Fintech risks: Digital banks more exposed – IMF Blog


The International Monetary Fund (IMF) Blog has alerted that fintech products such as digital banks are more exposed to risks than their traditional counterparts.

A new report seen says fast-growing fintechs pose challenges for both regulators and less technologically advanced banks.

The authors, Antonio Garcia Pascual and Fabio Natalucci, warned that digital banks’ exposure also extends to higher risk-taking in their securities portfolio, as well as higher liquidity risks.

They observed liquid assets held by neobanks relative to their deposits tend to be lower than what would be held by traditional banks.

“These factors also create a challenge for regulators: the risk management systems and overall resilience of most neobanks remain untested in an economic downturn.

“Not only do FinTech firms take on more risks themselves, they also exert pressure on long-established industry rivals.

“Competitive pressure from FinTech firms significantly hurt profitability of traditional banks, and this trend is set to continue”, the article published on IMFBlog reads.

Pascual and Natalucci discovered digital banks rely on decentralized finance, a crypto-based financial network without a central intermediary.

The authors said though the platform, a.k.a. DeFi, offers the potential of more innovative, inclusive, and transparent financial services, it involves the buildup of leverage and is “vulnerable to market, liquidity, and cyber risks”.

They noted that cyberattacks, which can be severe for traditional banks, are often lethal for Digital banks, stealing financial assets and undermining user trust.

The report further informed the public that the lack of deposit insurance in DeFi adds to the perception of all deposits being at risk.

 

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