The next SupTech generation: a time for collaboration, a hub and spoke approach

Emerging financial supervision (SupTech) technology applications have been increasing since the impact of the pandemic. During the COVID-19 outbreak, national competent authorities (NCAs) followed the same market trends that encouraged the adoption of new fintech solutions (Beerman et al., 2021). However, the implementation of tools for day-to-day supervision has only just started. The development of SupTech still faces innumerable obstacles, which mainly come from the internal structure of NCAs – a lack of budgets, poor data quality, reporting issues, inappropriate IT infrastructure, and legal and procurement constraints (Di Castri et al., 2022). These barriers to adopting emerging technologies in supervisory practice underline how developing skills and knowledge is fundamental in order to tackle technology and sustainability issues that are reshaping the financial sector (Crisanto et al., 2022). Indeed, the combination of the cost of developing SupTech technologies and the growing need for capacity development create a crucial dilemma for NCAs: whether to build in-house solutions or buy from external vendors.

This build vs. buy dilemma is difficult to solve as in Europe the high heterogeneity in the sizes of NCAs and their resources can create significant gaps in the adoption and development of SupTech, creating a need for cross-border collaboration. On the one hand, NCAs are all facing the same day-to-day supervisory challenges in automating and improving their capabilities and practices. On the other hand, the supervisory and regulatory architecture in Europe has a hub and spoke structure, which needs to be replaced in order to develop and adopt SupTech. (Carletti et al., 2021; Gopalan et al., 2021). It would be essential to define tech hubs inside the current supervisory architecture. They should be capable of designing and creating blueprint SupTech solutions that NCAs could plan in order to reduce the cost of the technology and generate economies of scale (Eisenbach et al., 2022). Basically, capacity development will continue to play a significant role in the evolution of SupTech, and initiatives such as the EU Supervisory Digital Finance Academy will be crucial not only to develop skills but also to generate new ideas for technology solutions and facilitate knowledge dissemination and cross-border collaboration.

References

Beerman, K., Prenio, J. & Zamil, R. (2021). SupTech tools for prudential supervision and their use during the pandemic. BIS, FSI Insights on policy implementation No. 37.
Carletti, E., Dell’Ariccia, G. & Marquez, R. (2021). Supervisory incentives in a banking union. Manage-ment Science, 67(1), 455-470.
Crisanto, J. C., Prenio, J. & Singh, M. (2022). Emerging sound practices on supervisory capacity devel-opment. BIS, FSI Insights on policy implementation No. 46.
Di Castri, S., Grasser, M., Ongwae, J., Mestanza, J. M., Daramola, D., Apostolides, A., Christofi, K., Rowan, P., Wu, T. & Zhang, B. (2022). The State of Suptech Report 2022, University of Cambridge.
Eisenbach, T. M., Lucca, D. O. & Townsend, R. M. (2022). Resource Allocation in Bank Supervision: Trade-Offs and Outcomes. Journal of Finance, 77(3), 1685-1736.
Gopalan, Y., Kalda, A. & Manela, A. (2021). Hub-and-Spoke Regulation and Bank Leverage. Review of Finance, 25(5), 1499-1545.

This blog post has been produced in the framework of the EU Supervisory Digital Finance Academy (EU-SDFA).

The EU Supervisory Digital Finance Academy (EU-SDFA) is a TSI flagship initiative aimed at supporting financial supervisory authorities in coping with the risks and opportunities associated to the use of advanced technologies in the financial sector. The European Commission – DG Reform has established the Academy in cooperation with the three European Supervisory Authorities (EBA – ESMA – EIOPA) and the Florence School of Banking and Finance part of the Robert Schuman Centre of the European University Institute (FBF-EUI).