APRA Chair Speaks About Uncertain Impact of Financial Innovations
At the 2018 Curious Thinkers Conference in Sydney, the APRA Chairman Wayne Byres examined the potential impact of financial technologies on the financial sector. In this context, he believes that the task of APRA is to ensure that regulated entities are adequately managing change and not exposing customers to undue risks. APRA should also ensure that regulation and supervision are fit for the future and can adapt as the financial system and its participants evolve.
APRA Chair revealed that an APRA review of the systems hygiene in the banking sector, suggested that the issues identified reflect persistent underinvestment over a number of years. The reviews emphasize that, to facilitate new technology, investment budgets need to be increased, not just reprioritized. APRA released its first information security prudential standard for consultation in March and it wants cyber-soundness to be thought about in the same way as institutions think about financial soundness. Additionally, in the area of cloud computing, APRA released an updated version of its 2015 paper, which acknowledges advancements in the safety and security in using the cloud, along with the increased appetite for doing so, especially among new and aspiring entities that want to take a cloud-first approach to data storage and management. In addition to reinforcing steps to minimize the risks of cloud usage, the information paper also summarizes observed weaknesses that industry must continue to focus on. While cloud usage, as with all other shared service arrangements, involves a degree of shared responsibility, boards and senior management of regulated entities remain ultimately accountable for the security of their data. That accountability cannot be outsourced.
A major challenge that technology poses for regulators is the growing trend toward outsourcing and partnering, according to Mr. Byres. Outsourcing and partnering is increasingly occurring for business-critical functions, not just at the periphery of activities. Many of these new partners and providers of critical functions sit outside regulators’ reach. The prudential supervisors’ ability to “kick the tyres” will be much harder in future, without new tools and methods. This gives rise to the systemic risk of an ostensibly large and diverse number of entities all dependent on just a few unregulated providers for critical services, creating a substantial concentration risk and increasing the threat of contagion in the event of a service failure. Applicants for new banking licenses may not fit the traditional mold and that is another risk posed by technology. Consequently, APRA has established a new licensing regime to provide for easier entry—but not lower standards—to the banking system for applicants with unconventional or non-traditional business models. The goal of the new Restricted Authorized Deposit-taking Institution regime is to allow applicants to commence limited banking business while still developing their capabilities and resources. It also allows APRA to learn about, and gain comfort with, new ways of doing things.
APRA is increasing effort to ensure that it has the expertise, knowledge, and technology in place to monitor and interpret the changing nature of the financial sector. APRA has established an internal Fintech Council to examine developments and trends in the fintech sector. Guided by the Council, APRA has stepped up the engagement with a range of players from outside the regulated sphere, such as Fintech Australia, the RegTech Association, and InsureTech Australia. The purpose of this engagement is to create a dialog with players in these emerging sectors to ensure APRA is up-to-speed with developments and to keep ahead of emerging issues that may cause regulatory challenges. He also welcomed the valuable insights gained from participating in ASIC’s Digital Finance Advisory Committee. Finally, he said that one of APRA’s key strategic priorities over the coming years is to broaden its risk-based supervision.
Related Link: Speech
Related 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