Mobile payments systems and peer-to-peer lending poses a significant threat to financial stability as traditional bank lending is challenged by unconventional practices, a leading economist has warned.
Research into the future of financial regulation by Professor Jan Kregel of the Levy Economics Institute and the Tallinn University of Technology found that regulators have not kept pace with rapid innovations in mobile payments systems and peer-to-peer lending and concludes that regulation must be focused on the emerging areas as well as the traditional financial sector to prevent another crisis.
The research was undertaken as part of the Financialisation, Economy, Society and Sustainable Development (FESSUD) research programme, €10m research project led by Leeds University Business School.
Peer-to-peer lending – where investors link directly to borrowers online – has grown rapidly in recent years despite concerns that low levels of due diligence could increasing lead to a large number of bad loans being made.
This growth is being made possible in part by innovation in mobile computing and smart phones, which are creating new payments systems capable of disrupting the activities of traditional banks.
Professor Kregel predicted that a single mobile payments system would ultimately come to dominate the market displacing traditional banks in the process, and that the system will continue to evolve from brokering to supplying loans, and should be regulated the same as existing financial institutions.
Professor Kregel said:
“Currently, banks largely control the flow of money through their payments systems, but this system is evolving. As banks will not have control of the payments system, loans will no longer create deposits, and lending will be carried out within a clearing system with the issue of private debts against the creation of assets, neither of which is regulated.
“The new payments systems have the ability to evade or distort regulation on financial institutions, and p2p lending systems replace due diligence of banks with algorithms. The regulation of this system is thus critical. P2p lending is the modern day equivalent of Securities Affiliates, which were at the centre of fraud in the run-up to the Great Depression. These systems eliminate normal due diligence, and they pose a huge threat to stability in the system.”
Professor Kregel presented his research at the final conference of the FESSUD project in Brussels on 27 and 28 September. FESSUD is a funded by the European Union and led by Leeds University Business School and involves 14 business schools in Europe and South Africa. The project has examined the dominance of the financial system over other parts of the European economy in the last 30 years and suggests reforms to support economic, social and environmental sustainability.
Ends
Professor Kregel is available for interview, please contact:
Guy Dixon, University of Leeds media relations: 0113 343 1028 or g.dixon@leeds.ac.uk
Notes to editors
Financialisation, Economy, Society and Sustainable Development (FESSUD) is a research project investigating the growth and impact of the financial system in Europe which suggests ways that the system might be reformed to support economic, social and environmental sustainability.
It is a €10m research programme funded by the European Union and led by Leeds University Business School and involves 14 business schools in Europe and South Africa as well as one civil society organisation in Belgium. The project has examined the dominance of the financial system over other parts of the European economy in the last 30 years and suggests reforms to support economic, social and environmental sustainability.
FESSUD is funded by a near €8m grant from the European Commission.
