Digital finance: a regulatory challenge [Go toslide 5] I will now turn to digital finance and its regulatory and supervisory challenges. 2.1. Rapidly growing markets but increased risks This digital finance relies on new players, new assets and new infrastructures. Among these new players are big techs, which should not be reduced to the GAFAMs alone. These have made targeted and fragmented inroads into financial services. These incursions include the provision of cloud services to financial institutions, which are progressively migrating their IT systems and infrastructures to these new solutions in order to reduce costs, increase the flexibility and security of their infrastructures, and improve customer experience. Furthermore, big techs are setting up their own financial activities, in a fragmented and unregulated manner, in the form of technical services (e.g. Apple Pay digital wallet, Google Pay, etc. ), or in the form of financial products and services (savings products, loans, issuance or trading of cryptoassets, etc.) which are developed in-house or in collaboration with traditional players. For example, Apple offers a savings account in partnership with Goldman Sachs, while also offering its own fractional payment service. What are the risks associated with these inroads into financial services?
[Go to slide 3] Silicon Valley Bank (SVB), which was virtually unknown to the general public before its collapse last March, was a - if not THE - tech bank and as such had a specific business model, based on two pillars: - its sources of funding were heavily dependent on uninsured deposits, stemming from a highly concentrated customer base of entrepreneurs and venture capitalists in the tech and digital world. - a very high share of these deposits was invested in long-term government bonds, issued by the US federal government or federal agencies, at fixed rates, since these securities are intended to be held for the long term. In 2022, the change in the US economic and financial environment transformed SVB's business model into a source of vulnerability to liquidity and interest rate risk. This vulnerability, combined with major failures in the bank's management and governance system, proved fatal. Indeed, in this new environment marked by rising interest rates and slowing growth, the cash flow needs of tech companies led them to withdraw a portion of their deposits, causing a liquidity problem for SVB, which forced it to sell part of its government bond portfolios. These forced sales, which were not anticipated by the bank, resulted in the crystallisation of unrealised losses, real losses in other words, as the securities sold shed value with the increase in key interest rates decided by the US central bank (the FED).