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Fintech can pose systemic risks: report

FINTECH may pose a systemic risk to financial systems, and its impact must be weighed by factors such as the level of unfettered competition, the degree of concentration risk, and its track record, said a report by Depository Trust & Clearing Corporation (DTCC), a post-trade financial services company.

"Fintech is likely to have a greater systemic impact through key transformational mechanisms, such as the disintermediation of incumbents, disaggregation of financial services and decentralisation of networks," said DTCC.

"These effects, along with fintech's potential to fundamentally alter competitive forces, market dynamics, financial inclusion, consumer rights and many other areas, could strengthen or weaken overall financial stability."

For one thing, DTCC noted a need to watch the degree of competition versus cooperation between fintech firms and incumbents.

"Competitive pressures on banks could erode their profitability, and may encourage them to pursue riskier strategies. Outright competition between fintech companies and incumbents is less likely to promote financial stability than an environment where parties engage in cooperative arrangements," it said.

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DTCC also proposed that fintech risk may reside in the level of concentration of a small cluster of fintech companies that become dominant in a given area.

"Fintech companies that provide core banking functions could enhance financial stability through diversification of credit and liquidity risk. However, given the short track record of these companies, they could also create systemic vulnerabilities," it added.

The report comes amid existing criteria for defining systemically important institutions, following the financial crisis that cast a spotlight on "too big to fail" banks. Such criteria include the size, the lack of substitutability, the scale of complexity, and the level of interconnectedness of the institutions.

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