The Basel Committee on Banking Supervision recently released a report that considers the implications of the ongoing digitalization of finance on banks and supervision.
The report builds on the Sound Practices: implications of fintech developments for banks and bank supervisors released in 2018, and “takes stock of recent developments in the digitalization 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 digitalization 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.”
Digitalization 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.
The Committee will continue to “monitor developments related to the digitalization of finance.”
Where necessary, it will consider “whether additional standards or guidance are needed to mitigate risks and vulnerabilities.”
As covered, the Basel Committee on Banking Supervision is described as “a committee of banking supervisory authorities that was established by the central bank governors of the Group of Ten countries in 1974.”
The committee has reportedly expanded its membership in 2009 and then again in 2014.
The Basel Committee on Banking Supervision (BCBS) is “the primary global standard setter for the prudential regulation of banks and provides a forum for regular cooperation on banking supervisory matters.”
Its 45 members comprise central banks and bank supervisors from 28 jurisdictions.
