Pentti Hakkarainen of ECB Speaks on Digitalization of Banking Sector
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 Article
Bundesbank Updates Handbook on AnaCredit Validation RulesRelated Articles
SEC Finalizes Climate-Related Disclosures Rule
The U.S. Securities and Exchange Commission (SEC) has finalized the long-awaited rule that mandates climate-related disclosures for domestic and foreign publicly listed companies in the U.S.
US Regulators Release Stress Test Scenarios for Banks
The U.S. regulators recently released baseline and severely adverse scenarios, along with other details, for stress testing the banks in 2024. The relevant U.S. banking regulators are the Federal Reserve Bank (FED), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC).
Asian Governments Aim for Interoperability in AI Governance Frameworks
The regulatory landscape for artificial intelligence (AI), including the generative kind, is evolving rapidly, with governments and regulators aiming to address the challenges and opportunities presented by this transformative technology.
EBA Proposes Operational Risk Standards Under Final Basel III Package
The European Union (EU) has been working on the final elements of Basel III standards, with endorsement of the Banking Package and the publication of the European Banking Authority (EBA) roadmap on Basel III implementation in December 2023.
EFRAG Proposes XBRL Taxonomy and Standard for Listed SMEs Under ESRS
The European Financial Reporting Advisory Group (EFRAG), which plays a crucial role in shaping corporate reporting standards in European Union (EU), is seeking comments, until May 21, 2024, on the Exposure Draft ESRS for listed SMEs.
ECB to Expand Climate Change Work in 2024-2025
Banking regulators worldwide are increasingly focusing on addressing, monitoring, and supervising the institutions' exposure to climate and environmental risks.
BIS Bulletin Examines Cognitive Limits of Large Language Models
The use cases of generative AI in the banking sector are evolving fast, with many institutions adopting the technology to enhance customer service and operational efficiency.
ECB is Conducting First Cyber Risk Stress Test for Banks
As part of the increasing regulatory focus on operational resilience, cyber risk stress testing is also becoming a crucial aspect of ensuring bank resilience in the face of cyber threats.
EBA Continues Momentum Toward Strengthening Prudential Rules for Banks
A few years down the road from the last global financial crisis, regulators are still issuing rules and monitoring banks to ensure that they comply with the regulations.
EU and UK Agencies Issue Updates on Final Basel III Rules
The European Commission (EC) recently issued an update informing that the European Council and the Parliament have endorsed the Banking Package implementing the final elements of Basel III standards