The interconnectedness of Banks and non-banks is a reality of financial sector. With increased digitalization, a large number of non-bank financial companies are currently in the fintech space. With the rise to prominence of Open Banking Framework, fintech firms complement the delivery of financial services and the process of financial intermediation to benefit consumers . Cloud computing and increased API integration enables fintech companies to deliver cost efficient financial services.
Beneath the surface of customer interface, Banks ( Conventional and Islamic) interactivwith the insurance sector while providing loans, insuring them from mortality risks and helping customer journey throughout the loan tenor through comprehensive insurance contracts. Moreover, recent Cyber security regulations require cyber risk insurance for which the businesses of insurance and banking licensees get interconnected. This, over and above the normal proprietary insurance, the two sectors have additional points of inflexion in the modern financial ecosystem.
Moreover, investment firms ( non-bank) tie up with Banks to deliver investment management and advisory services to the Banking Sector customers.such relationships increase the efficiency of Investment channels . Of late, special purpose vehicles , which are designed to be outside the banking sector through ring fencing , are looking to use bank financing to overcome short term liquidity mismatches. Such capital call facilities or subscription financing is becoming popular among banks due to favorable risk return profiles. This apart, the entire ecosystem of collective investment undertakings require multiple bank and non bank actors – operators, fund managers, fund administrators, custodians, registrars and placement agents to name a few . Provision of these services require interlinkages between banking sector and non-banking sector.
Since the pandemic, payment ecosystem is undergoing a remarkable transformation through product diversification and fast expansion. The payment service providers in the interoperability domain ( the payment system segment which connects the buyers and sellers in nanoseconds)play a key role in linking the issuer domain and the acquirer domain.
Moreover, listed Banks and bourses /exchanges require coordination through the self regulation models under the supervision of central banks.
The non-banking channels through their services enable banking customers a seamless experience. From the supervisory perspective, the oversight of Banks often lead to enquiries related to non-banking actors. The interlinked issues require joint oversight. Money laundering and fraud risk quickly engulf multiple entities in the financial sector. With growing digitization, the risks can no longer be seen separately for Banks and non banks. Financial stress is more likely to engulf both banks and the shadow banking system. As observed recently by the UBS chief, strict Banking regulation and weak regulation of non bank segment leaves a variety of systemic risks unattended. Coordinated regulation and monitoring of both banks and non banking sector is not just a necessity but an absolute must.
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