A new CEPR/IESE Report on the future of banking examines how new digital technologies can benefit and disrupt the finance industry and suggests policy and regulatory responses to ensure the financial system evolves in a modern, efficient, and stable way.
The report focuses on three key aspects related to the impact of technology on finance. It reviews the disruption in payment systems and the role of digital currencies in general, with a particular focus on CBDC. It explores the benefits and dangers of the massive use of data and ways to measure the value of data. And it deals with the consequences of the electronification of financial markets and the change in business models, together with the policy implications that derive from these changes.
The fourth report in The Future of Banking series from the IESE Business School and CEPR, authored by Darrell Duffie, Thierry Foucault, Laura Veldkamp and Xavier Vives highlights how the emergence of cutting-edge technologies such as machine learning and artificial intelligence, as well as the expansion of FinTech and BigTech companies into finance, have accelerated the digitalisation of financial services and changed the landscape of the finance industry in recent years.
The disruption caused by new entrants into the industry has led incumbents to consider their approach to payment systems, with many central banks considering the development of CBDCs to improve efficiency and inclusivity. The authors argue, however, that it could be premature for central banks to deploy CBDCs, as whilst the costs and benefits are large and remain relatively uncertain, they may bring new challenges relating to privacy and risk disrupting domestic banking systems. Policymakers should explore the appropriate role and regulation of novel payment arrangements, increase the reach and interoperability of fast payment systems, and regulate to foster greater competition in the bank payments system.
The growth of new data technologies, coupled with progress in artificial intelligence, is another key challenge for policymakers. The increasing use of consumer data can facilitate efficiency gains but also involves potential risks in terms of privacy issues, diminished competition, and potential increased income inequality. The report highlights the difficulty of resolving these trade-offs, and suggests policy solutions relying on data measurement approaches, which can be employed to gauge the quantity, private value and social welfare costs and benefits of modern firms’ use of data.
The electronification of market securities also has significant policy and economic consequences that need to be addressed. In particular, the report highlights issues of trading platforms' market power over their data, latency arbitrage, growing volumes of dark trading, and the danger of extreme price changes to financial stability. Among the policy proposals, it argues for the need of a consolidated tape in EU stock markets.
Overall, the report highlights the considerable challenges and disruption facing the finance industry as it deals with the introduction of new digital technologies. Finding the correct regulatory and policy responses to harness the potential benefits, while protecting consumers and ensuring market stability, is crucial.
To reach the authors, or for more information, please contact CEPR Press Officer Alexander Southworth.