2020s has been a decade of quite a few technological and geopolitical shifts that have had a significant impact on global financial markets. On the technology front, there was accelerated digitization across industries, with financial institutions adopting advanced technologies like blockchain, cloud computing, and AI. Fintech companies disrupted traditional banking models with mobile payments, peer-to-peer lending, and robo-advisors. Simultaneously, heightened concerns over cybersecurity prompted the implementation of robust measures in response to rising data breaches, ransomware attacks, and frauds.
On the geopolitical front, trade wars (Sino-US relations, etc.), Brexit, geopolitical hostilities (Russia-Ukraine war), and the pandemic took center stage. In April 2024, the collapse of Republic First Bank marked the beginning of a series of failures and voluntary collapses of several US banks over the past decade, with notable institutions such as Silicon Valley Bank and Signature Bank following suit in the preceding year.
While these shifts took place in different regions globally, today, global financial systems are interconnected more than ever. So, these changes have directly impacted investors, financial markets, and economies worldwide. For instance, a bank collapse in the US may have contributed to increased market volatility, prompting investors to seek refuge in safe-haven assets like gold or the Swiss Franc. Alternatively, war hostilities increased oil prices, thus influencing investment decisions in emerging economies.
Most importantly, these tensions and their impact on global financial markets have propelled European regulatory bodies and financial institutions to adopt a holistic approach to risk mitigation and compliance. Their approach is three-fold.
- mitigating risks, preventing regulatory arbitrage, ensuring systemic stability for protecting consumers (especially with data privacy), and developing compliance frameworks that are flexible and forward-looking.
- moving from passive observation of the idiosyncratic risks that financial institutions pose to securing a holistic and detailed view of the US and EU banking sector.
- scrutinizing financial risks at a granular level enables regulators to uncover hidden vulnerabilities, anticipate emerging threats, and tailor their interventions effectively.
A holistic approach such as this can foster excellent stability and trust in the financial system, protect consumers, and ensure systemic resilience. It also can enable European firms to bolster investor confidence and contribute to global financial markets’ overall stability and integrity.
A recent Regtech insights report by Maveric Systems reveals that regulators are zooming in to include not just financial risks like BASEL IV and FRTB but also non-financial risks like DORA, AI, Cybersecurity, and surveillance of bad actors (greenwashing). The report examines regulators’ key steps to mitigate financial risks and restore confidence in the global banking system.
1.) Regulators are implementing new mandates for better data to support their holistic approach to supervision. With better data practices, regulators can enhance their ability to oversee financial markets, protect investors, and ensure the financial system’s stability. For instance, in June 2023, ESMA (European Securities and Markets Authority) released a data strategy report that put data at the core of ESMA to use data to supervise financial markets and enhance investor protection effectively. ECB (European Central Bank), on the other hand, has identified RDAAR (Risk Data Aggregation and Risk Reporting) as a critical vulnerability and developed a comprehensive strategy to help banks strengthen their risk data practices.
2.) Regulators are continuing to focus on using technology to digitize reporting requirements and building data analytics systems. Digitization streamlines processes, reduces manual effort, and enhances accuracy. It helps regulators uncover patterns, detect anomalies, identify emerging risks, and comprehensively monitor financial institutions. International bodies like the Basel Committee on Banking Supervision have emphasized technology adoption and promoting sound data management practices. The first critical step in digitization is creating common data standards, including data dictionaries, data reporting processes, harmonization of data elements, and reporting formats. For instance, through its guide on Risk data aggregation and risk reporting (RDARR), the ECB intends to reinforce supervisory expectations on the existing BCBS 239 regulation. The ECB has also developed more comprehensive guidance and targeted supervisory strategy for 2023-2025. ECB acknowledges the importance of banks’ digital transformation strategies. As technology evolves, banks must adapt to the guidance developed by the ECB to encourage robust digital risk management.
3.) Regulators have increased efforts to assess banks’ preparedness for emerging liquidity and interest rate risk. In the EU, they achieve this through newer reporting requirements for IRRBB and FRTB Market Risk. In the US, the Fed has enhanced Fed call reporting to be more frequent and granular and provided significant updates on thresholds and capital ratios. These requirements can assess how well banks manage their exposure to these risks. By collecting more detailed data, regulators can gain insights into risk profiles and ensure financial stability.
4.) Regulators are attempting to coordinate their actions across the European and US landscapes. This coordination can ensure that regulatory actions are aligned to prevent cross-border spills, promote a level playing field for financial institutions, identify vulnerabilities early, and ensure timely, synchronized responses to emerging threats.
With regulators adopting comprehensive measures to stabilize the global banking system, banks now face the onerous task of recalibrating hundreds of systems to the new data schema and completing extensive testing ahead of the implementation deadlines. As banks work towards this goal, collaboration between regulatory bodies and financial institutions will be crucial in navigating the complexities of the modern financial landscape.
About the Author
As the Co-founder and whole-time Director at Maveric, P Venkatesh (PV) leads the global thought leadership function aimed at shaping and promoting Maveric’s perspectives as well as expertise in the banking technology space. By building relationships with industry influencers, partners and BankTech ecosystem leaders, PV drives creation of impactful frameworks, methodologies and landscape reports that provide informed perspectives on new age technologies that shape the BankTech space.
Originally published in GBFR
