Better technology would bring better banking supervision

The International Monetary Fund is concerned about the lack of progress in implementing bank reforms and the need for “greater urgency toward international co-operation”. Major new policies to meet the G-20-inspired reform programme have been agreed: higher levels of capital, liquidity requirements and resolution regimes. There has also been institutional progress with the establishment of supervisory colleges for 28 global systemically important financial institutions and a longer term structure for the Financial Stability Board (FSB).

Progress in collecting and analysing globally standardised data of relevance to financial stability has, however, been slow. Even the very first step of agreeing the nomenclature for reporting entities, the Legal Entity Identifier programme, is only now making progress. Work on the next and more complex step – the Implementation Plan for Unique Product Identifiers – has hardly started.

Masses of additional data will nevertheless be collected by national supervisors but its usability in assessing global systemic risks is problematic. Why is this? Apart from the complexities involved in any international reform, there are three underlying reasons: the limited resources available to supervisors, especially international bodies, in relation to the role they now play; a focus on national solutions; and a very traditional approach to “international co-operation” that is unsupported by new technologies.

Limited resources

Large national supervisors generally have operational budgets of about $1bn. There is no true international supervisor but the Bank for International Settlements (BIS) in Basel – the host organisation for the Basel Committee on Banking Supervision and the FSB among others – had a budget of just $340m in 2012. Such bodies rely extensively on borrowing resources from national supervisors. When it comes to technology support, the combined IT budgets of the seven largest supervisors are less than 10% of the resources available to just one global bank.

The FSB has asked national supervisors to devote more resources to monitoring of global systemically important financial institutions but its own budget remains nominal. There are some signs of progress in gaining resources commensurate with the task. The US’s new Office for Financial Research already has a budget of $158m and the combined budgets of the UK’s new Financial Conduct Authority and Prudential Regulation Authority represent a 24% increase compared to the UK's now defunct Financial Services Authority [a 36% increase in their IT budgets].

But unless national supervisors change the way that they co-operate internationally, there will be duplication, inconsistency and wastage. The financial crisis was international and requires international solutions, not a series of partially coordinated and hitherto underfunded national approaches.

New approaches

One of the major original recommendations by the G-20 following the crisis was to “intensify co-operation between international supervisors”. This has been interpreted in the traditional way to mean more meetings, more working groups and more conferences. In all the papers produced for G-20 meetings there are no references to the role technology could play in facilitating co-operation, and no consideration of making internationally coordinated technology investments. The FSB is only now starting the first phase of its Data Gaps Project to create a secure hub hosted by the BIS to store and manage data.

International companies have a variety of means to stimulate co-operation between national business units. They range from secure online communities sharing data, voices and videos to networks of telepresence [high-definition, immersive video conferencing] rooms to allow meetings to resolve problems quickly without the need for travel.

International supervisors could start to develop such means, potentially with the support of the banks they supervise. Interoperability between collaboration technologies is much improved, allowing national supervisors to make independent choices within internationally agreed parameters. If banks and regulators formed a 'collaboration community' with secure access to a range of tools and data in near real time, there would be more frequent and effective dialogue at all levels.

While the BIS has tested telepresence meetings on behalf of its hosted organisations, they can only work effectively if the majority of members have the technology to participate. Some supervisory and trade bodies provide online services to their communities but they tend to be disparate, lacking in investment and, therefore, under-used. If the global supervisory community is serious about monitoring and managing systemic risks more effectively in future, it needs to invest in technology support, and not just demand more data and tougher regulations. 

Angus Hislop leads Cisco’s internet business solutions group for banking.