Key Takeaways
- Financial regulation and supervision are under scrutiny due to the ongoing banking turmoil in the US and Europe.
- Despite digitization, financial reporting has remained relatively unchanged for decades.
- Regulation technology, or reg-tech, can streamline the exchange of financial information between banks and their supervisors, reducing risk.
- Reg-tech enables a ‘pull’ rather than ‘push’ information exchange, making financial information exchange faster and less error-prone.
- Fin-tech CEO Diana Paredes believes reg-tech can revolutionize financial industry supervision.
Reg-Tech: A Solution to Avert Future Banking Failures
As the banking turmoil intensifies in the US and Europe, financial regulation and supervision are under scrutiny. Tighter regulations are likely to follow recent events. Regulation technology (reg-tech) offers a solution to improve financial reporting and risk management, potentially averting future banking crises.
Reg-Tech Explained
Traditional financial regulatory systems, whether in the US or Europe, rely heavily on the judgment and competence of bank regulators. Financial reporting has remained relatively unchanged for decades, even in the digital era. Regulators monitor and supervise the global financial industry based on reports submitted by banking firms.
Reg-tech, on the other hand, enables a ‘pull’ rather than ‘push’ information exchange. Data is pulled directly from firms, eliminating the need for reports. This makes financial information exchange faster, more agile, and less prone to human error. Reg-tech allows the financial industry to move towards a regulator-led, pull-based system, providing real-time analysis, modeling, and trend projection for more effective industry supervision.
Diana Paredes, CEO and Co-founder of Suade, sees reg-tech as a solution where “news, analytics, and calculations are fast and pretty much out of the box.” The recent banking crisis, partly attributed to deregulation in the US, highlights the need for more agile and frequent reporting.
Increasing Liquidity Reporting
Paredes believes that the current banking crisis will lead to increased liquidity reporting, both in volume and frequency. The concept of ‘proportionality’ – adjusting regulatory weight based on the size of the bank – has been discussed in recent years. However, Paredes believes that the current situation will drive dramatic changes in regulatory activity, making deregulation less likely.
Reg-Tech’s Role in Supervision
Reg-tech could play a crucial role in the future of financial supervision. Paredes envisions a system where “regulators could have straight access to banks and do a lot of this analysis without notifying the markets or making any kind of panic around it.” This would allow for a more discreet and effective form of supervision, potentially preventing contagion due to rumors or loss of confidence.
As the financial industry navigates the current turmoil, reg-tech may emerge as a vital tool to improve financial reporting, risk management, and overall industry supervision, potentially preventing future banking crises.
