Author: Will Towning, Central Banks and Academia Programme Manager
What is Suptech Analytics?
Suptech is the application of innovative supervisory technology by central banks and financial authorities. It has traditionally focused on helping authorities collect and manage data more effectively, as well as digitise and automate certain processes. Such early iterations mostly support descriptive and diagnostic analytics. But more recently, financial authorities are turning to big data and advanced analytics to conduct predictive and prescriptive analytics.
Suptech analytics is the application of technology and analytical solutions which complement and enhance a financial authority’s data management processes. It is helping financial authorities make better use of the data they collect and generate previously unattainable insights.
Why is Suptech Analytics important?
The Global Financial Crisis ushered a number of major changes to the regulatory and supervisory landscape:
- Today, new infrastructure such as cloud computing and application programming interfaces (APIs) are allowing authorities to collect significantly more data in much greater granularity.
- Changes to central bank mandates and the structure of financial authorities have put financial stability into focus.
- Global regulatory advances increasingly require supervisors to have more sophisticated analytical capabilities, such as regular stress testing and near real-time monitoring.
To make sense of the vast, and in some cases overwhelming, amounts of data, financial authorities require advanced analytical capabilities. The financial and economic fallout of the 2008 crisis underscores the importance of building the capacity to anticipate, recognise and address early any difficulties banks or borrowers may be facing.
Financial markets and systems are dynamic and adaptive. They are also highly interconnected and risks can propagate through the system in various ways. The Covid-19 crisis stressed the importance of these characteristics once again. Near real-time monitoring and analytics is now a critical part of effective oversight and decision-making regimes.
Applications of Suptech Analytics
Financial authorities with relatively mature Suptech strategies are deploying analytical capabilities in three key areas: payments data analytics, RTGS stress testing and loan data analytics.
Payments data analytics is fast becoming a core oversight capability.
Liquidity risks generated from unforeseen operational problems or unanticipated changes in market conditions can proliferate rapidly into wider, more damaging issues. Under the Committee on Payment and Settlement Systems (CPSS) and International Organization of Securities Commissions (IOSCO) principles for financial market infrastructures, supervisors are required to have effective analytical tools to identify, measure, and monitor settlement and funding flows on an ongoing basis. This includes the use of intraday liquidity.
Supervisors use payments data analytics to monitor compliance with these regulations. Insights gathered from monitoring bank payment behaviour in near real-time are giving early indications of which banks are facing possible liquidity or solvency issues. Potential undetected problems are being addressed before they escalate.
RTGS Stress Testing is enabling financial authorities to develop appropriate ex-ante responses to potential liquidity or solvency shocks.
Since the Global Financial Crisis, regulatory and supervisory advances have raised the standards for effective liquidity management, requiring institutions to measure, monitor and manage liquidity risk. For example, the CPSS-IOSCO PFMIs require institutions to conduct daily stress tests to determine the amount and sufficiency of their liquidity resources and, as appropriate, reverse stress tests for more extreme scenarios. The International Monetary Fund’s Financial Sector Assessment Programme (FSAP) crisis management expectations also require authorities to maintain effective methods to evaluate liquidity and solvency risks.
Supervisors are using RTGS stress testing to better understand both the operational and financial stability implications of participants’ stresses on the system. The tool is being used to comply with PFMI and FSAP expectations. Such Suptech capabilities are helping answer questions such as:
- What impact would a failed RTGS participant have on other participants?
- Which RTGS participants might face liquidity or solvency issues in the near future?
- How resilient is the RTGS system on any given day to a stressed scenario?
Loan data analytics is revealing new insights about credit risk in the banking system.
The Global Financial Crisis vividly highlighted the importance of a stable banking sector and its role in the provision of credit for economic activity. But the Covid-19 crisis, increasing frequency of natural disasters, and climate change are generating new sources of credit risk.
Financial authorities are using loan data analytics to anticipate, identify and address issues before they threaten the stability of individual banks or the wider system. Authorities are monitoring credit risk sector-by-sector and corporation-by-corporation, spanning both macro- and micro-prudential domains. The suptech capabilities are helping answer questions such as:
- Which banks are exposed to a recently troubled corporation?
- Is there a concentration risk associated with a particular sector?
- How has government policy impacted corporate lending or credit quality?
- Where is the banking system currently positioned on the credit cycle?
Suptech is now a priority for the majority of central banks and financial authorities. Technologies are improving oversight, surveillance and analytical capabilities, and are generating real-time indicators of risk to support forward-looking and judgement based policymaking.
The Covid-19 crisis has served to accelerate interest in the capabilities Suptech is bringing to the fore. Authorities are increasingly discovering how technologies can be applied to new issues such as remote working, crisis response and cyber risk.
To join financial authorities and regulators around the world in transforming their analytical capabilities, or to discuss your Suptech requirements, get in touch with FNA’s Suptech Lead, Adam Csabay: firstname.lastname@example.org