**4.1 Financial stability implications of Fintech11**

Fintech reduces costs and frictions, increases efficiency and competition, and broadens access to financial services. But this new organization of banks and other financial firms raises new regulatory challenges. Digital banks, also known as "neobanks," are growing in systemic importance in their local markets. Neobanks are fintech firms that offer software and other technologies to streamline mobile and online banking. They generally specialize in a limited number of products, such as checking and saving accounts. They also tend to be nimbler and transparent than their megabank counterparts, even though many of them partner with such institutions to insure their financial products.

Preliminary evidence suggests that neobanks take higher risks in retail credit originations without appropriate provisioning and that they underprice credit risk. They also take higher risks in securities portfolios and do not maintain sufficient liquidity.

By taking innovation to a new level, a form of financial intermediation based on crypto assets, known as decentralized finance (DeFi), has enjoyed extraordinary growth between 2020 and 2022. DeFi is increasingly interconnected with traditional financial intermediaries. While its market size is still relatively small, unregulated DeFi poses market, liquidity, and cyber risks, against a backdrop of legal uncertainties. The absence of centralized entities governing DeFi is a challenge for effective regulation and supervision. This challenge is amplified by the international nature of those institutions—a fact that requires the cooperation of regulatory and supervisory agencies across different jurisdictions. The 2022 Global Financial Stability Report recommends that regulation and supervision should focus on issuers of stable coins and centralized exchanges, and should encourage the development of industry codes of conduct and self-regulation.
