Prudential Risk

 In Case Study, Wicked Problem

A view from Keith Saxton, Chair Financial Services and Payments Programmes, techUK

“FinTech innovations can have a significant impact on approaches taken by the prudential regulators and central banks. The goal to make the financial system more stable, resilient, efficient and inclusive clearly depends on both understanding the impact that FinTech innovations will deliver, as well as the dangers of unintended consequences if not fully controlled. The ability to improve their own capabilities from the use of these technologies would also appear attractive. Understanding the interconnectedness, concentrations and ‘health’ of the financial system from the significant amount of data now collected can only be achieved with innovative and powerful technologies. New approaches to data analytics, data cleaning, security and behavioural analysis can all benefit from work with FinTechs, preferably in close collaboration with all industry participants.

Systemic risk analysis can be greatly improved by using a powerful suite of technologies to assess the system at large. The approach to stress testing can be enhanced by application of new technologies such as simulation and visualisation. Developing market segments such as peer to peer lending and other so called shadow banking activities can also be assessed from data that may well be unstructured and sitting outside the normal reporting regimes. Resilience, recovery and resolvability of systemically important banks and institutions such as central clearing counterparties can be better assessed by using agent based modelling and the development of ‘real time’ dashboards which can inform policy and market intervention actions.

Assessing and understanding emerging technologies in collaboration with the industry can avoid costly initiatives which can increase the cost of compliance for the industry, and equally the prudential regulator can promote more active adoption of important regulation where banks legacy technology is impeding progress. Prudential authorities could also benefit from taking a systems engineering approach to assessing the financial services ecosystem and models. Collaboration with industry, technology firms and academia could well be positively stimulated by the engagement in an Industry Sandbox.”

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