Staff Working Paper No. 1,039September 2023Open banking, shadow banking and regulationStaff Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. Any views expressed are solely those of the author(s) and so cannot be taken to represent those of the Bank of England or to state Bank of England policy. This paper should therefore not be reported as representing the views of the Bank of England or members of the Monetary Policy Committee, Financial Policy Committee or Prudential Regulation Committee.Peter Eccles, Paul Grout, Paolo Siciliani and Anna (Ania) Zalewska(1) Bank of England. Email: peter.eccles@bankofengland.co.uk(2) Bank of England, University of Bristol and CEPR. Email: paul.grout@bankofengland.co.uk(3) Bank of England. Email: paolo.siciliani@bankofengland.co.uk(4) University of Leicester School of Business. Email: a.zalewska@leicester.ac.ukThe views expressed in this paper are those of the authors, and not necessarily those of the Bank of England or its committees. We would like to thank Xavier Freixas, Marc Hinterschweiger, Jean-Charles Rochet, Misa Tanaka, and the participants of the European Central Bank’s conference on ‘Financial intermediation, regulation and economic policy’ for their helpful comments and suggestions.The Bank’s working paper series can be found at www.bankofengland.co.uk/working-paper/staff-working-papers Bank of England, Threadneedle Street, London, EC2R 8AH Email: enquiries@bankofengland.co.uk ©2023 Bank of England ISSN 1749-9135 (on-line)1IntroductionIn the last decade there have been significant innovations which allow third parties to obtain dataon, and frequently access to, an individual’s bank accounts and payments functionality. This allowsthe third parties to offer, through application programming interfaces (APIs), aggregate funds intothe market and provide bespoke financial management advice and execution at low transaction cost.Such services go under a variety of names but are frequently referred to as open banking or openfinance. Open Banking is expected to revolutionize financial intermediaries. In 2021 McKinsey’sclaimed that “if open finance continues to accelerate, it could reshape the global financial servicesecosystem, change the very idea of banking, and increase pressure on incumbents”.1 Open banking isalready present in the leading financial markets (e.g., US, EU, UK, China, Japan, Australia, Canada)and in nascent or more developed forms in 87% of countries around the world.2Open banking increases diversity amongst depositors (who will be differentiated according to theextent that they embrace the new technology) and through this process will create a new competitiveenvironment. Some banks and shadow banks will take full advantage of attracting deposits from thosecustomers who embrace open banking and raise greater funds. The banks and shadow banks th...
