• Joe Rodriguez, Sr. Managing Director, Financial Services at Cloudera


• 26.04.2024 01:15 pm
#riskmanagement #AI #regtech #data

It’s hard to believe it’s been 15 years since the global financial crisis of 2007/2008. While this blast from the past is best left in the proverbial rear-view mirror, there have been echoes of it recently. Last year saw the collapse of Silicon Valley Bank (SVB) – the largest US bank to fail since 2008. Signature Bank also folded and Credit Suisse was sold to UBS for well below its market value to avoid triggering a banking crisis.

The reality is that on a long enough timescale, another global financial crisis is likely to occur. Given the impact of previous crises on the business landscape and people’s everyday lives, it’s vital that financial institutions do everything in their power to avoid a crash. And while there are myriad reasons SVB and Signature Bank collapsed, regulation and compliance pressures certainly played a part.

With impending regulations targeting the financial sector, such as BASEL IV and DORA, institutions must ensure they are resilient to compliance regulations now, to avoid more high-profile casualties.

Risks in the evolving regulatory landscape

Regulatory pressures confronting banks, financial services and insurance companies demand constant reassessment of compliance strategies and operational frameworks. Institutions must navigate a spectrum of challenges, from stringent data protection measures to intricate risk management protocols.

It's imperative not only to be flexible enough to adjust to regulatory shifts, but also to anticipate emerging requirements and proactively identify potential negative outcomes.

Here are five risks financial institutions should be aware of:

1. AI Regulation: The newly adopted EU AI Act promotes safety, compliance with fundamental rights, and aims to drive innovation. Alongside this, the US and UK have now signed a Memorandum of Understanding that details how they will work together to develop tests for advanced AI models. Financial institutions will need to ensure they remain compliant with new AI safety protocols.

2.  Regulatory compliance: Compliance is increasingly complex due to the growing number of regulations that banks and insurance companies must adhere to. Global bodies such as the Financial Stability Board (FSB) and the Basel Committee for Banking Supervision (BCBS) all impact the work of national regulators, and ultimately compliance within each individual institution. Additionally, each individual nation has its own regulations.

3. Cybersecurity and data privacy: As data breaches become more common, regulatory and compliance standards are becoming more stringent. Financial institutions must navigate a complex landscape of privacy laws, such as GDPR, the UK Data Protection Act 2018, and the California Consumer Privacy Act (CCPA). They are also subject to the Digital Operational Resilience Act (DORA), the European Union’s regulation aiming to strengthen the IT security of financial entities including banks, insurance companies, and investment firms, and ensure that the financial sector in Europe is resilient against cyber threats and operational disruptions.

4.  Risk management and governance: Regulators are increasingly focusing on risk governance, risk sustainability, and the detection, mitigation, tracking, and remediation of threat actors. Financial institutions must demonstrate robust risk accountability and governance, as well as maintain consumer protections.

5.  Cultural shift and technology adoption: Traditional banks and insurance companies must adapt to the emergence of fintech firms and disruptive, changing business models. This requires a shift towards a technology- and data-first attitude and includes the adoption of digital solutions to address industry challenges. 

Modern data architecture is the future

Adopting a modern data architecture is crucial to addressing these challenges and supporting banks, financial services firms, and insurers to satisfy changing regulatory and reporting requirements. When underpinned by a holistic data platform, a modern data architecture incorporates data governance practices and security controls to ensure data privacy, regulatory compliance, and protection against unauthorized access or breaches. Moreover, by providing self-service data access and analytics, a modern data architecture empowers business users and data analysts to analyse and visualise data, enabling faster decision-making and response to regulatory requirements.

Coupled with robust data integration capabilities, a modern data architecture makes real-time data ingestion from various sources—including structured, unstructured, and streaming data, as well as external data feeds—a reality. By leveraging advanced analytics techniques and providing real-time insights, modern data architecture empowers financial institutions to better manage risk and maintain compliance. It also enables scalability and futureproofing, allowing banking institutions to mitigate potential risks or the impact of future global banking disasters.

The financial regulatory future

Whilst compliance isn’t the only factor that has contributed towards recent turbulence in the finance industry, it has certainly had a huge impact. The promise of a modern data architecture might seem like a distant reality to some institutions, but it is vital to avoiding more failures and near misses.

This will not only ensure financial institutions ride out the next inevitable global banking crisis, but also enable them to meet new regulation and compliance measures head on. With the regulatory landscape showing little signs of slowing down thanks to a slew of impending AI regulations, financial institutions must start addressing potential risks today to ensure a more stable market tomorrow.