Big Tech "banks", financial stability and regulation

Abstract

This paper considers the financial stability risks caused by BigTech’s entry into retail banking and discusses alternative policy responses aimed at allaying those concerns. The entry of BigTech platforms may transform the retail banking industry in radical ways: while it may spur much-needed competition in the short term, it may also increase financial instability and lead to even more concentrated credit markets in the long-term. Importantly, traditional banks may be forced to transform into “narrow banks”, limited to funding the loans originated and distributed by the BigTechs. The separation between origination and funding has proved problematic once and again, from the savings and loans (S&L) crisis of the 80s and 90s to the financial collapse of the Great Recession. This time need not be different. Whether this grim prospect materialises, though, will depend on several factors, including how regulators respond to the new challenges posed by the entry of BigTech “banks”.