Pentti Hakkarainen of ECB spoke at the Lisbon Research Center about the benefits and risks attached to technological transformation of the banking sector. He examined how supervisors could make more advantageous use of innovative technology to further enhance their ability to detect and address banking risks.
Mr. Hakkarainen looked at the potential for change fueled by the shifting demand of bank customers and highlighted artificial intelligence and machine learning as the most promising upcoming are of technology for banks. Analysis and use of big data sets in the digital business models of banks can allow banks to enhance prediction accuracy and pricing efficiency. The new analytical techniques could play a useful role in the task of analyzing the credit risk of potential borrowers. Similarly, such techniques could play a role in sifting large data sets to detect money laundering or signs of internal conduct risk among banks’ own traders. He also examined the role of digitalization in making the provision of cross-border banking services easier for banks. It is now much more possible for banks to offer their services without geographical limits. Barriers to market entry are falling and the ability for new cross-border providers to quickly penetrate domestic markets by attracting customers via user-friendly digital products is increasing. To a large degree, this competition on the user-friendliness and trustworthiness of banks’ digital offerings will determine which firms succeed and which fail in the coming years.
Next, he examined the increasingly relevant emerging risks that banks, regulators, and supervisors should be remain vigilant about. Cyber security and outsourcing of IT services to external parties are areas that should be monitored. Fragmentation of bank services across a range of external providers creates a challenge for bank leaders. It is also a potential concern if many banks are outsourcing core elements of their digital banking business to a single provider, as such arrangements can create a concentration risk for the industry. A service delivery issue by a monopoly provider (for example, payment systems and processes), could pose operational risk and impair functioning of the entire sector. Artificial intelligence and machine learning, unless used the right way, can also become a source of risk. The algorithms underlying artificial intelligence must be carefully designed and the decisions embedded in these algorithms must be understood well by bank leaders and supervisors. He assured that "Through our regular Supervisory Review and Evaluation Process (SREP) and on-site inspection methodologies we are increasingly integrating the most up to date concerns that arise from the move to digitalization. Over time, these themes will become more and more central to the way we supervise and test banks’ governance, risk management, and IT architecture."
Regarding the opportunities for digitalization in the Single Supervisory Mechanism (SSM), he added that the role of supervisors and regulators is to keep a close eye to ensure prudential safety remains high. The collaboration between the industry and supervisors could improve data sharing systems via automation. This could make data provision increasingly timely and accurate for supervisors, while making things increasingly painless for bankers. He added that supervisors should begin taking advantage of artificial intelligence and machine learning to improve analysis of credit risks of the supervised banks. Artificial intelligence can be harnessed to help spot excessive bank risk-taking early on in its gestation. This can support facilitate early intervention—"before big potential problems become reality." He concluded, "Banks must continue to provide good value for money and high-quality services to their clients. Regulators and supervisors must continue focusing on maintaining the stability of banks and the banking system. Let us therefore embrace technological change where it helps us to achieve these stable long-term objectives...."
Related Link: Speech
Keywords: Europe, EU, Banking, SSM, Regtech, Operational Risk, Credit Risk, Cyber Risk, ECB
Previous ArticleFED Announces the 2018 Schedule for DFAST and CCAR Results
PRA published the policy statement PS14/20, which contains the supervisory statement SS1/20 and the feedback to responses to the consultation paper CP22/19 on expectations for investment by firms in accordance with the Prudent Person Principle, or PPP, as set out in the Investments Part of the PRA Rulebook.
EBA published an opinion following the notification by the French macro-prudential authority, the Haut Conseil de Stabilité Financière (HCSF), of its intention to extend a measure introduced in 2018 on the use of Article 458(9) of the Capital Requirements Regulation (CRR).
As part of a Research Bulletin on the recent policy-relevant work, ECB published an article that examines the lessons learned from past crises for nonperforming loan resolution in the post COVID-19 period.
RBNZ published the financial stability report for May 2020. This review of the financial system in the country highlights that the economic disruption associated with COVID-19 will present challenges to the financial system.
ECB updated the guidance notes for reporting related to the statistics on holdings of securities by reporting banking groups (SHSG).
ECB published results of the financial stability review in May 2020. Among other issues, the financial stability review assesses operations of the financial system so far during the COVID-19 pandemic.
Financial policymakers and international standard-setters met virtually with private-sector executives to discuss international policy responses to COVID-19 pandemic.
ESMA published a letter responding to IASB on the exposure draft on the phase 2 of the interest rate benchmark reform.
HKMA is consulting on revisions to the Supervisory Policy Manual module CR-G-14 on margin and other risk mitigation standards for non-centrally cleared over-the-counter (OTC) derivatives transactions.
EBA published thematic note presenting a preliminary assessment of the impact of COVID-19 outbreak on the banking sector in EU.