Featured Product

    Andrea Enria of ECB on Tackling Supervisory Challenges with Suptech

    March 11, 2019

    At a Banking Seminar organized by DNB in Amsterdam, Andrea Enria of ECB examined ways to mitigate the risks posed by digitization in banking sector. He discussed the role of regulators and supervisors in dealing with the fintech-related issues and outlined the steps taken and planned by ECB in this area. While discussing the suptech benefits and initiatives, he also mentioned that automated reporting, for instance, could ease the burden on banks and allow supervisors to collect data more efficiently.

    Mr. Enria began by discussing the relevant operational risks posed by digitization in the banking sector and how these risks can be mitigated. In terms of operational risks, he focused on risks posed by outdated IT systems and cyber risk, also outlining ways for banks to better deal with these risks. He highlighted that ECB has been monitoring IT and cyber risk since the early days of European banking supervision. ECB has conducted a number of in-depth reviews and frequent on-site inspections on IT risk and cyber security. ECB has also set up a cyber incident reporting process, enabling ECB to track actual incidents that might harm individual banks or the entire system. In addition, ECB holds general discussions with the national authorities and EBA on how to supervise fintech banking. As fintech is a new phenomenon, there is a chance to take a common European stance right from the start. In April, ECB will, for instance, hold a workshop on fintech supervision. This workshop will bring together many different parties, including market authorities, bank supervisors, legislators, and banks.

    He added that digitization of the sector also poses systemic risks. In case each small piece of the banking value chain may be occupied by an individual player—a bank or fintech—this poses systemic risk through the resulting interconnectedness that leads to forming of complex and opaque networks. Another potential systemic issue could arise from concentration, as digital services, such as cloud computing, might be offered by just a few players. In case something goes wrong any of these players, a huge number of banks might be affected, possibly unleashing a systemic crisis. In this context, banks must build up relevant expertise and knowledge and establish adequate governance structures and proper risk management practices, which need to be adapted to the digital age.

    Mr. Enria believes that regulators and supervisors are technology-neutral but not risk-neutral. However, dealing with innovation is a challenge for regulators and supervisors and they need to monitor innovation, assess any new risks, and then "tackle them head on" while adhering to the core principle of “same risk, same rules, same supervision.” One factor to focus on is the perimeter of regulation and supervision and whether this should be extended to include fintechs. He believes that the focus must be on the essence of banking—that is, taking deposits and granting loans. "This is how banks are defined in the regulation and this is what defines the perimeter." While fintechs compete with banks in parts of the value chain, they may not necessarily need to be licensed, regulated, and supervised like banks. However, he believes that these boundaries need to be monitored and adjusted at some point. The fintech companies engaging in core banking business must be treated like banks and they would first need a license. To this end, ECB has published a guide on licensing for fintechs. To supplement the guide, in 2017, it had also set up a Single Supervisory Mechanism fintech hub. This hub is a central point of contact for ECB and national supervisory authorities on all matters concerning the authorization of fintech banks; it serves as a platform for sharing information and discussing best practices.

    As fintech banks might come under the scope of banking supervision, the relevant risks must be addressed. He then discussed the importance of data to the work of supervisors, which results in banks being burdened with so many reporting requirements, and outlined the way the new digital tools could help supervisors and banks. Automated reporting, for instance, could ease the burden on banks and allow supervisors to collect data more efficiently. Meanwhile, machine learning could help us to validate—and even analyze—the data. Consequently, the supervisors could then become even faster in spotting new risks and dealing with them. He then mentioned that DNB is very active in the field of supervision technology or suptech. DNB has set up an innovation lab to explore new technologies and a Chief Innovation Office to coordinate suptech initiatives. DNB has lab-tested tools such as artificial intelligence and Robotics Process Automation, including the use of neural networks to detect liquidity risk. "This work should inspire other supervisors to follow suit."

    Mr. Enria added that ECB is also working on this topic and is assessing the ways in which digital tools can help it to do its job more effectively and more efficiently. Supervising banks is no exception. However, it is crucial to exchange views and share first experiences—with all stakeholders and at the global level. That’s why ECB attempts to connect with as many stakeholders as possible. In conclusion, he emphasized that he clearly sees the benefits of suptech and that the time has come to harness the opportunities offered by suptech. "I am convinced that it will become part of our toolbox—not as a substitute for supervisory judgment, but as a complement to it."


    Related Link: Speech


    Keywords: Europe, EU, Banking, Fintech, Regtech, Suptech, Banking Supervision, Automated Reporting, ECB

    Featured Experts
    Related Articles
    News

    PRA Finalizes Policy on Prudent Person Principle Under Solvency II

    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.

    May 27, 2020 WebPage Regulatory News
    News

    EBA on Extending Large Exposure Limits for French Systemic Banks

    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).

    May 27, 2020 WebPage Regulatory News
    News

    ECB Highlights NPL Resolution as Key Policy Issue in Post-COVID Europe

    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.

    May 27, 2020 WebPage Regulatory News
    News

    RBNZ Publishes Financial Stability Report for May 2020

    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.

    May 27, 2020 WebPage Regulatory News
    News

    ECB Updates Guidance on Reporting of Securities Holdings Statistics

    ECB updated the guidance notes for reporting related to the statistics on holdings of securities by reporting banking groups (SHSG).

    May 26, 2020 WebPage Regulatory News
    News

    ECB Publishes Results of Financial Stability Review in May 2020

    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.

    May 26, 2020 WebPage Regulatory News
    News

    Regulators and Private Sector Meet to Discuss COVID Policy Responses

    Financial policymakers and international standard-setters met virtually with private-sector executives to discuss international policy responses to COVID-19 pandemic.

    May 26, 2020 WebPage Regulatory News
    News

    ESMA Responds to IASB Consultation on Interest Rate Benchmark Reform

    ESMA published a letter responding to IASB on the exposure draft on the phase 2 of the interest rate benchmark reform.

    May 25, 2020 WebPage Regulatory News
    News

    HKMA Consults on Supervisory Policy for OTC Derivatives Transactions

    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.

    May 25, 2020 WebPage Regulatory News
    News

    EBA Examines Impact of COVID Crisis on Banking Sector in EU

    EBA published thematic note presenting a preliminary assessment of the impact of COVID-19 outbreak on the banking sector in EU.

    May 25, 2020 WebPage Regulatory News
    RESULTS 1 - 10 OF 5221