The CEO and a founder of a firm focused on changing the way finance works talks about technology and its effect on the fragility of banking, among other sectors, and how to handle these risks.

Technology and channels such as instant messaging mean that concerns about the health – or otherwise – of a bank can turn into a “run” very quickly, even faster than the panics of bank crashes of old. Events during and since the financial crash of 2008 have reinforced this point. Even the most seemingly solid financial institutions are potentially vulnerable. This raises questions for clients, bankers, regulators and policymakers. 

The following article is from Francesco Filia (pictured), founder and CEO of Fasanara Capital. This publication interviewed the business last year for its views about the changing world of credit and access to finance. The editors are pleased to share these views; the usual caveats apply to opinions of outside contributors. To comment, email tom.burroughes@wealthbriefing.com and amanda.cheesley@clearviewpublishing.com

The collapse of Silicon Valley Bank (SVB) and the near demise of Credit Suisse in 2023 serve as stark reminders that traditional banks can be inherently fragile. These events revealed structural weaknesses vulnerable to rapid technological advances, which together are heightening the risk of systemic financial crises. In this age of digital fragility, it is clear that we need to rethink our financial architecture to build a more resilient, innovative, and diversified system that supports the needs of modern economies more effectively.

The emergence of flash bank runs
Historically, bank runs conjured images of customers lining up outside branches, anxiously waiting to withdraw their money. Today, the bank run has gone digital, evolving into a near-instantaneous phenomenon fuelled by mobile banking apps, social media, and instantaneous communication. The collapse of SVB in March 2023 sparked a contagion which spread quickly across markets, impacting other institutions and shaking the confidence of high net worth individuals and wealth management clients.

Digital fragility has thus created a new paradigm for systemic risk, one where confidence can evaporate in hours rather than weeks. For wealth managers, who depend on the stability of banking partners, this newfound fragility underscores the urgency to diversify strategies and partner with institutions that can withstand digital-age shocks.

Structural fragility of traditional banks
At the heart of the banking system’s vulnerability is the fundamental mismatch between banks’ short-term liabilities and long-term assets. Depositors can demand their money back at any moment, while banks tie up multiples of those funds, up to the limits imposed by regulatory capital, in illiquid assets like loans and bonds. This structural imbalance has long been understood, but regulatory measures, such as liquidity coverage ratios (LCRs), have proven insufficient to address it.

SVB exemplified this problem. Faced with rising interest rates and a need to sell long-dated bonds at a loss, the bank quickly spiralled into insolvency once depositor panic set in. Credit Suisse, too, suffered from a broader erosion of trust, exacerbated by years of underperformance and regulatory missteps.

Narrow banking and alternative models
One proposed solution to the structural weaknesses of traditional banking is “narrow banking.” In a narrow banking model, banks would hold 100 per cent of loans, preferably short-term, and without leverage, mitigating the asset-liability mismatch. While this approach limits leverage, it also creates a more stable foundation for depositor confidence. For wealth management clients, narrow banking offers both capital preservation and liquidity.

Beyond narrow banking, alternative lending models have gained traction, particularly in the US, where nearly 80 per cent of lending occurs outside banks. Non-bank lenders, fintech platforms, and private credit funds have emerged as dominant players in areas such as real estate financing, consumer finance, corporate lending, and small business credit. These models often operate with lower leverage and better asset-liability matching.

Europe, however, still lags. The banking system remains dominant in lending and alternative lenders have yet to scale to the levels seen in the US. However, momentum is building. As wealth management clients increasingly look for resilient and more diversified financial partners, the market share of fintech platforms and non-bank lenders will only grow.

For HNW individuals, the attractions of these alternative models are their stability and their adaptability to specific financing needs. Private credit funds, for example, can offer bespoke solutions that traditional banks are ill-equipped to provide, such as tailored lending for family offices or complex asset-backed financing structures. This is particularly relevant in an environment where traditional banks are retreating from certain lending segments due to tighter regulation.

The role of fintech and non-bank lenders
Fintech platforms and non-bank lenders represent a paradigm shift towards a more resilient, equity-funded financial ecosystem. These players are digitally native, often leveraging technology to streamline processes, improving user experience, providing real-time risk assessment, and offering more transparency. By aligning funding structures with long-term stability, these platforms can address many of the weaknesses inherent in traditional banks.

For investors, fintech lending strategies offer compelling returns. Their characteristics typically include a low single-digit default rate, loan durations of around 90 days, and extreme diversification – with millions of loans distributed across different countries and numerous sectors. This diversification, combined with stable income generation and uncorrelated returns, yields a high Sharpe ratio [this compares the return of an investment with its risk], making fintech lending an attractive risk-adjusted investment opportunity.

However, these platforms face challenges of their own. The recent slowdown in venture capital and private equity funding has put pressure on fintech firms to achieve profitability and scale without relying on external capital injections. For many fintechs, maintaining equity health and managing liquidity in the absence of abundant capital will be critical to their long-term success.

Regulation will also play a role as non-bank lenders and fintech platforms grow in prominence. Shadow banking – or credit intermediation occurring outside regulated institutions – must be proactively monitored and managed to prevent systemic risks. For wealth management clients, confidence in these alternative models will depend on their ability to demonstrate both resilience and regulatory compliance.

Building a more resilient future
The banking crises of 2023 underscore the urgent need for a fundamental rethink of the global financial system. It is likely to happen again. Traditional banks remain structurally fragile in the face of digital-age pressures, while wealth management clients have learned the hard way that size does not equal safety. Narrow banking and fintech lending are, therefore, emerging not just as an alternative financial model but as a necessary adaptation to the demands of a rapidly changing economic landscape. 

The outlook for fintech lending is bright but contingent on continued evolution. As fintech platforms refine their technologies, enhance risk management capabilities, and achieve greater scale, they are positioned to play a central role in the financial ecosystem of the future. By operating with lower leverage and aligning funding with lending structures, fintech lenders can deliver more resilient solutions for borrowers and investors alike.

Author
Francesco Filia is the CEO and founder of Fasanara Capital, a London-based institutional investment manager and global leader in fintech lending and digital finance with over $4.5 billion in assets under management. Prior to co-founding Fasanara in 2011, Filia was managing director and EMEA head of the Midcaps and Principal Investors group at Bank of America Merrill Lynch. Prior to joining Merrill Lynch in 2000, Filia was a research analyst at JP Morgan Securities where he published several research white papers covering areas such as derivatives modelling, fixed income and volatility strategies. Filia is a graduate of Bocconi University in Milan and a scholar of Erasmus Universiteit Rotterdam.