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Regulations 06 Jan 2017

The balance between innovation and financial stability

Traditionally, regulation and supervision have played a key role in developing the banking sector. They have ensured its stability and solvency, the protection of its consumers and the improvement of its efficiency. Now, regulatory and supervisory authorities are faced with an additional challenge: to draw up a regulatory framework that achieves the right balance between promoting new digital value propositions and protecting against the risks inherent to the digitalization of financial services.

This was the opinion expressed today by José Manuel González-Páramo during the French Payments Committee Conference on Technological Innovation in Payment Systems, organized by the Bank of France in Paris. Other speakers at the event included Yves Mersch, a member of the European Central Bank’s Executive Committee, and François Villeroy, governor of the Bank of France.

According to BBVA’s Executive Director, regulation should adapt to the pace of innovation in the banking sector. To this end, he asked public authorities and the private sector to be open to maximizing the opportunities for the technological transformation of the banking sector and to overcome current barriers. He stated that, in many cases, lack of a specific supervisory and regulatory framework is what actually hinders digital advances.

Digital transformation – opportunities and risks

With regard to this issue, José Manuel González-Páramo reminded his audience that the players in the banking sector are redefining how they create value for their customers by designing and providing sophisticated digital products and services that offer a great user experience. In his opinion, the main beneficiary of this transformation is the consumer.

However, he warned that this digital revolution brings with it new challenges for the financial system’s stability and integrity and for the protection of its consumers. As examples, he cited vulnerability in the face of external attacks (cybersecurity) and the risks concerning protection of consumer data; risks associated with money laundering and terrorism financing derived from new electronic identification methods and blockchain technology; and risks associated with new business models (e.g. peer-to-peer lending) that are often not reflected in the existing regulatory framework.

José Manuel González-Páramo during his intervention - Bank of France

How can balance be achieved?

In his opinion, we are currently in the early stages of the banking sector’s transformation and the implementation of new technologies. The private sector, the public sector and customers are discovering new opportunities but also the risks of this new environment. During this phase, cooperation and communication between all stakeholders from the public and private sectors are of vital importance.

In this context, José Manuel González-Páramo proposed a scheme that combines the best of both worlds: self-control by the institutions themselves and a regulatory and supervisory framework.

Also, the authorities and the public sector would need to have experimentation environments (regulatory sandboxes) to test new technologies and business models with real consumers and under controlled conditions, without having to wait for specific regulations. From his point of view, this would help all players: companies would be able to test their innovative solutions; and authorities would gain better knowledge of these innovations by understanding their risks and benefits and, as result, they would be able to identify the necessary regulatory and supervisory amendments to be made.

José Manuel González-Páramo stressed that this model can only be successful if all providers of financial services are bound by the same rules. As a consequence, activities with a similar risk level should meet the same regulatory requirements.

Additionally, BBVA’s Executive Director suggested that, to ensure the effectiveness of this dialog and cooperation, regulatory and supervisory authorities need to build a solid knowledge base about new technologies and maybe recruit new profiles that help them understand and handle this new context in as effective a manner as possible.

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