In order for central banks to help maintain an effective financial system it is important that technological changes are considered and analyzed as they happen. Fintech is particularly disruptive because of the speed with which it has taken hold in today’s world of finance, where we expect instant access to all forms of information. It has become increasingly apparent that many of the systems that underpin the financial system are not immune to disruption. The aim of this article is to provide an understanding of how fintech may impact central banks’ governance, specifically in terms of its capabilities and resilience.
Governance in central banking covers a broad range of responsibilities covering management, structure, accountability and culture. A key aspect of governance in central banking is that the bank operates independently from government, this helps maintain its political independence and ensures it serves solely public interest. This prevents governments from using the central bank as an instrument of short-term economic management. It also allows the central bank to make objective decisions without fear or favour.
Central banks have a broad mandate which includes the provision of payment services, ensuring monetary and financial system stability and supervision of credit institutions. They have tools that allow them to implement their remit such as changing interest rates, conducting open market operations (the purchase or sale of government securities by a central bank) and setting banking capital requirements. In recent years it has become increasingly clear that many institutions in the financial sector are becoming exposed to cyber-related risks. The reason for this is that an increasing number of transactions and operations have a reliance on technology, as such there is a need for central banks to ensure that they are suitably prepared.
The impact of fintech on central bank governance has been felt in three key areas; resistance, capability and risk. First of all the financial system is becoming exposed to cyber related risks; over the last few years we have seen central banks and commercial banks being hit by ransomware attacks which are costly and disruptive. Central Banks need rigorous governance in place to ensure resilience is kept at a high level. Secondly, fintech has impacted central bank governance by becoming an ever-greater part of the financial system and this trend looks set to continue; in order for central banks to maintain their independence they must make sure they invest in technology that enables them to operate efficiently and effectively. This can prove challenging as technology is advancing at a rapid pace, it is therefore important that central banks have the capability to keep up with evolving technology. The last element of impact fintech has had on central bank governance is financial stability. If fintech developments are causing certain types of transactions or operations to be exposed to increased risks, this can end up having a negative impact on financial stability. Therefore central banks need governance in place to monitor risks and take appropriate action to minimize these threats, this can be achieved by putting in place effective operational risk management.