The Basel Committee has published a report on the implications of the digitalisation of finance for banks and supervision, as ”bis.org” informed.
The report considers both the benefits and risks of new technologies and the emergence of new technologically enabled suppliers for the provision of banking services.
It identifies eight implications for banks and supervisors relating to macro-structural elements, specific digitalisation themes, and capacity building and coordination.
The Basel Committee on Banking Supervision today published a report that considers the implications of the ongoing digitalisation of finance on banks and supervision. The report builds on the Sound Practices: implications of fintech developments for banks and bank supervisors published in 2018, and takes stock of recent developments in the digitalisation of finance.
The report reviews the use of key innovative technologies across various aspects of the banking value chain, including application programming interfaces, artificial intelligence and machine learning, distributed ledger technology and cloud computing. It also considers the role of new technologically enabled suppliers (eg big techs, fintechs and third-party service providers) and business models.
While digitalisation can benefit both banks and their customers, it can also create new vulnerabilities and amplify existing risks. These can include greater strategic and reputational risks, a larger scope of factors that could test banks’ operational risk and resilience, and potential system-wide risks due to increased interconnections. Banks are implementing various strategies and practices to mitigate these risks, but effective governance and risk management processes remain fundamental.
Digitalisation raises regulatory and supervisory implications for both banks and supervisors. These include:
– monitoring evolving risks and adopting a responsible approach to innovation;
– safeguarding data and implementing robust risk management processes; and
– securing the necessary resources, staff and capabilities to assess and mitigate risks from new technologies and business models.
Executive summary
Technological innovation is transforming the provision of banking services through three broad channels:
(i) an expansion in the set of financial services and products, as well as the distribution channels through which they are offered; (ii) the arrival of new technological suppliers of these services (eg big techs, fintechs and third-party service providers); and
(iii) the increasing use of digital innovations for managing,
mitigating and overseeing risks.
As the global standard setter for the prudential regulation of banks, the Basel Committee on Banking Supervision (BCBS) has a strong interest in monitoring digitalisation trends, understanding how these may impact banks and banking supervision, facilitating the exchange of information between supervisors to identify and address common challenges and, where appropriate, issuing standards or guidance to mitigate risks.
Section 2 reviews some of the key technologies across various aspects of the banking value chain. This includes the use by banks of application programming interfaces (API), artificial intelligence (AI) and machine learning (ML), distributed ledger technology (DLT) and cloud computing. Such technologies are
being used by a wide range of banks, albeit with varying degrees of intensity and scope. For example, despite the growing interest around AI/ML, most banks appear to be using such technology cautiously at this stage, especially for customer-facing services and for revenue generation. In contrast, there has been
a significant increase in the number of banks using cloud computing services in recent years, with this trend expected to continue.
Section 3 considers the role of new banking competitors and business models. To date, these developments have affected the banking system primarily through:
(i) competition from new entrants (eg in payments services); and (ii) the formation of strategic partnerships between banks and other firms.
Section 4 outlines the potential risks for banks and financial stability arising from the digitalisation of finance and the trends outlined in previous sections. While digitalisation can benefit both banks and their customers, it can also create new vulnerabilities and amplify existing risks to banks, their customers
and financial stability. These include greater challenges by banks to adapt their business strategies (“strategic risk”) to an increasingly digital environment, potentially heightened reputational risk to banks, a larger scope of factors that could test banks’ operational resilience and operational risk, and challenges
to banks’ data governance.
Against that backdrop, Section 5 considers the various strategies and practices that are, in principle, available for banks to mitigate risks. Effective governance structures and risk management
processes are fundamental to identifying, monitoring and mitigating risks associated with the digitalisation of finance. Banks may also mitigate specific digitalisation-related risks – such as those stemming from API or AI/ML models by enhancing controls and pursuing an “across the bank” human-centric approach to overseeing the use of such technologies. Similarly, banks manage data-related risks through robust governance arrangements and enhanced security protocols. Banks may also reinforce their due diligence and operational risk management to mitigate the risks stemming from their reliance on third-party service providers.
Regulations and supervisory frameworks have also evolved in response to the digitalisation of finance. Section 6 reviews these developments. For example, some jurisdictions have expanded the scope. Section 6 reviews these developments. For example, some jurisdictions have expanded the scope of the regulatory perimeter in their legislative frameworks. Most authorities also require new banking applications to follow the same framework applied to “traditional” bank entrants, with a few jurisdictions applying a distinct process for digital-only banks. Many jurisdictions have also issued specific supervisory guidance related to different aspects of the digitalisation of banking (eg on model risk management and cloud computing).
Section 7 concludes by outlining the regulatory and supervisory implications for both banks and banking supervisors. At a macro-structural level, supervisors should continue to monitor – and it is
important for banks to mitigate – the risks stemming from the evolving nature of banking as a result of technological innovations. The adoption of innovative technologies and business models should be guided by a principle of responsible innovation. As a result of the increasingly blurred lines between banks and the provision of banking services, integrating the principle of “same risk, same activity, same regulation” in regulatory and legal frameworks may help avoid regulatory arbitrage.
Read the full art. on ”bis.org” .
Download the full report Basel Committee on Banking Supervision – Digitalisation of Finance here (.pdf file; 837KB)
Foto: ”freepik.com”
Related art.:
– Digitalizarea sistemului bancar creează noi riscuri, susţine o autoritate globală de reglementare – ”economica.net”
