Humans keeping AI in check – emerging regulatory expectations in the financial sector
FSI Insights No 35, August 2021. Artificial intelligence (AI) has the potential to significantly improve the delivery of financial services. Several financial authorities have recently began developing frameworks, outlining their expectations on AI governance and use by financial institutions. These frameworks converge on common guiding principles on reliability, accountability, transparency, fairness and ethics.
Regulating big techs in finance
BIS Bulletin No 45 – Regulating big techs in finance – Big tech firms entering financial services can scale up rapidly with user data from their existing business lines in e-commerce and social media, and by harnessing the inherent network effects in digital services. In addition to traditional policy concerns such as financial risks, consumer protection and operational resilience, the entry of big techs into financial services gives rise to new challenges surrounding the concentration of market power and data governance. The current framework for regulating financial services follows an activities-based approach where providers must hold licences for specific business lines. There is scope to address the new policy challenges by developing specific entity-based rules, as proposed in several key jurisdictions – notably the European Union, China and the United States.
AML and CFT in banking – Executive Summary
AML and CFT in banking – Executive Summary
Fiscal and monetary policy interactions in a low interest rate world
We analyse fiscal and monetary policy interactions when interest rate policy is hampered by the zero lower bound (ZLB) in an environment where expectations are formed with perpetual learning.
Covid-19 and bank resilience: where do we stand?
A forward-looking view on bank resilience can be obtained through a combination of regulatory capital ratios, market valuations and insights from stress tests. Banks appear to have avoided the losses that once seemed likely given the severity of the pandemic shock, due in large part to policy support. While market valuations have largely recovered to pre-pandemic levels, a weaker tail of banks continues to struggle with anaemic profitability and potential for credit losses. The resilience of these banks could be tested if credit losses materialise following the winding down of policy support.
Global reflation ?
Inflation has risen in many countries. In conjunction with a rebound in GDP growth and evidence of significant bottlenecks in some sectors, this has prompted concerns that the low inflation era of recent decades could be nearing its end. A closer look at the data reveals that the pickup in inflation can be ascribed largely to base effects, increases in the prices of a small number of pandemic-affected items and higher energy prices. A common thread through these causes is that their effect on inflation is likely to be temporary. A more persistent increase in inflation would likely require a material pickup in labour costs and an unmooring of inflation expectations. However, wage growth remains contained and the medium-term inflation expectations of professional forecasters and financial markets show little sign of de-anchoring. These developments are consistent with medium-term inflation moving towards central bank targets.
Stress-testing banks for climate change – a comparison of practices
FSI Insights No 34, July 2021. This paper discusses the challenges that emerge when trying to adapt traditional stress tests to banks’ climate-related risks. These challenges relate to: (i) data availability and reliability; (ii) the adoption of very long time horizons; (iii) uncertainty around future pathways of key reference variables covering physical risks (eg floods, temperature increases and rising sea levels); and (iv) uncertainty relating to transition risks (eg changes in climate policies, technologies or consumer preferences).
Fintech and the digital transformation of financial services: implications for market structure and public policy
Economic frictions such as information asymmetries and economic forces such as economies of scale and scope give rise to financial intermediaries. These frictions and forces also shape market structure. While technological advances are not new to finance, digital innovation has brought major improvements in connectivity of systems, in computing power and cost, and in newly created and usable data. These improvements have alleviated transaction costs and given rise to new business models and new entrants. …
Central bank digital currencies for cross-border payments
Joint report to the G20 by the Committee on Payments and Market Infrastructures, the BIS Innovation Hub, the International Monetary Fund (IMF) and the World Bank. The report analyses how CBDCs could facilitate enhanced cross-border payments, and how practical efforts are taking these considerations forward.
Limits of stress-test based bank regulation
This paper studies exchange-traded funds’ (ETFs) price impact in the most ETF dominated asset classes: volatility (VIX) and commodities. I propose a model-independent approach to replicate the VIX futures contract. This allows me to isolate a non-fundamental component in VIX futures prices that is strongly related to the rebalancing of ETFs. To understand the source of that component, I decompose trading demand from ETFs into three parts: leverage rebalancing, calendar rebalancing, and flow rebalancing. Leverage rebalancing has the largest effects. It amplifies price changes and exposes ETF counterparties negatively to variance.