Will Fintech Cause the Next Major Financial Meltdown?

Financial Meltdown

We nearly hyperventilated when we saw the following op-ed on Bloomberg.  After all, we are ALL about fintech at FintekNews and we think that many of the advancements brought forward with financial technology will SAVE us from future financial meltdowns, rather than cause them, though we might hold an exception for quantitative trading, but that’s another story.  Nevertheless, we thought that the points noted in this piece were worth considering.  We don’t necessarily agree, but we do see the merit of the argument that if/when the next financial meltdown occurs, it well could come out of Silicon Valley rather than Wall Street.”
(Cindy Taylor/Publisher)

“It has been 10 years since the last financial crisis, and some have already started to predict that the next one is near. But when it comes, it will likely have its roots in Silicon Valley, not Wall Street.

The world of finance looks very different today than it did 10 years ago. In 2007, our biggest concern was “too big to fail.” Wall Street banks had grown to such staggering sizes, and had become so central to the health of the financial system, that no rational government could ever let them fail. Aware of their protected status, banks made excessively risky bets on housing markets and invented ever more complicated derivatives. The result was the worst financial crisis since the Great Depression.

 In the years since 2007, we have made great progress in addressing the too-big-to-fail dilemma. Our banks are better capitalized than ever. Our regulators conduct regular stress tests of large institutions. And the Dodd-Frank Act imposes strict requirements on systemically important financial institutions…

But revolutions often end in destruction. And the fintech revolution has created an environment ripe for instability and disruption. It does so in three ways.

First, fintech companies are more vulnerable to rapid, adverse shocks than typical Wall Street banks. Because they’re small and undiversified, they can easily go under when they hit a blip in the market…

Second, fintech companies are more difficult to monitor than conventional financial firms. Because they rely on complex computer algorithms for many of their essential functions, it’s hard for outsiders to get a clear picture of the risks and rewards….

Third, fintech has not developed the set of unwritten norms and expectations that guide more traditional financial institutions. In 2008, when Lehman Brothers was teetering on the brink of bankruptcy, the heads of the largest Wall Street investment banks gathered in New York to coordinate their actions and prevent further panic. It’s hard to imagine something like that happening in the fintech world…”

Full OpEd at Bloomberg