Fintech could “undermine financial stability”, MAS says

04 December 2017   Category: News, Asia, Global, Hong Kong, India, Korea, Malaysia, Singapore, Taiwan, Thailand   By Asia Asset Management

The Monetary Authority of Singapore (MAS), the city-state’s central bank, is warning that financial technology (fintech) firms may hurt financial stability, even though they are widely perceived as a driver of innovation.

In its Financial Stability Report released on November 30, MAS says that fintech has the potential to "undermine financial stability by creating greater or new imbalances and contagion channels".

The report, published once a year, notes that fintech companies, just like other financial institutions, are vulnerable to microfinancial risks.

"The crystallisation of such microfinancial risks could trigger company- or sector-wide distress that in turn propagates to the rest of the financial sector,” it says.

It warns that technologies that increase the speed and volume of financial transactions could lead to greater volatility and instability.

"Automated transactions based on common algorithms could lead to herding behaviour that could increase volatility. Wider adoption of technological solutions may increase vulnerabilities to cyberattacks.”

MAS says that if Singapore financial institutions do not fend against the fintech disruption, they could stand to lose more than 5% of their operating income, which would come mostly from disintermediation in the payments space.

On the other hand, financial institutions that are ready for the fintech disruption could stand to gain significantly, as MAS says that cost savings from leveraging fintech – such as in automating banking functions or the use of artificial intelligence – could yield a 30% reduction in costs.

"That in itself represents 10-20% of Asian banks' operating income," the report says.

Meanwhile, MAS also released the results of its study on the investment behaviour of institutional asset owners and investors, which found that investors tend to demonstrate contrarian behaviour and smoothen market turbulence in the Asia-10 bond markets.

According to the study, institutional investors tend to increase purchases of Asia-10 bonds when global financial conditions tighten. A one percentage-point increase in the Goldman Sachs US Financial Conditions Index – a proxy for global financial conditions – is associated with a 157% increase in inflows to Asia-10 bonds.

"This suggests that institutional investors tend to be counter-cyclical in response to a tightening in global financial conditions. We do not find similar behaviour in institutional portfolio inflows into Asia-10 equities," MAS says.

The Asia-10 markets as defined by MAS comprise China, Hong Kong, India, Indonesia, South Korea, Malaysia, the Philippines, Singapore, Taiwan and Thailand.