More than 10 years have passed since the global financial crisis broke out, and the financial institutions’ ability to rethink and sophisticate their business has been growing relentlessly.
Prof. Saule T. Omarova, law, argues in her latest work that while we are now more cognizant of, and to an extent protected from, the risk in some financial products, the financial system could be ill-equipped for the latest technological innovations in finance, otherwise known as fintech.
In her research paper, New Tech v. New Deal: Fintech As A Systemic Phenomenon she suggests that the fintech revolution can’t be as neutral as some actors pretend, because finance is “a matter of utmost and direct public policy significance.”
Omarova writes in New Tech v. New Deal that if we blur the public policy dimension in fintech, and grasp only the private dimension of how it enables transactions, we misrepresent its systemic risk. By doing so, she warns, we help new financial and tech conglomerates avoid financial regulation and circumvent the fundamental separation between banking and commerce, giving them a carte blanche to engage in riskier activities for consumers.
This reflection is at the very core of Omarova’s pro-regulation stance, made clear throughout her research work and more recently in her testimony before the Senate two weeks ago.
During the hearing on fintech she urged policy-makers not to find a “perfect solution”, but rather to find ways to preserve the balance between financial innovation and the interest of the financial system as a whole.
Formerly a bank regulatory lawyer in a law firm advising companies on Wall Street, Omarova has always been interested in an aggregate view of the financial system.
“The practice educated me a lot about what financial institutions are really doing and what matters to them and to us, as the public who should be overseeing and regulating those financial institutions,” Omarova said in an interview with The Sun last week.
When Lehman Brothers collapsed in 2008 and the financial crisis ensued, Omarova was a corporate law professor at University of North Carolina. She remembers coming to class and telling her students: “This was the law until yesterday”, referring to the fact that financial regulations had become obsolete overnight, in parallel with the fall of the financial system.
Regarding fintech, she fears that another shock in the financial system could occur if we don’t remember one of the major lessons of the last crisis.
“The financial market is bigger than just the sum of its parts, we have to understand how it’s all connected”, Omarova said.
For Omarova, there is an obscure rhetoric around fintech that wants us to focus on the small advantages of individual transactions, while fintech companies use technology for larger, more objectionable purposes like extracting personal data from us or making financial markets more volatile and unstable.
“If the financial system collapses tomorrow, consumers are not going to be better off just because yesterday they were able to send their payments fast,” she said. In this way, Omarova conveys the systemic risk that’s inherent in any financial innovation of the magnitude of fintech, but still missing in the discussions.
Omarova stresses that some ways of spreading risk are not harmful for the financial system, as long as they stay somehow tied to the real economy. However, in the world of cryptography and blockchain, “cryptoassets can trade effectively in huge numbers, in huge volumes, at high speed, and be scaled up almost without any natural constraint from the real economy”.
“That’s what’s scary,” she explains, because “financial markets are fundamentally backed by the public”. And that public can be ultimately affected by this speculative bubble.
Omarova discussed the need to not prevent technological development, but rather monitor its impact closely.
“The idea is not to be afraid of technology, but for us to understand the potential of new technology, either to make the system better for everybody or to make the system better for individual transactions but worse for everybody ultimately,” she said.