The Basel Committee on Banking Supervision published a report which considers the implications of the ongoing digitalization of finance on banks and supervision that takes stock of recent developments in the digitalization of finance.
The report considers both the benefits and risks of new technologies and the emergence of new technologically enabled suppliers on the provision of banking services. It identifies eight implications for banks and supervisors relating to macro-structural elements, specific digitalization themes, and capacity building and coordination.
It reviews: the use of technologies by banks such as application programming interfaces (API), artificial intelligence (AI) and machine learning (ML), distributed ledger technology (DLT) and cloud computing; the role of new banking competitors and business models; the potential risks for banks and financial stability arising from the digitalization of finance and trends; the various strategies and practices that are, in principle, available for banks to mitigate risks; regulations and supervisory frameworks that have evolved in response; and outlining the regulatory and supervisory implications for both banks and banking supervisors also with attention on implications of specific digitalization themes.
For distributed ledger technology (DLT), settlement processes and repo were among “notable use cases”, for example the tokenization of financial instruments such as intraday repo options and bonds, while on the other side of the balance sheet, it was noted that banks are also experimenting with tokenized liabilities (including deposits) and stablecoins with a highlight on EUR CoinVertible from SocGen Forge.
One of the specific themes related to the use of service providers, which has increased and is expected to continue doing so. Banks are engaging with service providers (which can include third parties, intragroup entities and other parties further along the supply chain) to deliver products and services across different parts of the banking value chain, and to enhance their technological capabilities.
“Supervisors may also have a role to play in identifying common points of exposure across banks to operational risks or vulnerabilities, including reliance on common service providers. Supervisors should assess potential systemic risks arising from the concentration of services provided by specific service providers to banks,” the report said.