<\/p>\n
Increasing interconnectivity increases complexity and opacity.<\/p>\n
Digitalisation is creating new vulnerabilities and amplifying existing risks for banks, warned the Basel Committee on Banking Supervision in a new report.<\/p>\n
Many of the new technologies and their applications are data intensive and require new data sources, or require leveraging existing data in new ways, the committee noted. This may exacerbate banks\u2019 data governance challenges, it warned.<\/p>\n
\u201cIn particular, the volume, velocity, variety, quality and integrity of data may heighten data governance risks,\u201d the committee said in its report \u201cDigitalisation of finance\u201d published in May 2024.<\/p>\n
The Basel Committee on Banking Supervision further noted that digitalisation also raises regulatory and supervisory implications for both banks and supervisors.<\/p>\n
\u201cThese include monitoring evolving risks and adopting a responsible approach to innovation; safeguarding data and implementing robust risk management processes; and securing the necessary resources, staff and capabilities to assess and mitigate risks from new technologies and business models,\u201d the committee said in a press release announcing the report\u2019s release.<\/p>\n
The report particularly highlighted data risks, noting that the use of alternative data in combination with artificial intelligence and money launder applications may exacerbate bias and explainability concerns.<\/p>\n
\u201cIn addition, the use of new data sources or techniques may also present challenges in integrating these processes with legacy risk management processes,\u201d it added.<\/p>\n
For example, the use of new data to underwrite credit products may be challenging to integrate with existing credit loss modelling when assessing the<\/p>\n
adequacy of allowances for credit losses, the committee said.<\/p>\n
Another risk that can be amplified were liquidity risks.<\/p>\n
\u201cFor example, retail customers could be easily confused if banks were to offer non-deposit forms of money (stablecoins) alongside deposits, and mistakenly assume that they have the same protections. Any event that prompts retail customers to lose confidence in a non-deposit form of digital money may spillover to a broader loss of confidence in bank deposits,\u201d the committee said.<\/p>\n
The committee also highlighted third-party risks. The third parties could reportedly amplify issues relating to information and cybersecurity, privacy, and operation resilience.<\/p>\n
\u201cBank oversight of third parties can be limited in cases where banks have no contractual relationship with the third party, or where the third party has no regulatory authorisation. Banks may find it challenging to exercise effective<\/p>\n
oversight and monitoring over these third parties,\u201d The committee noted.<\/p>\n
On the other end, fintechs\u2019 reliance on banks to hold reserves or maintain operating accounts could precipitate liquidity or other stress on the<\/p>\n
bank\u2019s financial condition if the fintech were to fail or to leave suddenly, the committee said.<\/p>\n
However, the committee also recognized the advantage posed by partnerships and banking-as-a-service to banks and other financial institutions.<\/p>\n
\u201cThese partnerships can improve banks\u2019 operational efficiency, expand their product offerings and distribution channels, and strengthen customer relationships,\u201d the committee wrote.<\/p>\n
Other risks highlighted include financial regulation risk; fraud-related risks; compliance risks; legan uncertainty; cyber risk; technology risk; and model risks.<\/p>\n
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