Basel Committee: Banking Digitalisation Creates ‘Risks’
Big tech in the finance industry has long been heralded for driving digital transformation and fostering a new age of innovation.
Between 2019 and 2023 alone, investment in fintech companies – the providers of emergent technologies – has totalled a staggering US$865bn, more than double the levels of investment seen between 2013-2018.
However, with new innovations comes the creation of new vulnerabilities and the amplification of existing risks.
So, while banks rush to onboard the latest innovations, the question remains: do the benefits of digitalisation outweigh the risks?
Perhaps not for the Basel Committee on Baking Supervision (BCBS), the global regulatory committee that agrees on standards for bank capital, funding and liquidity, which has said continued innovation in the banking sector has paved the way for strategic, reputational, operational and data risks.
Growing risk in the banking sector
The risks outlined by the BCBS pertain to the growth of cloud computing – where core banking services are supported by cloud technologies provided by third parties – the rise of AI, the use of distributed ledger technology (DLT) and the proliferation of open banking.
While these innovations are enabling the banking industry to offer levels of customer experience never before seen, for the BCBS, these technologies may test banks’ operational resilience and system-wide risks as a result of increased connections between banks and fintechs.
- Model risk: The use of AI/ML gives to potential model risk
- Technology risk: Banks’ legacy IT systems may not be sufficiently adaptable
- Cyber risk: New technologies and business arrangements can increase cyber risk
- Legal uncertainty: Certain technologies may test existing legal frameworks
- Compliance risk: For banks relying on third parties to perform KYC/AML checks
- Fraud related risk: Digitalisation facilitates new types of fraud
What’s more, from a regulatory position, it should be remembered that banks are held to higher regulatory standards compared to their fintech counterparts, which could cause lapses in regulatory adherence.
So, will new regulations – particularly around the partnerships created as a result of open banking – be required to address the risks?
The regulator says: “Where necessary, it will consider whether additional standards or guidance are needed to mitigate risks and vulnerabilities."
New regulations incoming for banks and fintechs?
Perhaps, then, new banking regulations could be pitched sooner rather than later, with the BCBS showing equal concern for data-related banking risks, which can exacerbate a bank’s data governance challenges.
Made up of central bankers and regulators from G20 economies, the BCBS commits to applying the rules its members jointly approve.
As such, additional banking regulators can be expected, which could prove more of a challenge for less regulated fintechs as opposed to banks, which have long been faced with stringent rules and regulations.
The makeup of these regulations is unclear, though, and it may be that the responsibility of regulatory demands lies solely at the feet of banks.
Earlier this year, US banking regulator the Office of the Comptroller of the Currency (OCC), suggested banks should be solely responsible for actively managing fintech partnership risks.
This responsibility could, therefore, come into effect as and when BCBS members take action.
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