ESRB Paper Shows Loan Performance Improves with Higher IT Adoption
ESRB published a paper that presents evidence to indicate the direct role of information technology (IT) adoption in strengthening the resilience of commercial banks in US. The analysis finds that higher pre-crisis IT adoption led to 10% fewer non-performing loans during the global financial crisis. Loan-level analysis reveals that high-IT adoption banks originated mortgages with better performance and did not offload low-quality loans. Loans originated by high-IT banks experienced lower delinquency rates during the crisis, even when they were securitized and sold to Freddie Mac. Thus, the results indicate that IT adoption helped banks to select better borrowers and produce more resilient loans.
To understand the potential impact of higher technology intensity in lending on financial stability, the authors studied non-performing loans on the balance sheet of traditional U.S. banks with a heterogeneous degree of IT adoption during the global financial crisis and the subsequent consequences for credit provision. The evidence presented in the paper suggests that the “fintech era” is likely to be beneficial to financial stability. However, the main caveat of using the results of this analysis to inform the debate on fintech and financial stability is that the technologies adopted by commercial banks before the global financial crisis might be significantly different than the ones that banks, fintech, and financial arms of bigtech companies are implementing nowadays (including machine learning technologies). If one focuses on the lending business, there are several commonalities between the IT-intensive methods used before global financial crisis and the most recent advancements. Statistical models to predict defaults were widely used during the decade preceding the crisis. The up-to-date machine learning techniques that are used to predict borrowers’ behavior are more powerful versions of the previously available statistical tools, rather than radically different systems. The collection and use of new data to inform application decisions, such as the digital footprint is not conceptually different than the use of credit scores. The main difference lies in the requirements—in terms of infrastructure and know-how—to acquire, store, manage, and employ these data.
Related Link: Paper (PDF)
Keywords: Europe, EU, Banking, NPLs, Fintech, Bigtech, Regtech, Credit Origination, Credit Risk, Financial Stability, ESRB
Previous ArticleESMA Updates Q&A on Transitional Provisions in Benchmarks Regulation
NGFS Updates Address Short-Term Climate Scenarios and Transition Plans
The Network for Greening the Financial System (NGFS) is exploring the development of short-term climate scenarios to complement its existing scenario framework of long-term climate scenarios.
ISSB Updates Address ESG Issues while IASB Consults on Impairments
The International Sustainability Standards Board (ISSB) is seeking feedback, until August 09, 2023, on the exposure draft that sets out the methodology proposed by ISSB to amend the Sustainability Accounting Standards Board (SASB) Standards' metrics
OSFI to Review Liquidity Adequacy Guidelines and Policy Architecture
The Office of the Superintendent of Financial Institutions (OSFI) is consulting, until June 21, 2023, on a review of the liquidity treatment provided in the Liquidity Adequacy Requirements (LAR) Guideline for wholesale funding sources with retail-like characteristics.
ESRB Publishes Report on Cryptos and DeFi; ECB Updates on Digital Euro
The European Systemic Risk Board (ESRB) published a report that outlines the systemic implications of crypto markets and proposes policy options to address the risks stemming from crypto-assets and decentralized finance or DeFi.
EU Agencies Issue Updates on DORA, ESAP, and Crowdfunding Regulation
The European Supervisory Authorities (ESAs) published a discussion paper on their joint advice to the European Commission (EC) on proposals to specify criteria for critical information and communication technology (ICT) third-party service providers
ESAs Propose ESG Disclosure on STS Securitization, Issue Other Updates
The Joint Committee of the three European Supervisory Authorities (ESAs) proposed to amend the Implementing Regulation 2016/1799 on the mapping of External Credit Assessment Institutions' (ECAIs) credit assessments.
UK Authorities Issue Updates, Finalize Policy on Model Risk Management
The Prudential Regulation Authority (PRA) finalized the model risk management principles for banks, the policy statement PS5/23 on risks from contingent leverage, and PS4/23 on moving senior managers regime forms from the PRA Rulebook.
APRA Revises Implementation Timeline for Operational Risk Standard
The Australian Prudential Regulation Authority (APRA) updated the implementation date of the new cross-industry prudential standard CPS 230 on operational risk management
BCBS Consults on Basel FAQs and Amendments, Issues Other Updates
The Basel Committee on Banking Supervision (BCBS) published a report assessing implementation of the global Basel standards on net stable funding ratio (NSFR) and large exposures (LEX) in South Africa
EBA Announces Multiple Regulatory and Reporting Updates in April 2023
The European Banking Authority (EBA) published consultations on the amendments to the guidelines on risk-based anti-money laundering and countering the financing of terrorism (AML/CFT) supervision