s long-term profitability?

So there have certainly been some wins and some losses since the credit crisis began. The global financial system is far from perfect and the chance of another crisis will always lurk in the shadows. Big picture: The global financial system isn’t too-big-to-fail, but it will take a lot more to bring it to its knees.

Earnest is looking to sell itself

There has to be a joke in here somewhere about Earnest wanting to re-finance itself, right? In general, the online lending industry is showing more and more signs of fatigue. It seems that shops like Earnest, SoFi and Prosper have reached a tipping point whereby they are running out of highly qualified customers to bring into their ecosystem. Pushing to expand their customer base to expand year-after-year means they have to constantly lower of their underwriting standards. So it shouldn’t be a surprise that defaults have ticked up and the entire line of business looks less rosy?

WYWW Appetizers

  • Minneapolis Fed boss Neel Kashkari called economic BS on the Trump administration’s plans for immigration.
  • OnDeck says it is gonna cut 27% of staff and improve underwriting standards and achieve double-digit loan growth? Hmmmm.