Exploring the potential of supervisory technology

Banks are increasingly tapping the potential of modern technology to meet new customer expectations, keep pace with competitors and boost sustainability. Against the backdrop of the coronavirus (COVID-19) pandemic, this trend has acquired new urgency, with Supervisory Board member Pentti Hakkarainen noting in May that banks must fully embrace the latest technology or risk going extinct. Technological innovation may be essential for the survival of banks, but what role can it play for banking supervisors? ECB Banking Supervision and national supervisors are tackling this very question. Together, they are exploring the potential of supervisory technology (suptech) and developing new tools aimed at enhancing everyday supervision.

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Suptech encompasses all forms of innovative technology that are used to support financial supervision. Therefore, cloud computing or machine learning techniques that are applied for supervisory purposes would qualify as suptech. Supervisors are interested in suptech’s potential to make supervision more efficient and proactive, for example by speeding up data collection and analysis.

Insights into the suptech projects under way in European banking supervision were provided at a dedicated virtual meet-up in June, which was attended by supervisors, IT experts and tech industry professionals from Europe and beyond. Colleagues from De Nederlandsche Bank explained how distributed ledger technology – whereby updatable information records are shared across a network of computers – could make supervision more agile by providing supervisors with real-time access to bank data. Banca d’Italia colleagues demonstrated how their use of artificial intelligence techniques enhances analysis of consumer complaints, as it can help analysts to quickly hone in on critical information and spot trends.

Meanwhile, ECB supervisors showed how natural language processing and machine learning could simplify and enhance fit and proper assessments of bank board members – a welcome development given the high number of appointees notified to the ECB each year (nearly 2,900 in 2019).

Natural language processing, where computers structure and assess large amounts of information provided in textual form, is one of the major areas of suptech that the ECB is focusing on. The ECB is also using advanced analytical models to gain new insights from the vast amounts of data it holds. In the context of the COVID-19 crisis, supervisors are applying advanced analytics to identify emerging trends across banks. In another development, the ECB is setting up an online portal that will serve as a single, secure gateway through which banks can submit authorisation requests. The aim is to further digitalise and automate authorisation procedures in order to support banks in submitting complete applications, reduce bureaucracy and increase transparency with regard to the status of procedures.

It is safe to assume that we are going to see a lot more of suptech in the future. Participants at the virtual meet-up agreed that its emerging importance had become even more evident in the current crisis situation, which has substantially increased remote collaboration and off-site supervision. In these circumstances, supervisors should seize the opportunity to explore suptech and gauge where it can make the most impact – especially as the extent to which working arrangements will return to the “old normal” is not yet clear. While supervisory technologies will never be able to replace humans, they can enrich and complement supervisory judgement and free supervisors from bureaucratic tasks. European banking supervision will continue to explore their potential with a view to delivering lasting benefits for the day-to-day work of supervisors.

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