To advance a strategic partnership with the Bank for International Settlements (BIS) Innovation Hub, the Federal Reserve Bank of New York (NY FED) launched the New York Innovation Center (NYIC). The NYIC is collaborating with the Federal Reserve System (FED), the BIS Innovation Hub, and public and private sector experts to validate, design, build, and launch new financial technology products and services for the central bank community. NYIC will focus on five opportunity areas: Supervisory and Regulatory Technology, Financial Market Infrastructures, Future of Money, Open Finance, and Climate Risk. The NYIC will develop opportunities from concept to in-market solution. In addition, the Financial Stability Institute (FSI) of BIS published a paper that examines suptech tools for prudential supervision and their use during the pandemic.
This paper on suptech tools takes stock of suptech data analytics tools used for prudential purposes in 20 jurisdictions and explores the associated benefits, risks, and implementation challenges. The 71 prudential suptech tools examined in this paper have been classified into the categories of tools for qualitative data, tools for quantitative data, and tools for qualitative and quantitative data. Within each of the three categories are various subcategories that classify how the tools are used. Tools that rely on mainly qualitative data represent slightly more than half of those examined; these tools are used for text analysis, text summarization, information classification, or sentiment analysis. Tools that mainly look at quantitative data and those that utilize both quantitative and qualitative data account for approximately 25% of use cases each. The former is used for risk identification, while the latter may be used for network analysis, peer group identification, or automation of inspections. The paper notes that suptech tools were widely deployed during the Covid-19 pandemic, particularly those that scrutinize qualitative data and support risk identification.
As suptech tools take on a greater role in prudential supervision, supervisory judgment may diminish. Suptech tools are automating lower-value, labor-intensive tasks and supporting higher-value, judgment-based functions. As these tools get operationalized, supervisors could rely less on their own judgment and depend more on the suptech output to identify key supervisory issues; this may lead to supervisory blind spots and a broader loss of institutional knowledge based on the art of judgment-based supervision. While authorities have emphasized that suptech tools support, rather than replace, supervisory judgment, explicit policies that acknowledge the tensions between, and outline the respective roles of, supervisory judgment and suptech tool outputs, could help. Regardless, suptech data analytics tools are making prudential supervision more efficient, particularly those for analyzing unstructured data and risk identification proved essential during the pandemic. The pandemic experience highlighted the need for continued improvements in technology infrastructure and data collection practices, which can support ongoing exploration of new suptech tools. However, the report concludes that It is important that deployment of suptech tools be accompanied by appropriate safeguards to mitigate potential unintended consequences.
Keywords: International, Americas, US, Banking, Regtech, Suptech, Open Finance, Climate Change Risk, NYIC, COVID-19, NY FED, FED, BIS, FSI
Dr. Denton provides industry leadership in the quantification of sustainability issues, climate risk, trade credit and emerging lending risks. His deep foundations in market and credit risk provide critical perspectives on how climate/sustainability risks can be measured, communicated and used to drive commercial opportunities, policy, strategy, and compliance. He supports corporate clients and financial institutions in leveraging Moody’s tools and capabilities to improve decision-making and compliance capabilities, with particular focus on the energy, agriculture and physical commodities industries.
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