By Bill Coen, Basel Committee on Banking Supervision & Chair, IFRS Advisory Council
What, for you, are the benefits of attending the ‘Risk Americas Convention’ and what have attendees learnt from your session?
The assertion that the only constant is change is especially true for risk management and financial regulation. The financial industry continues to witness monumental change, much of which is unfolding rapidly. Dealing with the “traditional” risks like credit risk and market risk is often a daunting task but now risk managers, C-suite executives, and boards of directors must now contend with and adapt to: technology-driven innovation in financial services; ongoing technological advances including the use of artificial intelligence and machine learning; more widespread use of digital assets and tokens; and persistent cyber-risk.
Having a thorough understanding of emerging risks, market developments, what constitutes good governance, the regulatory perspective, and the rapidly shifting business environment are essential to effectively manage the risks. This is a formidable set of challenges for risk managers.
The “Risk Americas Convention” provides an outstanding opportunity to stay abreast of and improve one’s understanding of emerging and evolving risks. Participants examined their peers’ experiences in managing these risks and heard about successful strategies as well as challenges and roadblocks. Based on my 35 years of experience, which includes 20 years of international experience and having worked through several financial crises, I provided an official sector perspective on regulatory developments and shared my views on the future direction of supervision and regulation.
Has your former role of Secretary General at the Basel Committee on Banking Supervision impacted your view of risk and regulation?
My close involvement in responding to the global financial crisis (GFC) has had a significant influence on how I think about risk and regulation. The GFC underscored the imperative of managing risk comprehensively and proactively (rather than reactively). Risk managers and regulators need to ask: How do different risk types interact and combine? What could be the catalyst or the set of triggers that cause this interaction? What measures can be taken to control or mitigate the risk?
The GFC reinforced some essential elements of effective risk management. This includes, for example, the roles of the board of directors, board risk committees, senior management and the control functions, including the CRO and internal audit. The GFC was a stark reminder of the hazards of placing excessive reliance on individual risk management tools (e.g. external credit ratings or internal models) and dispelled the notion that bank capital is in all cases a suitable backstop to absorb losses.
From a regulatory perspective, the GFC underscored the need for standard-setting bodies like the Basel Committee on Banking Supervision to formulate policies by means of a process which is inclusive, transparent, and well-informed. The process must include a mechanism for engaging with and receiving comments from all interested stakeholders on the proposed policies. These consultations must be accompanied by a careful assessment of the quantitative impact that is based on quality data. Quantitative impact studies are an important element – but not the sole driver – of the policy-making process.
One of the most important lessons learned from the GFC was this: the global standard-setting process, regardless of how rigorous and inclusive it may be and no matter how robust and well-designed the standards that it produces are, is essentially a waste of time if the standards are not implemented in a full, timely, and consistent manner by those who agreed the standards. Actual implementation of the globally-agreed standards into rules, regulations, or directives at the national or jurisdictional level within a reasonable timeline with appropriate transitional arrangements where necessary is crucial.
In your opinion, why is it important to take stock of regulatory reform?
Taking stock of regulatory reform is a critical step in the standard-setting process. Have the minimum standards been implemented within the timeframe and manner in which they were agreed? Are the reforms producing the expected outcome? Are there unintended consequences (versus fully intended consequences)? If so, are modifications warranted?
It is important to emphasize the timeliness and consistency of implementing the full range of the reforms. Delays in putting the reforms in place or diluting the global minimum standards distort a level playing field. This course of action engenders doubt and mistrust as to the soundness of a jurisdiction’s banks and banking system. In the long term, delays and dilution are a risk to the financial system.
What is your opinion on fintechs in the banking space? Should they have the same regulations as traditional banks?
It is important to distinguish between supervisory oversight and regulation. In my view, the focus at this time should be on supervisory oversight. Technology-driven innovation in financial services – or fintech – can lead to faster, more inclusive, more convenient, and overall improved delivery of financial services that is beneficial to end users. It also represents a potential opportunity for firms that can deliver the services in a cost-efficient manner while effectively managing the attendant risks. This can be an expensive proposition so fintech’s impact on a bank’s business strategy and profitability should be a key focus for senior management and the board.
Standard setters, supervisory authorities, and regulators for their part should continue to monitor closely banks’ management of the risks associated with fintech. This includes strategic and profitability risks; operational risk, including cyber risk; compliance risk; and outsourcing and the use of third-party vendors. From a broader perspective, the official sector must also be attentive to any financial stability implications stemming from developments in fintech. The official sector must also continue to examine how best to take advantage of technological advances (i.e. suptech) in order to carry out supervisory responsibilities as efficiently and effectively as possible.
Authorities must proceed cautiously when it comes to the regulation of fintech firms and their activities to avoid stifling innovation or unduly obstructing the benefits they confer. This is not to say that authorities have no role. They do and they could even facilitate innovative technologies and business models for financial services. Authorities have an opportunity to provide a safe environment for banks to test newly developed products through, for example, innovation hubs, accelerators, and regulatory sandboxes.