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Preoccupied by ultra-low interest rates in much of the industrialized world, the financial industry risks being blindsided by an even bigger challenge, according to Russian central bank Governor Elvira Nabiullina.
"Banks could fall into a trap," Nabiullina said at a conference in Kazan, capital of Russia's republic of Tatarstan. "What do they mostly complain about now? Low interest rates, tough oversight, unjust regulation compared with parallel sectors. Meanwhile financial technologies quietly crept up from behind, and that's the main challenge that banks should pay attention to."
New financial technologies such as peer-to-peer lending and the use of cryptocurrencies such as bitcoin are coming under greater scrutiny by central banks. While some countries such as Singapore have taken a more relaxed approach to regulation as they focus on the benefits of innovation, nations from India to China are tightening oversight to curb emerging risks. The technologies present a test for regulators that may even eclipse the challenge they pose for the banking industry as a whole, according to Nabiullina.
"Since the environment is changing, we are forced — under the old paradigm — to produce ever more documents, to limit, regulate," she said. "Institutions are evolving dynamically, new technologies and services develop, and ordinary regulators are failing to catch up."
Technologies such as bitcoin may become increasingly attractive to investors as a protection against central bank policies of low- and negative interest rates that threaten capitalism, according to billionaire bond manager Bill Gross.
Policies by the Federal Reserve, the Bank of Japan and the European Central Bank are destroying historical business models that foster savings, investment and economic growth, Gross, who runs the $1.5 billion Janus Global Unconstrained Bond Fund, said in an October investment outlook. He said that as investors lose faith in the system, they will increasingly seek havens.
For the Bank of Russia, as the overseer of lenders and the country's financial system as a whole, its entire "ideology" of regulation may need to change, Nabiullina said. The governor signaled that countries like Singapore and the U.K. will serve as models for Russia's approach.
"As long as financial technologies aren't too massive, we shouldn't push too hard on our regulation," she said. "We need to give new technologies a chance to develop."
Criminal Threat
Banks have another reason to pay attention to emerging technologies following a series of thefts. In February, thieves made off with $81 million from the central bank of Bangladesh. A commercial bank in Ecuador said it was held up for $12 million last year, while a bank in Vietnam said criminals tried, and failed, to steal $1.1 million in what experts say may have been a practice run for Bangladesh.
All of the attacks were committed by cybercriminals, and at least some made use of a messaging system run by the Society for Worldwide Interbank Financial Telecommunication, better known as Swift. Blockchain could help prevent such hacks. Unlike Swift, a banking system run on a blockchain would be distributed with no one point of failure because the system runs simultaneously on all the computers linked to it around the world.
Although causing limited damage for now, cybercrime will eventually pose bigger risks, according to Nabiullina.
"The threat will grow," she said. "Cybercrime can't be treated lightly."
While demand for traditional banking services will remain for some time, client preferences for new technologies will increasingly crowd out older approaches, Nabiullina said.
"Banks must be prepared for this," she said. "Whether they use the chance to transform, or go extinct as institutions, depends only on them."