• The Basel Committee has published a report on the implications of the digitalisation of finance for banks and supervision.
• The report considers both the benefits and risks of new technologies and the emergence of new technologically enabled suppliers for the provision of banking services.
• It identifies eight implications for banks and supervisors relating to macro-structural elements, specific digitalisation themes, and capacity building and coordination.

The Basel Committee on Banking Supervision published a report that considers the implications of the ongoing digitalisation of finance on banks and supervision. The report builds on the Sound Practices: implications of fintech developments for banks and bank supervisors published in 2018, and takes stock of recent developments in the digitalisation of finance.

The report reviews the use of key innovative technologies across various aspects of the banking value chain, including application programming interfaces, artificial intelligence and machine learning, distributed ledger technology and cloud computing. It also considers the role of new technologically enabled suppliers (eg big techs, fintechs and third-party service providers) and business models.

While digitalisation can benefit both banks and their customers, it can also create new vulnerabilities and amplify existing risks. These can include greater strategic and reputational risks, a larger scope of factors that could test banks’ operational risk and resilience, and potential system-wide risks due to increased interconnections. Banks are implementing various strategies and practices to mitigate these risks, but effective governance and risk management processes remain fundamental.

Digitalisation raises regulatory and supervisory implications for both banks and supervisors. These 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.

The Committee will continue to monitor developments related to the digitalisation of finance. Where necessary, it will consider whether additional standards or guidance are needed to mitigate risks and vulnerabilities.

Source: BIS