The European Central Bank (ECB) is looking to develop ‘customised cockpits’ fired by artificial intelligence (AI) as it looks to provide banking supervisors with ‘SupTech at your fingertips’.
The ECB oversees more than 100 of the largest banks across the 20-member Eurozone through the Single Supervisory Mechanism (SSM) and, in cooperation with national supervisors, is responsible for ensuring supervision is effective and consistent. It has the authority to conduct supervisory reviews, on-site inspections and investigations, and grant or withdraw banking licences.
ECB Supervisory Board member Elizabeth McCaul gave a flavour of a ‘SSM Digital Strategy 2024-2028’, which is slated to be announced early next year, in a speech titled ‘Technology, data and innovation – shaping the future of supervision’ at the ECB-hosted ‘Supervision Innovators Conference 2023’.
The authority wants to “fully integrate core systems and SupTech” (where ‘SupTech’ is short for supervisory technology) as it looks to ensure that supervisors can “access a real-time picture of the banks they supervise in just a few clicks,” she told the in-person and online audience.
“We want to develop a kind of single supervisory platform or cockpit where supervisors have direct access to most of the IT applications they need, receive alerts and data notifications from relevant internal and external data sources and have an advanced search and query function, leveraging artificial intelligence (AI),” McCaul said in the technology-focused opening part of her speech.
“Supervisors would be able to customise their cockpit based on their role and personal preferences,” she said. “This would be a bit like a ‘smartphone for supervisors’, with powerful, complex technology working in the background while being simple and intuitive to use, allowing supervisors to focus exclusively on the banks they supervise, equipping them with a clear line of sight into risks.”
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‘Ever-growing pool’ of data
In the section of her speech focused on data, McCaul opened by saying that supervisors can already access an “ever-growing pool” of quantitative and qualitative supervisory data.
She referenced ‘Agora’ – one of three tools she name-checked in her speech at the same event last year (she referred to Agora as ‘hopefully a game-changer for prudential analytics’) – describing it as “the single data lake for European banking supervision” that has “allowed us to integrate data and provide easier access for supervisors.”
“Our ultimate objective is to make even more use of the data goldmine,” she said. “This could include not only transaction-level data and high-frequency financial market data but also relevant publicly available information from news platforms and social media. With such information readily at hand, we will be able to identify potential issues much earlier or, dare I say, even in real time. We are also aiming to add more advanced data analytics capabilities, for example in our core supervisory processes such as the Supervisory Review and Evaluation Process (SREP) [which assesses where a bank stands in terms of capital and liquidity requirements, as well as the adequacy of its internal arrangements and risk controls] and for specific activities such as the review of internal model investigation reports.”
“With advanced analytics, possibly also leveraging AI, we could further enhance the single supervisory platform or cockpit that I mentioned earlier,” she said. “Such a platform could include early-warning indicators to help steer the supervisory focus towards the most important vulnerabilities that may be building up in the system.”
McCaul then made reference to the potential to better detect systemic risks. “Earlier this year, supervisors around the world were asking themselves the same question: what are the unrealised losses in the held-to-maturity portfolios of the banks we supervise? Instead of having to embark upon ad hoc data collection exercises to support such analysis, I can imagine a future in which this information is at our supervisors’ fingertips,” she said. “This will help us be even more proactive in our supervisory response. Moreover, it may also help to identify potential systemic risks or risk correlations, which can be more elusive to detect.”
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ECB working with Fed, BoE and FCA
In reference to innovation, McCaul – a former Goldman Sachs banker who joined the ECB in 2019 – said that the ECB had, in recent years, “intensified cooperation” with the Monetary Authority of Singapore (MAS) and the US Office of the Comptroller of the Currency (OCC); and had “identified initial areas for joint SupTech development” with the US Federal Reserve System, Bank of England (BoE) and UK Financial Conduct Authority (FCA).
The ECB, Fed, BoE and FCA are also working on specific projects, with the first focused on IT and cyber risk.
The ECB is planning to run a ‘cyber-resilience stress test’ during the first half of 2024 and is examining ways in which SupTech can boost its supervisory activities in this area, McCaul said.
An app is also being developed, she said, to support supervisors in identifying specific IT and cyber risks with the help of natural-language processing (NLP).
The 20 September event’s opening remarks came from the outgoing chair of the ECB Supervisory Board, Andrea Enria, who gave an overview of ECB SupTech digitalisation initiatives and collaborations, including “engagement with several start-ups to support our work on innovative tools and corresponding studies to further shape our innovation culture”; and the training of “around 3,000 experts and over 100 managers on various facets of innovation and digital transformation”.
The ECB Governing Council has nominated Claudia Buch, currently vice-president of the Deutsche Bundesbank, to succeed Enria. Her nomination has been approved by European Parliamentarians and now awaits a thumbs-up from the Council of the European Union. She would succeed Enria on 1 January 2024.