RBI asks banking supervisors to get abridged with latest tech tools

The Reserve Bank has called upon banking supervisors to get abridged with the latest technological tools so that their capabilities are enhanced enough to meet the challenges of the fast-evolving financial technologies.

As banks adopt new technologies, it is essential for supervisors to be equipped with the necessary knowledge, skills and resources to effectively supervise and regulate these advancements, Reserve Bank deputy governor Mukesh Jain told the 25th SEACEN-FSI conference of the directors of supervision of Asia-Pacific economies here.

Jain, who is in charge of the banking supervision at the central bank, further said this is all the more necessary as in today's rapidly evolving banking landscape, supervisors cannot afford to stay behind the curve and therefore it is essential for banking supervisors to stay abreast of industry developments, enhance their supervisory techniques, and strengthen risk management practices to address emerging challenges.

The best way to achieve these objectives is capacity building by equipping supervisors with the right skill sets and tools is an ongoing process so that they are empowered to fulfil their roles in maintaining the stability and soundness of the banking sector.

He further said supervisors should stay abreast of technological advancements, monitor the evolving risk landscape, keep pace with regulatory developments, and adopt the latest analytical tools, which will help supervisors effectively fulfil their role in maintaining financial stability, protecting consumers, and fostering a resilient banking sector.

He also called for learning from past experiences and collaborating across jurisdictions, which can help better navigate the challenges ahead.

Noting that the recent bank failures abroad have made the task of banking supervisors all the more challenging, Jain said that given these new challenges, supervisors have to find a delicate balance between ensuring financial stability and addressing the moral hazard implications of their actions on the other.

By implementing prudent regulations, conducting effective risk-based supervision, promoting transparency, doing timely interventions, and maintaining independence and accountability, supervisors can strive to strike an optimum balance that fosters stability, while minimising moral hazard risks, ultimately contributing to a resilient and sustainable banking sector, which can support the real economy, the commercial banker turned central banker said.

Noting that banking supervisors have come a long way from being mere regulatory compliance enforcers to becoming risk assessors, the deputy governor said new supervisory tools aim to instil a forward-looking and calibrated supervisory approach based on principles of proportionality and risk perception. This approach involves a constant focus on emerging risks and the business models at the supervised entities.

On the technology revolution sweeping the financial world, especially the emergence of an army of fintechs, he said this is pushing traditional banks to embrace digital transformation and become agile and innovative.

While technology brings numerous benefits such as increased efficiency and improved customer experiences, it also presents varied risks. Banks must, therefore, carefully manage tech adoption by ensuring adequate controls and safeguards to address potential vulnerabilities, he said, adding the reliance on third-party technology providers requires robust due diligence and risk management practices to mitigate the risks associated with outsourcing.

He also flagged the urgent need of protecting data, saying that closely linked to technology is the issue of data. Banks possess a wealth of data that can be leveraged for various purposes. These datasets cover customer information, financial transactions, credit histories, and more.

While there are significant opportunities to derive value from this data, it is crucial to acknowledge and address the inherent risks associated with its handling, including those relating to data breaches and privacy concerns, Jain said, adding thus, more than ever before, there is a need for both banks and banking supervisors to build capacities to handle technological advancements and navigate uncertain waters. This would entail enhancing knowledge and skills and investing in technology with a long-term vision.

Recalling that the Reserve Bank over the years has employed various analytical tools to enhance the effectiveness of supervisory frameworks such as early warning system, stress testing models, vulnerability assessments, cyber key risk indicators, phishing and cyber reconnaissance exercises, targeted evaluations of compliance with KYC/AML norms and micro-data analytics, among others.

Additionally, the Reserve Bank is in the process of adopting advanced analytics, artificial intelligence and machine learning into supervisory data, while taking necessary safeguards, to gain even deeper insights into the operations of supervised entities.

Also, realising the importance of adequate skill and capacity building in supervisors, the Reserve Bank has set up a dedicated College of Supervisors, which has been conducting a large number of general and specialised training programmes, he concluded.