Disruption, CCP default and the latest Libor problem

The week on Risk.net, January 18–24, 2020

7 days montage 240120

Bank disruptors: tread carefully and bend things

How BofA, SocGen, JP Morgan, Nomura, UBS and others are disrupting themselves

As business mix shifts, Eurex bulks up its default fund

Clearing house will raise charge to 9% from 7% as stress tests signal need for a fatter fund

Signing the Libor fallback protocol: a cautionary tale

As Orwell’s Room 101 beckons for Libor publication, muRisQ Advisory’s Marc Henrard warns of a potential pitfall in the fallback protocol

COMMENTARY: Innovation farms

This week, Risk.net looked at examples of technological innovation across the banking sector – the utility settlement coin aimed at speeding up cash settlement legs, artificial intelligence market analysis, quantum computing, asset tokenisation and many more.

It’s striking how much of this innovation comes from inside large established banks, rather than challenger start-ups – certainly a contrast to the situation in, for example, goods retail (how many venerable department stores and high street chains have now collapsed in the face of Amazon?). What is it about banking that makes it so resistant to disruption? Why has, for example, Facebook’s attempt at an e-currency, Libra, failed to take off so far, while banks’ own attempts at digital currencies are showing promising signs of growth?

Technological innovation seems to come mostly from within, and there are three interlocking reasons for this: funding, data and trust.

A financial start-up using quantum computing, for example, requires two sorts of funding – both of which are easier to obtain under the umbrella of a major bank. Like any start-up, it needs to cover operating expenses – salaries, equipment, machine time and so forth. But, unlike many other start-ups, it also needs assets to manage, deals to process or transactions to complete – it is far easier to obtain those as part of an existing bank with its own deal flow, rather than starting from scratch.

Second, it needs data – if the bricks that banks are built from are assets, then the mortar is data. Banks have decades of credit information, transaction data and market records not publicly available, so access to a parent’s data is a near-unbeatable advantage for in-house start-ups.

Third, and most important, is trust. The internet start-up ethos of “move fast and break things” has run headfirst into the culture of post-crisis banking regulation more than once: trust between customer and provider, and between company and regulator, is a crop that is slow to grow.

Has it always been this way? Yes and no. There was a post-crisis boom in fintech start-ups, driven by advances in technology and upheaval in the financial industry, but it has left few survivors. Banks are difficult customers to deal with at the best of times, and this is likely to leave future fintech entrepreneurs with the same choice they face today: get inside – or go elsewhere.


Credit assets held by shadow banking entities increased 5.7% in 2018, up from 4.7% the year prior, to $44.9 trillion, with growth fastest among hedge funds and broker-dealers.



“We are hopeful to see [initial margin haircutting] excluded as a possibility in the final text – as a resolution tool it would only lead to bad outcomes once a CCP is in crisis” – Bill Stenning, Societe Generale, on draft proposals from the Council of the European Union that would curb the ability of resolution authorities to dip into the initial margin accounts of central counterparty members during a crisis.

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