US banking regulator warns of crisis risk from fintech proliferation

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Representations of cryptocurrencies in this illustration taken January 24, 2022. REUTERS/Dado Ruvic/Illustration

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NEW YORK, Sept 7 (Reuters) – The rise of fintech services and digital banking could spur financial risks and potentially a long-term crisis, Michael Hsu, acting comptroller of the currency, a major banking regulator, warned on Wednesday. American.

“I think fintechs and big tech have a big impact and are much more deserving of our attention,” Hsu told a conference in New York, noting that the encroachment of fintech companies into the traditional financial sector, including through partnerships with banks, created more complexity. and the “disintegration” in the entire banking sector.

“My deep feeling is that this process, left to its own devices, is likely to accelerate and expand until there is a serious problem or even a crisis,” Hsu said.

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Banks and tech companies, in a bid to deliver a seamless customer experience, are teaming up in ways to make it harder for regulators to distinguish between where banking stops and where tech business begins, a Hsu said. And with fintech valuations falling as funding costs rise, banking partnerships with fintechs are on the rise, he said.

This could create IT risks around information security and resiliency, and also raises customer protection concerns, Hsu said.

“I worry more and more about the ‘unknowns’ and worry that the less familiar risks of this digital transition are being labeled and therefore invisible. As we learned from the 2008 financial crisis, invisible risks tend to grow and later become the source of unpleasant surprises,” Hsu said.

Earlier, Gene Ludwig, a former comptroller of the currency, also warned that regulations for fintechs are much less stringent than those governing banks.

“The non-banking industry gets away with murder,” said Ludwig, who is now a managing partner at Canapi Ventures, a venture capital firm.

Ludwig predicted that non-banks “will drag us into the next financial crisis if we do nothing about it.”

US regulators have been reluctant to allow banks to dive into cryptocurrencies, which have crashed in recent months, over fears that interest rate hikes could end the era of cheap money. Several crypto companies have filed for bankruptcy.

Hsu said the turmoil had “all the hallmarks of a classic run” on an interconnected industry that was struggling, and warned the market was very “hype-driven”.

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Reporting by Lananh Nguyen and Saeed Azhar; written by Michelle Price; Editing by Chizu Nomiyama and David Gregorio

Our standards: The Thomson Reuters Trust Principles.

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