By Gayle Markovitz, World Economic Forum
Each financial crisis puts a spotlight on banking regulation. It happened in 2008 and some 15 years later, here we are again.
While this banking tailspin is very different to 2008 and there are reasons to hope that it won’t descend into market panic, it’s not over yet and there’s a sense that something’s gone wrong and needs fixing. What happens next is unclear but rising interest rates and fear itself are presenting a very fragile outlook for the days and weeks to come. Regulators have already responded by tightening up supervision.
Regulation technology – or reg-tech as it’s known in the industry – was an innovation that came out of the last crisis. This time around, it might emerge as technology’s answer to better financial reporting and risk management that has the potential to avert the next crisis.
So how does it work?
One of the weaknesses of a traditional financial regulatory system – whether in the US or Europe – is that it is over-reliant on the judgement and competence of bank regulators. Despite digitization, financial reporting has not changed much in decades. It is based on a system where central banks monitor and supervise the global financial industry based on reporting that is pushed out by banking firms.
In contrast, reg-tech enables what’s known in the industry as ‘pull’ rather than ‘push’ information exchange. So data is pulled from firms, removing the need for reports entirely. This makes financial information exchange faster, more agile and less dependent on supervision or human error.
Reg-tech could therefore enable the financial industry to move to a more regulator-led pull-based system, where information is pulled at source, analysed and modelled in real time with future trends projected continuously, ensuring supervision of the industry remains on point at all times.
Fin-tech CEO and Co-founder of Suade, Diana Paredes, says reg-tech offers a scenario “where news, analytics and calculations are fast and pretty much out of the box”.
The latest banking crisis is seen in part to have stemmed from a wave of deregulation in the US where smaller and mid-size banks operating below a threshold became subject to more relaxed supervision.