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For many years, financial sector supervisors saw with skepticism the adoption of SupTech—essentially the use of technology-enabled solutions to increase the efficiency and effectiveness of supervisory activities. Many asked “why” they should be investing in these technologies, in a common first reaction to any process that will substantially impact the way things are done.
Although some pioneering authorities managed to implement innovative solutions in the past few years, most were still at the “why” stage, weighing the cost-benefit rationale, when COVID-19 hit, changing the circumstances quite a bit. Looking at the new reality—through the windows of their living rooms turned offices—supervisors have come to realize that it was time to replace the “why” questions with “how”.
Two factors contributed to this turn of events: Firstly, supervisors no longer have recourse to a commonly applied tool: on-site inspections. Secondly,the rapid migration of financial firms to virtual platforms, which makes the use of technology ever more relevant to the identification of risks. To understand the effects of this crisis, supervisors need more than ever to be agile and able to make decisions based on alternative sources of data.
Increasing efficiency through innovation
To help financial sector supervisors forge their understanding of SupTech solutions and provide practical information on how to implement them, the World Bank has recently launched a step-by-step guide: A Roadmap to SupTech Solutions for Low-Income Countries. The paper presents the main challenges faced by the supervisory authorities and provides different governance models used globally, as well as guidelines for the development of SupTech strategies and their implementation for prudential uses. It also includes case studies on the use of SupTech in efforts related to anti-money laundering (AML) and combating the finance or terrorism (CFT).
The last decade has brought significant evolution in technology, computing power and, most importantly, price reduction for these technologies. This has paved the way for modern SupTech approaches to use tools such as Artificial Intelligence (AI) and Machine Learning (ML) to quickly digest information and identify patterns that might have been missed previously or taken significant time and human resources. SupTech solutions are now being developed for various stages of the supervisory process: from macro and micro prudential through to licensing and AML/CFT supervision (see Figure 1).
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Figure: Use of SupTech solutions for supervision phases
The 2008 global financial crisis led to a significant increase in the data collected by supervisors, and it is likely that the COVID-19 pandemic will bring about a similar outcome. In fact, the data currently being collected has reached such level of detail, volume, and complexity that it is often referred to as big data.
Despite the increase in data collection and processing, supervisory authorities still face challenges. One of the most common ones is the availability of resources, both human and financial. Often, the capacity needed to process the collected data surpasses the capacity of supervisory resources allocated for the task. This reality—which is being exacerbated by the COVID-19 pandemic—requires the implementation of scalable solutions that leverage technology to compensate the resource gap and allow supervisors to identify, measure, and mitigate the risks in a more effective manner.
The poor quality of data is another major challenge faced by supervisors around the world. Many of them see poor-quality data as a hindrance for the effective implementation of SupTech solutions. However, this is a “chicken or egg” problem: Is the effectiveness of SupTech solutions low due to the poor quality of data or is the poor-quality of data due to the use of ineffective supervisory tools? Regardless of how supervisors look at this dilemma, the most effective way to support collection of better-quality data is to have a robust data governance strategy in which SupTech solutions would play a key role.
Transforming supervisory processes
SupTech tools can support and enhance a number of the supervisory processes, from licensing to analyzing fit and proper tests to the assessment of credit risk. In our paper, we identify three particular use cases for automated reporting, workflow management, and assessment of credit. We also highlight a compendium of use cases and countries where they have been implemented.
Even though advanced technologies have become more accessible for supervisors, finding the right balance between functionalities, costs, and implementation approaches remain a concern. SupTech is not intended to replace supervisors but to help them fulfill their mandate in the most effective and efficient way. By taking away the routine operations from supervisory tasks, supervisors can allow themselves to focus on risk assessment, data analysis, decision-making processes, and other activities that require professional judgment and expertise.
The digitalization and development of new financial products is drastically transforming the financial sector of all countries. This transformation will also lead to the transformation of the supervisory processes, which can be accomplished more effectively with the support of SupTech tools.
Credit: Matei Dohotaru & Sharmista Appaya
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