Three challenges that digital banking poses for regulators and supervisors
Regulators and supervisors are facing an enormous challenge: how to deal with digital innovation in banking. According to BBVA’s Head of Regulation, José Manuel González-Páramo, the three main short-term challenges are establishing a level playing field, creating regulatory sandboxes and guaranteeing cybersecurity.
A level playing field should ensure fair competition between banks and the rest of the providers of financial services (such as fintech startups and the “techfins,” the digital giants). On the other hand, sandboxes seem to be a feasible alternative for allowing institutions to try out new digital value propositions with real customers in a secure testing environment. And in third place, cyberseurity, where international cooperation is essential, because of the economic or geopolitical impact of online attacks. A lack of cybersecurity can create a lack of confidence in the safety and security of digital technologies – even though these offer substantial benefits – and by extension, in the stability of the financial system.
José Manuel González-Páramo explained these key challenges during the Belgian Financial Forum, an international financial event promoted by the National Bank of Belgium and the Belgian Banking Association. The forum was set up in 1992 with the purpose of promoting research and analysis and stimulating new ideas in the field of finance.
During his presentation, González-Páramo said that “the era of disruption we live in,” is not foreign to regulators and supervisors. Now, they have the challenge of maintaining their four traditional objectives: safeguarding the stability of the financial system, promoting efficiency, protecting the consumer and guaranteeing the sector’s integrity in the new digital context.
The speed with which the regulators understand this new digital environment and begin to move in that direction will make the pace of change in the sector”
In short, he said the new risks that come with the arrival of exponential technologies to the banking sector are not completely covered by the traditional supervisory approach (that is, capital or liquidity requirements). Regulators and supervisors must face theses challenges without hindering the transformation of the financial industry.
José Manuel González-Páramo during his speech at the Belgian Financial Forum, in Brussels
Changing the mentality of regulators and supervisors.
Likewise, he stressed that “the speed with which the regulators understand this new digital environment and begin to move in that direction will make the pace of change in the sector.” In his opinion, “many banks are clear about where they want to be” with respect to the technologies, but not so the regulators. In short, the combination of the vision the banks have of the future and the role of regulators and supervisors will decide the pace of innovation in the financial system.
Lastly, he suggested the creation of knowledge and innovation centers that function as a point of contact between regulators and the finance industry, and that lead to joint innovative exploration in the sandboxes. He also believes that regulatory authorities should acquire new talent, who are experts in digital innovation and open to public-private collaboration.
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