Financial stability issues are discussed in a recent IMF report. It states that the dangers have increased as the financial system’s resilience is put to the test through numerous channels as a result of the Ukraine war.
The first chapter examines the financial system’s impact on the Ukraine conflict. Commodity prices present central banks with difficult trade-offs. Many emerging and frontier markets are experiencing particularly challenging conditions. Financial vulnerabilities in China remain high, owing to persistent property market stress and new COVID-19 outbreaks. Without compromising the recovery, central banks should act decisively to prevent inflation from becoming entrenched.
What Are the Facts?
Policymakers will have to deal with the systemic challenges that the war has brought to light, such as the trade-off between energy security and climate change.
The third chapter, however, is the most interesting for the crypto business. “The Rapid Growth of Fintech: Vulnerabilities and Challenges for Financial Stability,” as the title suggests. An essential section of the chapter discusses the hazards and benefits of DeFi. Fintech, according to the report, can boost efficiency and competition while also expanding access to financial services. It claims fintech firms’ rapid expansion into hazardous industry categories, as well as their lack of oversight and interconnection with the traditional financial system, can jeopardize financial stability.
In a research titled “Fintechs in Banking: Conceptual Framework and Risks,” the report states that the main business strategy of banks is to collect deposits as well as offer loans. They accomplish this by performing the most important economic job of financial intermediaries: converting deposits (savings) into credit (investments), which involves the translation of liquidity, maturity, and credit risk. Fintechs enter the financial intermediation chain at various points, usually by providing specialized services. Fintechs can quickly build novel solutions that improve efficiency or customer experience by doing so.
The IMF research offers an interesting perspective on the risks of DeFi. The speed, breadth, and depth of these shifts create systemic concerns and put financial stability at risk. Fintechs are rapidly gaining traction in a wide range of vital financial services, assisted by favorable regulatory treatment for specialized financial services in some cases. While some fintechs are still small, they have the ability to build up quickly—often in riskier industry categories and with riskier customers than traditional lenders.
Systemic concerns arise from the combination of rapid growth and the growing role of fintech financial services in the operation of financial intermediation. Traditional intermediaries have additional hurdles as a result of the speed and breadth of such developments.