Governor Lane focusses on opportunities and risks of technological innovation in financial services

• Technological innovation presents risks to business models of incumbent firms, but also opportunities for new entrants
• Challenge for Central Bank is to maintain financial stability and protect consumers during a wave of financial innovation
• Central Bank is  embracing technological innovation, such as undertaking better analysis of “big data” in the identification of financial risks

In a speech entitled Technological Innovation and Financial Services, Governor of the Central Bank of Ireland, Philip R. Lane, focussed on the opportunities and risks posed by technological innovation for the financial services industry. His comments were made at the Financial Services Ireland – Ibec Annual Lunch today.

Governor Lane said there are conflicting forces at work in reshaping the structure of the financial sector.  He said “In one direction, economies of scale and scope may result in a higher degree of consolidation across financial services providers.” Yet, “In the other direction, there are other forces that may lead to increasing fragmentation of in the provision of financial services, with specialist providers increasing the level of competition in individual market segments and threatening the integrated model of universal banking.”

He went on to say, “The fundamentals of running businesses well and in a prudent manner will remain critically important as the financial services sector continues to evolve.  Strong governance, clear strategic planning, effective and embedded risk management, and the careful shepherding of resources are vitally important in times of innovation as in times of greater stability.”

He said that in an environment of innovation, “resolution planning is thrown into sharp relief, in view of the potential financial stability risks associated with the failure of larger, established firms and the elevated likelihood of failure for smaller, newly-formed, mono-line enterprises,” with orderly resolution essential to absorb the failure of individual firms.

On the role of the Central Bank, he said the organisation “has to ensure that it keeps abreast of the changing technological environment and is able to assess the level of preparedness of regulated firms, both in the authorisation process and during ongoing supervisory engagement.”

To conclude, Governor Lane said that “the challenge for policy makers is to understand and attempt to appropriately regulate the evolving financial services landscape, while at the same time balancing often-competing objectives of competition and choice, financial stability, and the effectiveness of macroeconomic policies.”