US bank regulator warns of crisis risks from spread of financial technology

The cryptocurrency representations in this illustration were captured on January 24, 2022. REUTERS / Dado Ruvic / Illustration

NEW YORK (Reuters) – Acting Currency Controller Michael Hsu, a major regulator of U.S. banks, has warned that the rise of financial technology and digital banking services could lead to financial risks and possibly a crisis in the long run.

“I think fintech and big tech have a huge impact and deserve more of our attention,” Hsu said at a conference in New York, noting that the encroachment of fintech companies on the traditional financial sector, including through partnerships with banks, was creating more complexity. and “non-integration” across the banking sector.

“My strong sense 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.

Hsu said that banks and tech companies, in an effort to provide a seamless customer experience, are cooperating in ways that make it difficult for regulators to distinguish between where a bank stops and where a tech company starts. He said that as fintech valuations fall as financing costs rise, banks’ partnerships with fintech companies are on the rise.

Hsu said that could create risks in the IT space around information security and resiliency, and also raise customer protection issues.

“I am increasingly concerned about the ‘unknown’ and fear that the less common risks of this digital transformation are unclassified and therefore invisible. As we learned from the 2008 financial crisis, invisible risks tend to grow and later become a source of nasty surprises,” Hsu said.

Earlier, Jane Ludwig, a former currency controller, warned that regulations on fintech are far less stringent than those governing banks.

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

Ludwig predicted that changing the banks “will get us into the next financial crisis if we don’t do something about it.”

US regulators have been wary of allowing banks to plunge into cryptocurrencies, which have been mired in recent months on concerns that raising interest rates will end the era of cheap money. Many crypto companies have filed for bankruptcy.

Hsu said the turmoil bears “all the hallmarks of a classic walk” on an interconnected industry that has problems, and cautioned that the market is “driven by hype”.

(Reported by Lanana Nguyen and Saeed Azhar). Writing by Michelle Price; Editing by Chizu Nomiyama and David Gregorio

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