Jacqueline Loh deputy managing director Monetary Authority of Singapore talks about innovation.
Innovation is transforming the financial sector. Digitalisation of financial services has made it easier for financial institutions to expand their global footprint, opened the door to new players, and set the stage for increasing cross-border connectivity.
The adoption of new technologies has become more prevalent and is fundamentally changing how the financial system functions, states Jacqueline Loh deputy managing director (corporate development) at the Monetary Authority of Singapore talks about innovation in central banks.
“Distributed ledger technologies for example, have seen use cases expand beyond digital payments and trade finance, to the security of data and personal identity, as well as anti-money laundering,” she said in a speech recently.
“Artificial intelligence and machine learning enable the industry to make much better use of available data than possible previously, by efficiently developing a deep understanding of the unique needs of their customers and risk profiles.”
While central banking and supervisory mission remains unchanged, given the rapid transformation and the changing landscape, the way they achieve their mission and objectives needs to evolve quickly.
“Overall, our approach must be to ensure that our toolkits and methods remain relevant and fit for purpose,” Loh noted. “We need to be informed by a deep understanding not only of the new players and their products and services, but also of the new technologies – how they work, why they are being adopted, how they better serve customers’ needs, how they are re-shaping financial services and the broader financial sector, and the opportunities and challenges they present.”
For example, artificial intelligence has been used by banks for credit scoring, and by insurers for underwriting and fraud detection.
“Supervisors, including MAS, have taken steps to ensure that artificial intelligence (AI) is used by financial institutions in a fair and responsible manner,” noted Loh. “Predictive analytics can also empower supervisors to be more effective.”
AI and machine learning, when applied to the myriad of data that supervisors have, offer the possibility of real-time customised risk assessments and early warning capabilities. This can inform policy interventions in times of heightened risk and help to preserve financial stability.
The application of such tools is enabled by transforming regulatory reporting to be based on the mapping of granular data to a common data model, moving away from fixed templates.
This integrated solution, which has the potential to be scaled across supervisory authorities, Loh stated.
“In fact, some central banks including MAS have deliberately provided room for emerging technologies to be explored deeply, and their benefits and risks to be properly understood,” said Loh. “We have avoided having regulation front-run innovation, so as not to stifle new ideas.”
Beyond experimentation, such exploration may also require testing of use cases in the market to assess their technical functionality and commercial viability in a production environment.
To this end, regulatory sandboxes have come in useful over the past few years. Tailored relaxation of regulatory requirements within well-defined parameters has allowed opportunities afforded by new technologies to be explored, while maintaining the overall soundness of the financial system.
In fact, some central banks including MAS have deliberately provided room for emerging technologies to be explored deeply, and their benefits and risks to be properly understood. We have avoided having regulation front-run innovation, so as not to stifle new ideas.
Beyond experimentation, such exploration may also require testing of use cases in the market to assess their technical functionality and commercial viability in a production environment.
To this end, regulatory sandboxes have come in useful over the past few years. Tailored relaxation of regulatory requirements within well-defined parameters has allowed opportunities afforded by new technologies to be explored, while maintaining the overall soundness of the financial system.
Loh noted the central banks’ role in innovation goes further than this. Beyond embracing and facilitating innovation and central banks can play an important role in leading innovation, by being at the centre of experimentation.
“The private sector is good at leading innovation, subject to the return on investment providing a clear incentive,” she said. “When this is the case, they do an excellent job. They drive applied research, apply technology in an agile fashion, and deploy solutions to markets quickly.”
However, private sector firms are less incentivised to innovate in cases where the return on investment is unclear and the benefits may not accrue primarily to them.
“When there is a need for innovation to develop essential industry infrastructures that benefit the entire financial system, central banks can step in to provide these public goods,” said Loh. “We are able to leverage our unique position in the ecosystem to drive collaboration within the local financial sector community, and act as bridges to facilitate collaboration across borders.
Where appropriate, central banks can also encourage industry stakeholders to pursue specific commercialisation opportunities which meet wider financial system needs.”
In so doing, central banks need to carry the spirit of innovation in their working philosophy, be open to collaborate with the private sector, adopt an agile approach when exploring possibilities, and even be prepared to fail fast within boundaries.
