Due to the access to the internet with smart devices and internet platforms, the way of raising funds from customers has now changed radically. Online platforms are a prime example, as they now allow investors and traders from around the world to integrate into the money, stock, commodity, and foreign exchange markets in a way they could not have imagined a few decades ago.
Banks that take advantage of new technologies now offer more personalized services and products since, although at the risk of violating the privacy of their customers, they collect and eventually use a wealth of data from customers in order to provide them with products appropriate to their profile.
On the other hand, financial services due to new technologies are now increasingly offered by companies that are not necessarily banks, which in fact provide a wider range of innovative products. Customers benefit from these products to build portfolios and develop strategic transactions. These customers are from all over the world, many of whom until recently did not have access to financial services.
The emergence of this type of clientele has far-reaching implications for both traditional intermediaries and regulators, as well as for financial stability.
A big issue is that these customers have a high level of financial illiteracy. In order for the technological developments of the last decades in the financial sector to be sustainable, this issue must be substantially improved. Only then will the global financial system take full advantage of these new customers.
In addition, the so-called democratization of funding through technological advancement requires an approach that focuses on the analysis of big data and places great emphasis on cyber security.
It is now necessary for authorities and regulators to carefully balance between:
The importance of public access to new financial products and services,
In the context of reducing financial risks, in recent years there has been an increased focus at the banking level on "micro-prudential supervision". Indeed, the post-financial crisis reforms are designed to strengthen micro-prudential supervision and, therefore, to increase the resilience of individual banks in times of stress. Thus, the concern for economies now is not focused on the failure of an individual bank, but on a collapse that may be caused by non-traditional financial services and companies, which potentially will be able to affect the entire global financial system.
The problem arises from the fact that non-bank financial products and the companies that offer them, have expanded globally in regions that do not follow the common regulatory standards. At the same time, the regulatory standards imposed on banks encouraged the development of shadow financial intermediaries.
Considering all the above-mentioned a great concern is that financial illiteracy, cyberattacks, and the lack of following common regulatory standards in many regions in the world, can create conditions of high doubt, uncertainty, and frustration in non-bank financial products and/or in the shadow financial system. In this case, the frightened customers are very likely to withdraw their funds at an unsustainable rate, so this can be a very important source of systemic financial risk.
Consider, for example, the capitalization of cryptocurrencies which is a product traded by non-banking institutions, and potentially integrated into a wide range of companies and regions that do not fully comply with regulatory standards is about $3 trillion, which is about 28% of the Dow Jones' capitalization. Financial illiteracy in terms of cryptocurrencies, cyber security breaches, and the lack of a regulatory framework can act, considering that the crypto market has such a large capitalization, as systemic risk factors. Accordingly, the multibillion-dollar transactions made by non-bank financial intermediaries around the world, for the corresponding reasons, are potentially serious sources of systemic risk.
Thus, the elimination of financial illiteracy worldwide, the extension of the common regulatory standards in all regions in the world, and the high level of cybersecurity is a one-way path. Otherwise, it will be a matter of time before the “first explosion” occurs, which is likely to create a chain reaction of “explosions” throughout the financial system around the world, leading to systemic financial and market risk worldwide.
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