Financial Stability in the Digital Era


François Villeroy de Galhau, the Governor of the Bank of France, presented on “Financial Stability in the Digital Era” at the Paris Europlace International Financial Forum.

He pointed out that the fact that regulators are turning their attention to the impact of digitalisation and how to regulate the consequential changes, should come as no surprise.

“It is our responsibility, as central bankers and regulators, to strike the right balance between the obvious benefits that digital innovation can bring to the financial sector, and the need for an adequate framework to mitigate risks and guarantee financial stability”.

His arguments were centred on three main areas: innovation, stability and regulation.

1. Innovation

“The majority of financial innovations have the potential to be highly disruptive, be it in payments, in financing (crowdfunding) or in financial markets (high-frequency-trading)”.

2. Stability

Although banking and financial innovations can also be a source of instability, as evidenced by the subprime crisis. Digital innovations actually expose the financial system to new forms of risk e.g. blockchain technology, cyber-crime, anti-money laundering and counter-terrorist financing”.

3. Regulation

  • “The first principle is an absolute guarantee of payment and transaction security”. Central Banks are trying to take a proactive approach towards the digital transition, to avoid being left behind by the highly technical nature of certain innovations.
  • “The second principle is a proportionate adaptation of regulations and supervision to address the development of FinTechs”. The regulation should avoid stifling innovations that may be beneficial to consumers and, more generally, to the economy and society; but at the same time it should also guarantee consumer protection and address issues of financial stability.

While Mr. de Galhau is pro a gradual adjustment of regulatory intensity, he prefers “gradualism” rather than a “sandbox” approach. This is in contrast to other markets such as the UK and more recently, Australia.

He remains concerned however, that FinTech companies (operating via the Internet) are not bound by borders and as such, it raises questions as to the efficacy of regulations which are still largely domestic or based on residency criteria; international coordination of regulation is therefore necessary.

Mr. de Galhau concluded: “In the long run, it will be necessary to ensure that the same rules apply to the same activities, irrespective of the players performing them. In order to ensure a level playing field, financial players must be regulated according to what they do and not what they are!”

The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions, position, or policy of Berkeley Research Group, LLC or its other employees and affiliates.

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