Pentti Hakkarainen of ECB Speaks on Digitalization of Banking Sector

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