From pen and paper to app: banking supervision in the data era
How does a bank make the change from pen and paper to algorithms to analyse customers’ ability to pay? What does the average household have to do with the broad economy? And how does Banking Supervision monitor that it all works as it should?
Everything you always wanted to know and were never told about banking risk, digitalisation or the ubiquitous stress tests, clearly (and very concisely) explained by Antonio Morillo).
“Your bank should give you a mortgage, not because you have a house that’s worth a lot of money, but because you earn sufficient income to pay the monthly repayments. Banks are not in the mortgage business to be left holding houses, cars, commercial premises or other property”
You may listen to this episode using automatic dubbing in other languages (not generated or reviewed by the Banco de España), by selecting the preferred audio track in the YouTube settings icon.
From pen and paper at the counter to verification codes on the app: how has digitalisation changed customers, banks and supervision?
Not so very long ago, banking supervision was done with pen and paper. Today, the reality is very different: data, algorithms and artificial intelligence are part and parcel of the day-to-day activities of banks, and of their supervisors.
In this episode, Ana Comellas celebrates the first anniversary of the CIENxCIEN podcast in conversation with Antonio Morillo, director of one of our Supervision departments. He will show us how banks are monitored to ensure that they are doing their job correctly and why that is so important for the real economy in which we all live (and consume and produce).
Whenever a household applies for a mortgage, or a firm needs funding to enable it to invest and create jobs, banks act as intermediaries: they capture the savings of thousands of ordinary households and pass those funds on to those who need them. But that process involves risks, and this is where Banking Supervision comes in.
Antonio sets out clearly the key risks. The first is business model risk: not all banks are alike and their sustainability depends on how well their strategy is defined and implemented.
Credit risk is the second and most well-known risk and requires that the bank assess the person applying for the loan to ensure they will be able to repay it. Antonio emphasises that here the key is not the collateral supplied (the mortgaged home, car or commercial premises), but rather the borrower’s ability to pay, or in other words, their real recurring income.
The third is operational risk, which covers a broad range of issues including computer failures, mis-selling of products and legal errors.
Digitalisation has transformed the risk landscape. In the past, customer information was kept in filing cabinets, whereas now it’s digitalised, interconnected and analysed using algorithms. While this leads to a more efficient bank-customer relationship and better risk assessment, it also brings new threats, such as cyber security, technological failures and automated decision-making that must be closely monitored. Banking supervision has evolved in step with these developments, incorporating technical expertise and new ways of working.
Antonio also discusses Spain’s role within the European Single Supervisory Mechanism (SSM), how the ECB’s joint supervisory teams work and what sets “significant” institutions apart from “less significant” ones. And he debunks the myth of dramatic inspections – no cars with tinted windows or secret briefcases, just teams of experts spending weeks analysing specific areas in depth.
As an added bonus, this episode also looks at the stress tests that we’ve all heard about, which assess how banks would hold up under adverse economic scenarios, such as a drop in GDP, rising unemployment or geopolitical tensions. Much like a simulated financial apocalypse, these tests help anticipate problems and strengthen the solvency of the banking system across Spain and Europe.
If you’d like to know how your money, your savings and the stability of the financial system are safeguarded, this episode explains it all in a clear and straightforward way, with examples that will sound very familiar.
