• Linkedin
  • Twitter

Regtech meets financial supervision: how climate scenario analysis by supervisors is ushering in a new regulatory paradigm

Author(s): Jakob Thomä

Date published: Nov 2018

To begin, consider this example: a bank regulator has sent out a survey to its banks on the latest trending topic – “green finance”. The idea is for the regulator to understand what percentage of a bank’s lending portfolio is “green” (i.e. associated with environmental benefits). One of the larger banks in the jurisdiction judiciously fills out the survey, and, given that plants and trees are literally ‘green’, they decide to label their entire agricultural lending as “green finance” – everything – from palm oil to fertilizer companies, close to 100% of their portfolio.

What sounds like a farcical anecdote is actually the real-world experience for many financial supervisors. Indeed, financial supervisors know the process all too well: when there is a new regulatory agenda – in this case “green finance” – they send out a survey, and then the confusion ensues. One response to this process could simply be to blame the supervisors: after all, shouldn’t they be more precise about what constitutes “green finance”? This is a valid point, however, even the most well-designed survey processes can be very complex, as they need to be appropriate for diverse institutions and be able to address capacity gaps. Those who have ever had to fill out a form in their private life and mixed up the “Last Name” and “First Name” boxes perhaps understand the struggle.

People’s inability to fill out forms is a relatively significant problem. It is expensive for banks, insurance companies and pension funds to have to design their own responses. However, there are many banks that hire staff exclusively for the purpose of filling out surveys. Every topic is important, so every topic warrants a survey. This process is inefficient for supervisors, who have to create questions and deal with survey responses. In the best-case scenario, the surveys provide a rough idea of what the bank is doing, and in a worst-case scenario, the results are useless and incoherent. The absolute worst-case scenario occurs when all of the results make sense and are consistent – but the wrong questions were asked. The masochists will then restart the process, sending out another survey, and so on, and so on. All of these processes tend to cost an incredible amount of time and money.

Read Full Text

Regtech meets financial supervision: how climate scenario analysis by supervisors is ushering in a new regulatory paradigmRegtech meets financial supervision: how climate scenario analysis by supervisors is ushering in a new regulatory paradigm

0Web version: Regtech meets financial supervision: how climate scenario analysis by supervisors is ushering in a new regulatory paradigm

© SUERF - The European Money and Finance Forum 2010-2018 .:. Société Universitaire Européenne de Recherches Financières

Privacy Policy .:. Legal notice

Design by draganmarkovic.net