Banking supervision at a crossroads

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By FINTECH Books Contributor, Pascal Di Prima, Co-Author Tobias Bauerfeind, author for Lexemo LLC and a financial supervision lawyer in Frankfurt.

Digital is tomorrow’s battlefield for banks. While traditional credit institutions face enormous challenges and suffer from a period of low interest rates by simultaneously increasing costs and regulatory requirements, constantly new FinTech companies hope to get a slice of the cake. Those FinTech companies plough single segments and processes of traditional banking transactions more efficient and agile than the old industry and are thus committed to achieve a leading role in financial markets.

In this context, agile technology does not only have to be a threat to financial industry but can help banks better understand and manage their risks. Therefore, RegTech companies can not only provide a more efficient way to report, monitor and comply with prudential requirements but also a tool to strategically allocate, manage and coordinate banking risks. With regard to banks, RegTech companies will help firms to automate compliance tasks and reduce risks associated with meeting reporting obligations by using analytic tools to intelligently mine existing “big data” sets and unlock their potential.

RegTech will be able to provide a new way of approaching regulation – for banks, as explained above, and also for banking supervision itself. Within this framework, banking supervision can totally be reconceptualised. This also ties in with the quantitative prudential approach of the European Central Bank (ECB) – unlike with the qualitative approach of most of national competent authorities (NCA).

What will happen when the ECB as the competent authority is able to retrieve, process and analyse necessary prudential (big) data flows in almost real time without any detours (via NCA or on-site assessments) when prudential algorithms control and manage supervisory examinations when supervisor and respective bank management have access to same risk management dashboard?