Potential problems associated with these entities raise new risk issues for central banks, said Daniela Klingebiel, senior financial economist at the World Bank in Washington. Klingebiel cowrote the report - which doesn't purport to offer an official World Bank position - along with World Bank economists Stijn Claessens and Thomas Glaessner. The paper, which will be presented at the annual meetings of the World Bank and the IMF in September, is the Bank's first study of the implications of electronic technology on world finance.
"In general, the links between operators and systemic risks will become harder to understand" in a world where online finance is dominant, says a draft copy of the report. Systemic risk refers to situations where settlement failure stemming from one or more organizations can lead to widespread payment problems between otherwise unrelated parties.
"The Russian and Long Term Capital Management crises of 1998 surprised many," the report says. "The lines between financial and other markets will become even more blurred as trading spreads through power, natural gas, and agricultural commodity contracts, risking greater spillovers from nonfinancial institutions and markets to financial markets."
In this dynamic financial environment, with its expanding list of players, central banks "may find it increasingly difficult to limit their lender of last resort support in the future," the report warns. It questions whether the so-called financial safety net currently offered to banks in times of crisis will need to be extended to nonbank and nonfinancial institutions.
The authors also suggest that online networks will make some countries more vulnerable to attacks on their currency. "The easy spread of information - and misinformation - could make asset prices and capital flows more volatile," while the growing number of creditors makes coordination among regulators more complicated, prior to or during a financial crisis, the report says.
Moreover, it questions whether the scope of competition policy should be expanded, noting that this field was until recently not seen as critical for the financial-services or information industries.