20230928_How tech is shaping banking supervision.txt

 Pretty much all aspects of our lives are linked to technology. There has been a lot of talk about artificial intelligence over the past few months. How can we use new tools or even AI to make our work more efficient? You're listening to the ECB podcast, bringing you insights into the world of economics and central banking. My name is Stefania Secola. Technology and innovation also matter for banks. Digitalization is at the heart of keeping up to speed for them. And if something matters to banks, it also mattered to those who watch them, are banking supervisors. On the one hand, supervisors push banks to innovate and become more digital to stay in good shape. On the other hand, there are risks that need to be managed properly. But what does technological progress mean for our work in banking supervision? Which are the challenges and how exactly can we use technology when supervising Europe's biggest banks. I want to discuss this with my guest today and I'm happy to welcome supervisory board member Elizabeth McCall. Elizabeth. Welcome to the podcast. Thank you. It's an honor to be here today with you. Digitalization is happening fast. Some even say that we are seeing the biggest development ever with AI. The launch of chat-GPT, for example, was a huge milestone. And it sparked a lot of discussion about how our work will change in the future. Elizabeth, what do all these changes mean for banking supervisors? Great question. You know, banking supervisors, you know, live in the real world and, you know, the feeling that I have in one that I talk with them about is you have this sensation that the Earth is literally moving under our feet. It's a physical feeling because we're living in a technological renaissance. The pace at which technology is changing is so fast. It's monthly, weekly, daily changes that are taking place that are changing the society that we live in. So how we work has to change with that. And certainly our supervisors need to be equipped with the technology and the tools and need to understand them so that they can really assess the risks in the institutions. So the key thing for us is to make sure that we harness technology and that we deliver to the fingertips of the supervisors the tools that they need to be able to have a line of sight into the risk that is happening in the financial world, in the banking world. And you know it's very interesting as we begin to develop what we call soup tech tools. We are handing our supervisors different tools that allow them to assess the institutions that they supervise, they're also learning how the banks themselves are deploying those tools as they use this technology and that in turn helps them to understand the risk. But the bottom line is, technology can make the job so much more efficient, can make it easier to see a very complex risk picture by connecting the dots and taking an enormous amount of information and synthesizing it for our supervisors. Yeah that's fascinating it sounds like there's a lot going on and more to come. I want to ask you a special question. Will robot supervise banks instead of our colleagues at a certain point? That's a, you know, I think we all are science fiction readers or have in some way interacting with some of the books and the movies that are out there, what comes to mind. When you ask me that question is that movie X Makina, where the female robot is more intelligent than the human being and scary things happen. I don't imagine a world where the robots take over the jobs of the supervisors and I would even take that a step further. The technology is there for us to harness, for us to use, to make the job of the supervisors easier to do and to make them better at it by equipping them with information. We always have to be aware that human judgment has to play a role in supervision and that the supervisors have to use the technology and use it in a way that allows them to then take the big decisions that they need to take. So information synthesizing, process automation, use of AI, to gather more data. These are all things we should encourage, but always being aware of the risk that we not seed control of the key decisions to the technology. We need our supervisors, all of us, to be in the driver's seat. Absolutely. And let's unpack a bit what that means in practice. I'd like to have some examples. You spoke about data. And technology and innovation are often about data. And this is also the case, known for banking supervision, of course. Our supervisors work with lots and lots of data about banks, transactions, their loans, their profits. Technology can help us collect this ocean of data, analyze it, and make sense of it all. What role does this play for our supervisors, and more importantly, how does it ultimately matter for us as citizens and bank customers? So data is growing exponentially. If you look at the amount of information that any individual supervisor has to assess today versus even last year or the year before that, there's been an exponential growth in the information that's coming across the desk and that has to be understood and analyzed. I talked a little bit before about SupTech where we're equipping our supervisors with tools that really enable them to assess this incredible amount of data and information that's coming across their desk. I'm very proud to say that at the ECB we've been the winner of four Central Banking Awards. That would be the equivalent of the Oscars in our field of business where the teams, and I have nothing whatsoever to do with this, it began long before I was responsible for the digital agenda here at the ECB and the SSM, my colleagues began a work in 2019 to set up a digital blueprint where they really assessed across all of the countries that are the national competent authorities that are part of the single supervisory mechanism here in the Eurozone. And we really looked at how we could collaborate and how we could connect all of the information in the different countries across all of the panoply of institutions we supervised. So what came out of that digital blueprint was a plan from 2020 to 2023 to deliver tools to supervisors. 14 tools went live and some of them, ones called Athena for example, that allows the supervisors to assess over 1,000 supervisors to analyze more than 5 million documents. So this is just an example and it uses natural language processing. It's an AI tool that enables them to assess that information. That's one of the ones that won an award. And there's another one known as Agora. And that Agora is a tool that offers a single data lake for the European banking supervision. Agora, wow. I like that name. It's just like the central public space in ancient Greek city states. very strong image. There's a, that image is the perfect image for what Agora seeks to do. It gathers in a single place all the relevant information, the statistical data and commercial data that the banks are submitting to us, which have to be analyzed, and otherwise they were scattered across a wide variety of different systems. and that meant it was difficult for a supervisor to see across the different systems and then make meaningful conclusions about what that data was delivering to them so they can work the supervisors can now work using the single data lake Agora, very efficiently across data sets, and that makes them better able to do analysis. Interesting, interesting. Another important concept is speed. Technology is a lot about making things faster and more efficient. I want to zoom in one area where you're using AI to speed things up. and that's what you call fit and proper supervision. In other words, when you make sure that banks are run by the right people and that sounds reassuring, can you tell us a bit more about this? You're touching on a cornerstone of supervision and this is you know very important for clients of banks to know that the European Central Bank supervisors look very carefully at the governance of an institution. For me, it's been an area throughout my entire career that I've always zeroed in on, that if you have good governance and you have a well-managed bank, then you have a safe and sound institution that protects the livelihoods of our citizens in their accounts that they hold at that bank. So making sure that we harness technology to be able to assess whether those that are running the banks are fit and proper to do that, meaning that then they will be good stewards of your money., we need tools to help us to do that, meaning that then they will be good stewards of your money. We need tools to help us to do that. So there's another tool that we have first envisioned and then now created and now implemented being used by the supervisors. It's known as Heimdahl and it's used for the fit and proper assessments. So so what happens in the governance process in the fit and proper process is that candidates are put forward to serve in board positions, to serve in senior roles as senior leaders of the institution, and we have a responsibility to assess the worthiness of those individuals. Do they have the experience? Do they have the right qualifications? Will they be able to contribute with integrity to running those institutions? And so Heimdahl processes, translates, pre-analyzes, and enormous amount of data that we get documents about those individuals and streamlines it so that... and this fits very well with what I said before, the information is then synthesized and presented to the supervisors so they can use their judgment and make the determinations about the appropriate governance for the institutions with the persons that they're assessing. So the human judgment is still there, but the process that is, that needs to be done to assess all the information about those candidates is far more efficient using the advances in technology. Using Heimdel, another name I like, it makes me think of the Avengers movie where Heimdel is the superhero who sees and hears everything. It's of course inspired by the Nordic God. So another nice image for our supervisors. So we have a Greek name, we have a Nordic name, we're right here in the euro area with examples of really incredible tools that are making the ECB do an effective job. And this is amazing because I would like exactly to speak about cooperation, right? So about working together. Again, it's people who are ultimately behind progress and new tools. The financial system is global. Everything is interconnected and we've seen it with every crisis. Risks can spread very quickly and cyber risk is a good example. How do you work together with other supervisors on that? You are really touching on the way that the single supervisory mechanism is constructed, which is quite an awesome thing. You know, if we go back, we're only a supervisor that is 10 years old, and coming out of the great financial crisis, we created the single supervisory mechanism, bringing together with great collaboration all of the national competent authorities in the different countries and a centralized function here at the European Central Bank to together collaborate and conduct supervision across the Eurozone countries. So how can such a process operate? We are 21 members of the Single Supervisory Board right now that includes the Eurozone countries and Bulgaria that has opted to use the supervision at the ECB. It means that we have to, we're very challenged to have teams working together and to make it very practical for the listeners, the way that this works in practice is we have something called joint supervisory teams that are comprised of supervisors that sit here in Frankfurt at the ECB, but also very importantly with colleagues that are sitting in the different countries across the SSM, the single supervisory mechanism, as part of those teams, to together conduct the responsibilities that we have within our mandate to supervise the institutions, the significant institutions. So that creates a challenge and that challenge is we have to be able to collaborate together. We have tools to foster that collaboration and enable it. You raise the you know the the very correct risk that's one of our key concerns today, which is cyber risk, especially in the geopolitical environment that we now operate in with the terrible war by Russia and Ukraine. And so we know that the risk of cyber attack is higher than it was previously in this context. So we're using these tools to be able to report incidents on that are occurring across the Eurozone to make sure that this information is available also to the institutions that we supervise so that we can see whether the risk is rising. And we can enable the banks themselves to put the right fixes in place and to buttress their system. So far, we haven't seen a very significant rise in-incipient-inc the banks themselves to put the right fixes in place and to buttress their system. So far we haven't seen a very significant rise in cyber incidents but we need to be ready. Absolutely. Thank you so much Elizabeth. So I think this takes us a bit towards the end of our chat and at this point we always have a question for all our guests and and that's a hot tip linked to the topic we're discussing today. So supervisory technology and innovation. Elizabeth, what do you have for us today? So first of all, my my hot tip would be to don't be afraid of using this technology. Everyone. Earlier this year, ChatGPT was launched, the new artificial intelligence tool that allows anyone to go on to their smartphone and ask ChatGPT, any question that they like. Do it. It's fun. It's not scary. It's a very learning thing to do, and you will find, I think, as I did, that the tool doesn't always have the right answers and you may even I had a situation the other day where I asked the tool a question and I I saw the answer and I said back to it are you sure that there aren't tests involved with that particular thing and it said oh I apologize indeed there are tests involved. So, and it's a very kind speaking engagement that you have with the tool. So first thing is to use it. But the second thing is, you know, and I said this in the beginning, we're living in this technology renaissance. You know, I have this physical feeling of the earth moving under our feet. And I think it's inspiring, this, you know, the human ability to innovate, and I think of the Little Prince, the book by Antoine de Saint-Exubiri, and there's a quote that comes to mind, and it's a rock pile ceases to be a rock pile, the moment a single man contemplates it, bearing within him the image of a cathedral. And I think of building cathedrals with the innovation that humans are able to do today. Lovely, lovely. Thank you so much. This brings us to the end of this episode. I want to thank Supervisory board member Elizabeth McColl for joining the conversation today. Thank you so much. The listeners, check out the show notes for more on this topic. You've been listening to the ECB podcast with Stefa. Dear listeners, check out the show notes for more on this topic. You've been listening to the ECB podcast with Stefania Secola. If you like what you've heard, please subscribe and leave us a review. Until next time, thanks for listening. And as we say in Finnish, Kuleh Messin.