Impact of New Regulations on Banks Using Digital Deposit Platforms in Sweden and Europe
Read the summary of the article (in Swedish) on DI Bank here.
In a significant regulatory development, Finansinspektionen, Sweden’s financial supervisory authority, issued a decision[1] regarding digital deposit platforms, which are gaining traction across the financial sector. These platforms allow third parties to deposit funds with banks or credit institutions through intermediaries, often for a fee. The Swedish regulator has now classified companies running such platforms as deposit brokers, which subjects them to the same scrutiny and regulatory requirements as banks. This move addresses growing concerns over liquidity risks and the stability of banks relying on these platforms to collect deposits. More specifically, the decision could have a huge impact on smaller lenders that rely heavily on deposit brokers as the calculated outflow from such deposits increase from 10% to 50%, when calculating the regulatory measures LCR and NSFR.
The Issue: Volatility in Digital Deposits
The rise of digital deposit platforms, which often operate in collaboration with fintech companies, has brought convenience and flexibility to the market, enabling consumers to access competitive interest rates across multiple banks. However, the increase in reliance on these intermediaries has exposed banks to greater liquidity risks. Deposits funneled through digital platforms are more likely to fluctuate, as they often come from more transient sources, such as individual savers seeking the best rates and moving their funds accordingly.
Finansinspektionen’s decision reflects concerns that this volatility can undermine a bank’s liquidity position, especially in times of financial stress. Traditional deposits, such as those from long-term savings accounts or institutional clients, are considered more stable and predictable. Digital deposits, by contrast, can disappear quickly if customers are incentivized to move their funds to another institution offering better terms.
Effects on Banks and Financial Institutions
The reclassification of digital deposit platforms as deposit brokers will have far-reaching implications for banks and financial institutions that use such services. These banks will now need to comply with stricter liquidity and capital requirements to ensure that they can withstand sudden outflows of deposits. Specifically, under the new regulations, these institutions will need to bolster their liquidity coverage ratios (LCR), ensuring that they hold enough high-quality liquid assets (HQLA) to survive a 30-day period of significant deposit withdrawals.
In practical terms, this could mean that banks may have to increase their reserves, which ties up capital that could otherwise be used for lending or investment. Further, funding will most likely become more expensive directly (more effort on gathering) or indirectly (more funding needed to ensure compliance with LCR requirements). It might also drive banks to reevaluate their relationships with digital deposit platforms, as the added costs and regulatory requirements could make them less attractive. Smaller banks or newer digital-first institutions may be disproportionately affected, as they often rely on such platforms to quickly gather deposits and fuel growth.
Beyond Sweden, this regulatory shift could influence the wider European financial landscape. Given the interconnected nature of the European banking system, and the tendency for regulatory trends to spread across the EU, similar measures may be adopted by other national authorities, especially in countries where digital deposit platforms are gaining market share.
Preparing for the Change
To adapt to these regulatory changes, banks must take proactive steps to mitigate potential risks. One approach is improving liquidity management. Banks should perform stress tests regularly to understand how vulnerable their liquidity is to sudden outflows and to adjust their capital holdings accordingly. Establishing more stable, long-term deposit relationships with customers may also help mitigate some of the risks associated with digital deposits. Banks could encourage clients to lock in their savings through longer-term products that are less prone to sudden withdrawals.
Furthermore, banks might also consider adjusting their business models to reduce dependence on digital deposit platforms. This could mean diversifying funding sources, exploring new markets, or adopting technology that allows them to attract deposits directly, without relying on third-party platforms. Another approach could be to collaborate more closely with fintech firms, incorporating new digital services that appeal to savers while ensuring greater deposit stability.
Lastly, communication will be key. Banks should be transparent with investors, regulators, and depositors about their liquidity strategies, showing that they are prepared for regulatory changes and are managing risks prudently. This could also help build trust among customers, which might discourage them from moving their deposits to other institutions at the first sign of financial instability.
Conclusion
The reclassification of digital deposit platforms as deposit brokers by Finansinspektionen introduces a new era of regulatory oversight for banks and financial institutions in Sweden and potentially across Europe. While it aims to strengthen financial stability by addressing liquidity risks associated with volatile digital deposits, it presents significant challenges for banks. To navigate this evolving landscape, financial institutions must enhance their liquidity management strategies, reduce reliance on digital platforms, and explore innovative ways to maintain stability while continuing to attract deposits in an increasingly competitive market.
[1] 2024:2 Inlåning genom digitala inlåningsplattformar | Finansinspektionen
Sebastian Fritz-Morgenthal
Head of Regulatory Strategy & Capital – ECB Office
