Digitalising banking supervision: an ongoing journey, not a final destination
Speech by Pentti Hakkarainen, Member of the Supervisory Board of the ECB, at the Supervision Innovators Conference
Frankfurt, 30 November 2020
Europe is undergoing a digital transformation. Last year, the European Commission’s Digital Economy and Society Index (DESI) stood at around 55 on a scale of 0 to 100 – showing both that digitalisation is underway, and that it still has a long way to go. European businesses are becoming increasingly digitalised. In 2019 38.5% of large companies relied on advanced cloud services and 32.7% were using big data analytics. In the manufacturing and energy sectors, artificial intelligence, internet of things, robotics and 3D printing are almost equally widespread. In the banking sector, fintech enterprises are gaining an increasingly important role. We now have over a dozen fintech banks, 600 online payment providers and 200 e-money institutions.
The pandemic has shown us just how essential digital technology is for our economy and our society. Various digital technologies have allowed many of us to continue working, to buy goods and services, and even to enjoy something of a social life despite the lockdown.
These experiences are likely to speed up digitalisation.
The work of supervision has traditionally involved writing reams of reports, carrying out off-site analysis, conducting face-to-face interviews and applying a healthy supply of human “expert judgement”. These are not generally the type of manual processes that can easily be entrusted to machines.
In my remarks today, I will explore how advanced information technology can be harnessed to benefit our supervisory work. I will argue that our kind of work can perhaps benefit even more from advanced use of IT than other sectors where there are more obvious possibilities for automation.
However, harnessing technology to the maximum extent will require us to embark on a journey together to digitally transform banking supervision. Fortunately, for this audience of supervisory innovators, the journey is already well under way. As you help us pioneer the way ahead, I encourage you to enjoy the voyage – and to make the most of the opportunities it will provide to find creative improvements that benefit us all.
Generations of supervisory technology – past, present and future
For an insight into the various benefits that technology can offer to supervisors, we can refer to the four generations of supervisory technology (or suptech for short) identified by the Bank for International Settlements. This approach also allows us to understand where we currently stand in the transformation process, and where we want to go.
The first generation of supervisors relies on analysing and validating data manually while using descriptive analysis. The second generation benefits from the digitisation and automation of certain paper-based and manual processes. Making this switch facilitates deeper diagnostic analysis and the development of richer descriptive insights. The third generation employs big data architecture that allows for data of higher granularity, diversity and frequency than could be accommodated previously. Larger data pools coupled with greater computing power enable more advanced statistical modelling, including predictive analytics. The fourth generation takes automation one step further:
by exploiting natural language processing that matches and merges disparate datasets;
by using machine learning to execute supervisory tasks previously performed by humans, such as responding to and resolving customer complaints; and
by applying artificial intelligence that mimics human thinking, extracts insights from unstructured data and suggests courses of action.
Suptech generations evolve much faster than human generations: instead of the 20 years defined by social science, we’re looking at roughly five years. This will resonate with IT experts, who know how difficult it is to return to the IT industry after a career break because, without constant updating, skills and knowledge soon become hopelessly outdated. In supervision, innovation is speeding ahead, and the next suptech generation will be with us before we know it.
This fast pace of change is nothing to be afraid of. Instead, we should all embrace this dynamic reality as a source of stimulation that will make our careers more interesting and enjoyable in the years to come.
Indeed, our journey of digital transformation will involve an ongoing and constant process of discovering new ideas, testing them out and putting the good ones into practice. In other words, this journey of ours does not have a set final destination where we can stop, settle and relax. Opportunities for technological improvement will continually arise – and we must never stop engaging with them.
My vision for European banking supervision is for us to lead the pack in this endeavour. We should aim to be at the vanguard of the fifth suptech generation, and of the generations that follow after that. Not only do we want to develop and incorporate state-of-the-art technologies in our daily routine, we also want to be digital pioneers and to help drive suptech innovation around the world.
Before explaining how the next steps on this journey will look and feel in more detail, I’d like to outline for you some of the benefits I expect it to yield.
Digital future for European banking supervision
In my view, there are two key elements in the digital future for European banking supervision.
First, I see our supervisory judgement being widely supported by artificial intelligence-driven analysis, which will improve the speed, quality and richness of supervisory data analytics. It will also reduce repetitive tasks and consequently free up time and resources for more value-adding activities that require our supervisors’ brain power.
Of course, any new technology that we deploy must comply with ethical values and standards. All our suptech tools are, and will continue to be, developed in accordance with the EU’s ethics guidelines for trustworthy artificial intelligence.
Second, supervisory reporting will be able to benefit from direct digital gateways to supervised entities and centralised, cutting-edge data architecture. Real-time data pulled from banks’ systems in the form supervisors need will significantly enhance our assessment of the supervised entities and of the risks across the European banking sector as a whole.
These two elements – artificial intelligence and smart data architecture – will naturally help us keep our skills and knowledge up to date and ensure that banks adopt new technologies in a prudentially safe manner. If we don’t evolve at the same pace as the banking industry, we have little chance of delivering high-quality supervision of banks’ digital transformation.
So what are our next steps towards the digital future I’ve just described?
First of all, we need to actively leverage on the structure of European banking supervision, which is a natural innovation ecosystem. Within the Single Supervisory Mechanism, we have 28 participating national competent authorities and central banks that have already developed their own digitalisation strategies, set up innovation labs and introduced suptech tools. We now need to build on the knowledge and multiple initiatives of our members. In 2019 we started to keep a comprehensive inventory that currently contains over 80 suptech applications and use cases. Some of these have already been realised and put into use, others are fleshed-out ideas that are moving into production, and many remain at the concept stage.
This latter category in particular represents a great pipeline of potential productivity gains for European banking supervision. Part of the challenge in the ongoing digital transformation is to ensure that the most promising future projects from this pipeline get the support they need. To achieve this, we’re developing a digital blueprint, which uses a structured approach to prioritisation – based on rigorously evaluating projects against objective criteria. Principally, these criteria seek to assess the business value of the use case and how easy it would be to implement.
This element of structured prioritisation leaves plenty of flexibility for innovation to proceed across the countries participating in European banking supervision, including for projects to be led and executed at different levels. Some projects will be a natural fit for an SSM-wide approach, and these can either be completed centrally by the ECB then rolled out to NCAs, or they can sometimes be carried out efficiently by joint ECB/NCA teams. Other initiatives are more suited to being led at the national level.
Let me give you a few examples of use cases that are moving forward across the different levels.
One excellent example of a project that is being driven centrally with a view to SSM-wide roll-out is the Banking Supervision portal, which was launched in October 2020 and is being further developed by the ECB in collaboration with NCAs.
The innovative element here is the external interface of the Information Management System for the SSM or IMAS for short which can be accessed by supervised banks. Before the portal was launched, applications were often submitted on paper to NCAs, where all the documents were scanned and uploaded to IMAS before the assessment could start.
As you may know, the number of fit and proper assessments performed is always very high. Last year, for example, we were notified of nearly 3,000 individual assessments for board members, key function holders and third-country branch managers. This entailed an enormous amount of paperwork for some NCAs. I know that, at some authorities, staff used to spend dozens of working hours just scanning and uploading documentation all day. Fortunately, those days are gone, as banks upload documents directly on the portal, which allows NCAs to press ahead with assessment.
Another advantage is that banks gain greater transparency on the decision-making process because they are now able to track their applications. Online application forms with mandatory fields mean that supervisors receive more complete applications, which reduces requests for additional documents after initial submission. So not only will banks receive a better service, the portal will also help to shorten processing times.
Many suptech applications have been developed individually by NCAs or the ECB under their own steam. For example, the Oesterreichische Nationalbank has developed statistical cubes and automated data collection with a single, complete description of the reporting data that contains harmonised definitions. The Banca d’Italia applies artificial intelligence-based techniques to process customer complaints. And the Banque de France is developing an algorithm that automatically assesses the compliance of banks’ regular supervisory reports and other submissions and rates the quality of the information using natural language processing methods. And there are many other impressive examples besides these.
At the ECB, we developed something we call Truffle Analytics which was implemented for the Supervisory Review and Evaluation Process, or SREP for short. Based on machine learning, this tool analyses SREP proceedings and decisions and helps to spot similarities across different banks and identify trends. Given that every SREP cycle involves over 5,000 pages of structured text documents, it would be simply impossible to perform such an analysis manually.
Let me conclude by quoting the English science writer and futurist Arthur C. Clarke, who said that “any sufficiently advanced technology is indistinguishable from magic”.
Indeed, if I’d heard what I’m saying now four years ago when I started working for ECB Banking Supervision, I’d have thought that somebody was quoting from a science fiction book. Or at least that this was not for supervisors. I never thought for a moment that supervisors would be pioneers when it came to using modern information technology. In fact, I well remember a discussion on the Supervisory Board three years ago when I intervened to propose AI as a potential solution for one particular case. On this occasion, I was in a minority of one. When I pointed out that even the lifts in the ECB’s main building use AI, the Chair retorted, “...oh, I didn’t think you were being serious.”!
We all can, and need to, use modern technology, and none of it is science fiction any more. What’s remarkable is that we’re already designing this magic ourselves. This work is under way in a joint effort encompassing staff in all 21 countries participating in European banking supervision. Such a user-centric, staff-led approach will pay off, as only supervisors know what kind of technologies they need and why.
This is the way for us to build the new – digital – reality of European banking supervision. This reality will gradually allow us to spend much more time and effort on enriching our supervisory judgement and delivering state-of-the-art supervision.
I’m glad that we’ve set off on this journey, I’m grateful to have all your innovative minds on board, and I hope you enjoy the ride.