Given these new challenges, Central Banking needs urgent transformation of their IT Infrastructure, systems, and Organization in order to effectively deliver on its role as a Banking regulator. The legacy IT estate, tools, methods & processes will not be adequate to meet with the new world challenges and can create serious disruption in delivering Central Banking functions across the world.
Many Central Banks have been proactive in recognizing this new reality by taking transformation initiatives, however the pace of reforms and maturity differs across countries and regions.
There are many aspects Central Banks will need to consider as part of the Technological transformation to effectively perform their function:
1. Data, Artificial Intelligence and Analytics:
The world is generating massive data every day and Banking is not an exception. Central Banks must gear up to manage and analyze this data generated by Banking system and use it effectively for decision-making. Central Banks can no longer just rely on traditional economic data indicators for monetary policy decisions but will need to use AI and Advanced analytics too for decision making. But handling the available volume and new sets of data is no trivial task and needs special focus on Data, AI and Analytics technology. These new technologies can provide significant edge in enforcing policies around Anti Money Laundering, KYC and Foreign Exchange controls and sanctions/restrictions. European Central banks are already evaluating these technologies to make their role more effective and aid in enforcement of rules.
Cybersecurity is recognized as a major threat across Banking and every major bank has been subject to variety of cyberattacks and these attacks are expected to intensify in the future. Central banks must gear up to challenges of Cybersecurity by devising policies for Banks to strengthen Cybersecurity as well as strengthen their own IT systems and process to effectively tackle Cyber-attacks. Counties payment systems are especially prone to Cyber-attacks and need to be tackled effectively else these attacks have potential to disrupt the entire financial stability of any country. Guidelines on Open Banking standards, Payments directive, Strong customer authentication, Dynamic Linking standards, digital applications security as well as encryption standards for data both at rest and in transit are steps in this direction.
3. Issuance and Regulation of Cryptocurrencies:
Cryptocurrencies are no longer a topic of debate but a reality. Crypto Assets are gaining importance rapidly and more and more financial institutions are investing part of their assets in Crypto Assets. Central Banks have to gear up policies, processes and address technology issues, maintain and supervise Central Bank Digital Currencies (CBDC). A central bank digital currency (CBDC) would use digital tokens and blockchain technology and would provide alternative to physical currency. Many Central Banks like The Bank of England (BOE), China’s People’s Bank of China (PBoC), Bank of Canada (BoC), The Monetary Authority of Singapore and many more are actively working on policies for introducing a central bank-issued digital currency.
4. Digital Delivery of Central Banking Services:
Traditional model of delivering Central Banking services is changing. From implementing monetary policy to obtaining data and reports from Banking and financial participants must be done in a digital manner. Traditional mode of paper records and collection of data is no longer efficient and Central Banks must ensure they design systems to enable Digital delivery of services. This includes Digital channels to interact with banking participants as well as adapting Digital technology like Intelligent workflows to improve internal processes. The IMAS portal of European Central Bank (ECB) allows banks supervised by the ECB to submit information related to supervisory processes, track their status and exchange information with supervisors.
5. Adapting new age Cloud Infrastructure:
Central Banks must strengthen their legacy infrastructure and make it resilient, scalable, agile and cost effective by adapting Cloud technology. Many Central Banks like Monetary Authority of Singapore, the Netherlands central bank DNB, have started taking steps in adapting Cloud infrastructure. Across the world, a large number of private banks as well as State owned banks have taken steps to cloudify their infrastructure. Central Banks must provide clear guidelines to Banks on adoption of Cloud technology and coach Banks on concerns over data security, data residency, data recovery, third party risks and obligations during an investigation. Several regulators have published guidelines for banks to adopt cloud services while making it clear that banks cannot relinquish accountability of the outsourced IT services.
Banking has evolved considerably in the past few decades fueled by technology innovation and Central banks must also evolve, realize and understand the steps in adapting Cloud infrastructure. Success with process re-engineering and efforts at digitalization with emerging technologies such as artificial intelligence are dependent on cloud computing. While some organizations are apprehensive about using the cloud, it is an integral component of today’s service-delivery model and it enables banks to tap into new market opportunities and access new delivery channels
Across the world, a large number of private banks as well as State owned banks have taken steps to cloudify their infrastructure. Central Banks must provide clear guidelines to challenges and changing role in this world so as to effectively regulate the markets. They need to be proactive to understand, evaluate, adopt and as well as prescribe new age technologies to effectively play the role of supervisors of the Banking and Financial system and must remain in the forefront of technological innovation.
Central Banks are expected to take a leadership role here in setting standards and frameworks and will require to partner with IT firms and niche vendors (FinTechs, SupTechs & RegTechs) in the technology space to counter these threats and make adoption more seamless.