Banks, technology companies and regulators should work together to find new ways of categorising risks emanating from burgeoning technology, which could affect a lender’s regulatory capital requirements, a new research paper urges. The explosion in the past two years in the banks’ use of the cloud, artificial intelligence and blockchain technology means lenders’ traditional ways of managing risks — and regulators’ means of supervising them — are outmoded, reads the paper by industry lobby group UK Finance and management consultancy Parker Fitzgerald.

The paper, published days before sweeping EU legislation around data protection is introduced, argues that while these technologies bring efficiency and a way for banks to move off notoriously inefficient legacy systems, they also carry new risk. Regulators already force individual banks to hold more capital if they judge that they are exposed to more operational risk, which includes cyber security and how a lender manages its relationship with outsourcers.

“As firms adapt so too must the regulatory principles under which they operate,” the paper stated. “This process should consider both how to achieve a consistent treatment internationally and also how capital charges could be evolved to place greater emphasis on the effective management of technology and cyber risks.” The paper comes as financial groups are increasingly storing their data in the cloud.

They are also exploring how artificial intelligence and distributed-ledger technology, which underpins cryptocurrencies such as bitcoin, might inform business decisions and make transactions more efficient, from insurers using machine learning in calculating premiums, to clearing houses using blockchain to make the settlement of securities and derivatives quicker and cheaper. This has caught the attention of financial regulators, which are increasingly grappling with how to effectively supervise these new ways of doing business.

Watchdogs are also worried about the concentration risk of three big tech companies, Microsoft, Amazon and Google, dominating cloud provision for the world’s biggest banks and insurers. Banks are also in an increasingly tense relationship with their tech providers as “this dynamic based on collaboration may well give way to a more competitive relationship in the future,” the paper said. Read more from…

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