Learning objectives: Differentiate between the five Basel fintech scenarios and the roles participants (incumbent banks, new banks, Big Tech, fintech firms and service providers) perform and risks they are subject to in each. Discuss the Basel disintermediated bank scenario and its impact on incumbent banks’ present business models. Identify areas of existing product and funding risks. Distinguish practical instances of Basel Committee’s Principles for sound management of operational risk (PSMOR) as applied to fintech. Distinguish the implications for bank supervisors on regulatory frameworks as a result of fintech along with existing licensing regimes and regulatory responses
Questions:
20.4.1. In order to assess the impact of fintech (which the authors define as technologically-enabled financial innovation that could result in new business models, applications, processes, or products with an associated material effect on financial markets and institutions and the provision of financial services) the Basel Committee on Banking Supervision (BCBS) generated the following five forward-looking scenarios:
I. Better Bank: incumbents digitize--and leverage technology to change business models--to successfully retain customer relationships and core banking services
II. New Bank: incumbents are disrupted by new ("neo") banks who offer full-service built-for-digital banking platforms
III. Distributed Bank: financial services are unbundled (aka, modularized) amid the proliferation of specific or niche services
IV. Relegated Bank: incumbents become commoditized service providers who provide core and/or back-office (often licensed) lending, payment, and deposit-talking
V. Disintermediated Bank: incumbent banks displaced from customer financial transactions given the removal of the need for balance sheet intermediation and/or trusted third parties
In regard to these scenarios and their possible/likely implications, each of the following is true EXCEPT which is false?
a. Bigtech and fintech players emerge actively in (at least) three of the scenarios: Distributed, Relegated, and Disintermediated Bank
b. Incumbents banks do not survive (at least in their current business models) in at least two of the scenarios: New and Disintermediated Bank
c. Systemic risk--including the inability of supervisors to monitor end-to-end transactions across multiple third parties--is a potential key risk in three of the scenarios: Distributed, Relegated, and Disintermediated Bank.
d. Because the key risks implied by each scenario are mutually exclusive (e.g., cyber-risk emerges in one scenario only) and further, only one of the scenarios will emerge in the medium- or long-term, the incumbent bank should invest according to their single most likely scenario
20.4.2. According to the Basel Committee on Banking Supervision (BCBS), there do exist three fintech-enabling technologies. BCBS claims "these enabling technologies are not new financial products or services themselves, but instead are the catalyst that allows for the development of new innovative products and for fintech companies to enter the banking markets. These technologies may lower barriers for entrants by allowing for low-cost infrastructure and access to direct delivery channels to customers, thus bypassing traditional channels." (Source: BCBS, Sound Practices: Implications of fintech developments for banks and bank supervisors, Feb 2018)
Each of the following is one of these fintech-enabling technologies EXCEPT which is not?
a. Distributed ledger technology (DLT)
b. Cloud-based services; e.g., IaaS, PaaS, and SaaS
c. Peak Productivity Innovation Trigger Protocol Points (PPITPPs)
d. Artificial intelligence and its subcategory machine learning (AI & ML)
20.4.3. Scenario analysis conducted by the Basel Committee on Banking Supervision (BCBS) generated five scenarios (i.e., Better, New, Distributed, Relegated, and Disintermediated Bank). Although each scenario presents a different pattern of risks (and highly overlapping opportunities such as greater financial inclusion, lower transaction costs, and faster services), several risks featured prominently in all five scenarios. Each of the following is one of these prominent risks (i.e., associated with all five scenarios to one degree or another) EXCEPT which is not?
a. Strategic risk
b. Systemic operational risk
c. Idiosyncratic operational risk
d. Asset (aka, market/product) liquidity risk
Answers here:
Questions:
20.4.1. In order to assess the impact of fintech (which the authors define as technologically-enabled financial innovation that could result in new business models, applications, processes, or products with an associated material effect on financial markets and institutions and the provision of financial services) the Basel Committee on Banking Supervision (BCBS) generated the following five forward-looking scenarios:
I. Better Bank: incumbents digitize--and leverage technology to change business models--to successfully retain customer relationships and core banking services
II. New Bank: incumbents are disrupted by new ("neo") banks who offer full-service built-for-digital banking platforms
III. Distributed Bank: financial services are unbundled (aka, modularized) amid the proliferation of specific or niche services
IV. Relegated Bank: incumbents become commoditized service providers who provide core and/or back-office (often licensed) lending, payment, and deposit-talking
V. Disintermediated Bank: incumbent banks displaced from customer financial transactions given the removal of the need for balance sheet intermediation and/or trusted third parties
In regard to these scenarios and their possible/likely implications, each of the following is true EXCEPT which is false?
a. Bigtech and fintech players emerge actively in (at least) three of the scenarios: Distributed, Relegated, and Disintermediated Bank
b. Incumbents banks do not survive (at least in their current business models) in at least two of the scenarios: New and Disintermediated Bank
c. Systemic risk--including the inability of supervisors to monitor end-to-end transactions across multiple third parties--is a potential key risk in three of the scenarios: Distributed, Relegated, and Disintermediated Bank.
d. Because the key risks implied by each scenario are mutually exclusive (e.g., cyber-risk emerges in one scenario only) and further, only one of the scenarios will emerge in the medium- or long-term, the incumbent bank should invest according to their single most likely scenario
20.4.2. According to the Basel Committee on Banking Supervision (BCBS), there do exist three fintech-enabling technologies. BCBS claims "these enabling technologies are not new financial products or services themselves, but instead are the catalyst that allows for the development of new innovative products and for fintech companies to enter the banking markets. These technologies may lower barriers for entrants by allowing for low-cost infrastructure and access to direct delivery channels to customers, thus bypassing traditional channels." (Source: BCBS, Sound Practices: Implications of fintech developments for banks and bank supervisors, Feb 2018)
Each of the following is one of these fintech-enabling technologies EXCEPT which is not?
a. Distributed ledger technology (DLT)
b. Cloud-based services; e.g., IaaS, PaaS, and SaaS
c. Peak Productivity Innovation Trigger Protocol Points (PPITPPs)
d. Artificial intelligence and its subcategory machine learning (AI & ML)
20.4.3. Scenario analysis conducted by the Basel Committee on Banking Supervision (BCBS) generated five scenarios (i.e., Better, New, Distributed, Relegated, and Disintermediated Bank). Although each scenario presents a different pattern of risks (and highly overlapping opportunities such as greater financial inclusion, lower transaction costs, and faster services), several risks featured prominently in all five scenarios. Each of the following is one of these prominent risks (i.e., associated with all five scenarios to one degree or another) EXCEPT which is not?
a. Strategic risk
b. Systemic operational risk
c. Idiosyncratic operational risk
d. Asset (aka, market/product) liquidity risk
Answers here:
