Page 31 - Banking Finance April 2019

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arrangements as the interconnectedness between the and supervisor to embrace these changes and
institutions, countries will increase, and the boundaries understand them well in order to stay ahead of the
will get blurred. Digital channels too present new kinds curve. Accordingly, as FinTech companies become
of risk including greater exposure of digital assets. systemically important, the regulators on their part
22. Apart from this, financial institutions will require newer have embraced RegTech (Regulatory Technology). Use
skillsets for their manpower as the complexity and of predictive analytics in stress testing, artificial
intelligence and machine learning-powered systems to
opacity of big data analytics models warrant. Further,
the pace of change required in operations will increase identify money laundering risks, cognitive computing
manifold and the institutions will be required to be and behavioural algorithms to detect suspicious
nimble and be fast enough to learn and unlearn. The trading, etc., are some the technology adopted by
main challenges that risk managers highlight are legacy regulators to meet its objectives of regulation.
IT systems and a lack of easily accessible, high-quality Supervisors are also developing their own ‘SupTech’ to
data. IT systems are often patchworks, and that can improve and sharpen surveillance and analytical
degrade data quality. The rise of digitization requires capabilities. Bank of England for instance has used
risk managers to pay close attention to model risk, and automation to assess its vulnerability management
which has resulted in their security teams to react
the greater level of interconnectedness among
quickly. BoE can assess whether it is fully patched from
businesses requires vigilance on contagion risk.
a vulnerability within minutes and can inform this to the
23. A McKinsey report estimates that regulatory cost for
decision makers.
risk increased by more than 50 percent over the last
five years. Moreover, it is predicted that costs will 25. Digitization is an important lever to cope with the
continue to increase somewhat over the next five years. regulatory burden of enhanced regulation and
Though some aspects may begin to be deregulated supervision. Regulators will move from consuming reports
to receiving near-live data using advanced analytics and
slightly, banks can expect an overall increase in
decision-making automation. Dashboards and analytical
regulatory constraints on topics including supervision (for
tools that allow regulators to create the exposure views
instance, TRIM and SREP), systemic risk (such as stress
they need, as well as the ability to run impromptu stress
tests and Basel III), data protection (like GDPR), and
customer protection (for instance, PSD II). Digitization tests and analyses. This will help in converting a vicious
can also strongly help to cope with the repercussions— cycle from digitization to a virtuous cycle.
nearly 100 percent of the respondents, irrespective of 26. The regulatory regime should encourage ongoing
geography or category (G-SIB versus D-SIB), state that vigilance by boards and senior management to build
digitization is an important lever to cope with the resilience through investment in cyber security while
regulatory burden. giving institutions flexibility to address the risks in the
way they see as optimal. Given the differentiated
Mitigating Cyber Risks – Regulations nature of cyber risks, the regulatory architecture needs

We are giving away too much biometric data. If a bad guy
wants your biometric data, remember this: he doesn’t need
your actual fingerprint, just the data that represents your
fingerprint. That will be unique, one of a kind.” — Mike
Muscatel, Senior. Information Security Manager, Snyder’s-
Lance.

24. Risk management practices need to keep pace with the
changing risk profile of IT reflected in the approach to
regulation and supervision. The ability of machine
learning to learn our cyber defenses and devise ways
to circumvent them makes it even more important to
manage cyber risks. It is incumbent upon the regulator

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