The views expressed in this presentation are the views of the author and do not

necessarily reflect the views or policies of the Asian Development Bank Institute
(ADBI), the Asian Development Bank (ADB), its Board of Directors, or the
governments they represent. ADBI does not guarantee the accuracy of the data
included in this paper and accepts no responsibility for any consequences of their use.
Terminology used may not necessarily be consistent with ADB official terms.

BANKS, DIGITAL BANKING

INITIATIVES AND THE
FINANCIAL SAFETY NET
OECD-ADBI Tokyo Roundtable
26-27 February 2019
ADBI, Tokyo

Stephen A. Lumpkin, Ph.D.

Sebastian Schich, OECD
 Topic outline

1. The digital transformation

Rules and Financial
2. Are banks special?
regulations resources

3. Components of the financial safety net

Functions that make banks special

4. Fintech initiatives
Information (digital banking)
Capacity

5. Why banks remain special

THE DIGITAL TRANSFORMATION

3
The digital transformation of the economy

The technological shift to digital forms of interaction has begun

to alter the nature of assets that generate value, how
ownership is imparted, and where value is being generated.

These shifts change the structure and operation of markets,

enable the formation of mini-economies or eco-systems and
ultimately influence how relationships – both economic and
social – are developed, maintained and located.
“Technological improvements and innovations are often
beneficial for an economy, but they can place strains on the
incumbents in a particular industry or sector on which they are
focused, and they may create challenges for public policy,
especially in a heavily regulated industry”
Implications of digital innovations for banks

 Focus: functions typically associated with depository

institutions (i.e. banks)
 Question: are banks still special and thus warrant
exclusive access to all of the provisions of the financial
safety net?
 Question: or is it rather the case as Bill Gates once
quipped that ‘banking is necessary; banks are not’?
 Issue: New commercial-loan and deposit-like substitutes
pose questions about the design of public policy towards
the banking sector.
ARE BANKS STILL SPECIAL?

6
Why were banks deemed to be special?

Taking deposits that are withdrawable on demand at

par

Providing liquidity to other banks and non-banks, thus

effectively engaging in maturity transformation, and

Serving as conduits for monetary policy transmission

Institutions versus functions and the FSN

The literature on why banks are special implies that this

mix of functions explains why banks, as institutions, are
given access to all financial safety net components and
why the boundaries of the FSN have tended to be
focused on institutions rather than functions.

In any event, banks have been the only institutions that

provide all three relevant functions.
Components of the financial safety net

Note: Traditionally, the financial safety net was defined as consisting of a lender
of last resort and a deposit insurance function (which could include special bank
failure resolution regimes) and, as a counterbalance for the privileges associated
9
with these functions, a regulatory and supervisory framework. (Schich, 2013)
The “specialness” of banks
Functions that make banks special

Functions that make banks “special” Functions of digital banks and other
under the FSN FinTech initiatives
Safekeeping (deposit taking) Safekeeping (eW); Deposit taking (DB)

Offering transactions accounts Offering transactions accounts (DB,

(redeemable in cash on demand) eW)

Liquidity provision Liquidity provision (DB, eW)

Maturity transformation
Facilitating the exchange of payments
Clearing and settling payments
DB, eW, API)

Serving as conduits for transmission

of monetary policy
A key question

Digital banking initiatives basically

unbundle selected bank functions and
products and deliver them separately or
rebundle them.
Given the overlap in functions one might
ask whether banks remain special and
whether these other entities should also
be covered by the financial safety net.
The short answer

 The specialness of banks depends crucially on

decisions of the central banking community to
support a system of intermediation based largely on
the provision of central bank money to and
withdrawal of central bank money from commercial
banks.
 The sight deposits that commercial banks hold with
the central bank are particularly important in this
context, as they are used for the settlement of
payment transactions.
 the importance of banks as conduits of monetary
policy should not be minimised when thinking about
which types of entities should be covered by the full
financial safety net.
Banks and digital initiatives and the FSN
The short answer

 A key issue with the financial safety net is the

appropriate pricing of its support provisions.
 Hence, one should note that the financial safety net
consists not only of those components that provide
protection or support but also those that aim to limit
moral hazard by imposing restrictions on activities of
banks to limit their incentives and ability to take on
excessive risk.
 The common elements include the regulations on banks’
capital, which require banks to hold a buffer layer of
capital relative to risk-weighted assets that is
subordinate to the claims of depositors and other
providers of low cost funds, which helps to protect the
deposit insurance fund.
 Presumably, the same or equivalent requirements would
need to be applied to other service providers who
receive the benefits of insured deposits.
THANK YOU!
Contact:
Stephen A. Lumpkin, Ph.D.
stephen_lumpkin@yahoo.com
Sebastian Schich, OECD
Sebastian.Schich@oecd.org