Michael Hsu, Acting Comptroller of the Currency, a significant U.S. bank regulator, cautioned on Wednesday that the growth of fintech services and digital banking could lead to long-term financial dangers and possibly a crisis.
The encroachment of fintech companies into the traditional financial sector, including through partnerships with banks, was increasing complexity and “de-integration” across the banking sector, Hsu noted at a conference in New York. “I believe fintech and big techs are having a large impact and warrant much more of our attention,” Hsu said.
If left to run its course this process in Hsu’s opinion “is likely to accelerate and grow until there is a serious problem or even a crisis.”
In an effort to offer a seamless client experience, banks and internet companies are collaborating in ways that make it more challenging for regulators to determine where the bank ends and the tech business begins, according to Hsu. Additionally, he said, bank relationships with fintech are growing as valuations for fintech companies decline and financing costs rise.
According to Hsu, this raises concerns about customer protection as well as IT risks related to information security and resilience.
“I am concerned that the less understood threats of this digital transformation are unlabeled and, as a result, unnoticed, which makes me worry more and more about the “unknowns”. Unseen risks have a propensity to build and eventually serve as the cause of unpleasant surprises, as the 2008 financial crisis taught us, “said Hsu.
Gene Ludwig, a former Comptroller of the Currency, had issued a warning about the fact that fintech laws are significantly less stringent than those that apply to banks.
The non-banking sector is getting away with murder, according to Ludwig, who is currently the managing partner of the venture capital firm Canapi Ventures.
If we don’t take action, Ludwig predicted, non-banks “will get us into the next financial catastrophe.”
Since cryptocurrencies have fallen off in recent months due to concerns that interest rate hikes would put an end to the age of cheap money, U.S. regulators have been reluctant to permit banks to invest in them. A number of cryptocurrency businesses have declared bankruptcy.
Hsu warned that the market is particularly “hype-driven” and noted that the unrest has “all of the elements of a classic run” on an interconnected industry with issues.
