How to stop AI going rogue

Artificial intelligence is improving so fast that no one knows what it might be capable of. It brings huge opportunities, but also huge risks. Arjun Ramani, The Economist's global business and economics correspondent, explains what could go wrong.

How to keep innovation moving

Managing the risks and rewards of emerging technologies is a tricky balancing act. How is it possible to maximise the upsides of innovation while minimizing the potential downsides? Read more here: https://econ.st/327bXxU

DeFi: Crypto’s ‘Wild West’ of Finance - WSJ

Many are calling decentralized finance, or DeFi, the “Wild West of finance.” This fast-growing industry aims to provide automated banking services for cryptocurrencies to everyone, with no middle men. But DeFi is still in its early stages, which means there are risks. 

 

What China’s New Data Rules Mean for Tesla and Other Auto Makers

China's new rules on auto data require car companies to store important data locally. Cars today offer high-tech features and gather troves of data to train algorithms. As China steps up controls over new technologies, WSJ looks at the risks for Tesla and other global brands that are now required to keep data within the country. Screenshot: Tesla China 

 

Why managing operational risk is so important

By Stanley Epstein

Banks, like any other firm or individual, are exposed to many different forms of risk. So one would not expect it, but the term “risk” still remains one of the most misunderstood terms in the banking industry.

This short article will explain what risk is and some of the different types of risk that banks and other financial institutions are exposed to in their everyday business activities.
The definition of “Risk” as “exposure to the chance of injury or loss” is a typical one (with thanks to Dictionary.com).

There may be other variations on this theme, but what we have is good enough. The key elements of “RISK” are EXPOSURE to the CHANCE of LOSS. Put another way; the possibility that something will cause a financial or other loss. This is the basis for understanding the different types of risks that banks face.

In its basic form, banks take in deposits and lend these deposits out in the form of loans. Should the borrower not repay his loan the bank is faced with what is called “credit risk”. Credit risk is the possibility that a borrower will be unable to make payment of the amount of the loan when it falls due. Credit risk is absolute. It’s the chance that the borrower will never be able to repay the loan. Credit risk and bankruptcy are closely linked.

Liquidity risk is on the other hand not absolute. Liquidity risk is the possibility that a borrower will be unable to make payment of the amount due at the time that it is due. However the reason for this could be cash flow issues. It does not imply that the borrower is insolvent as he may be waiting for funds due to him to arrive. In terms of Liquidity risk the borrower may still be able to repay the loan at a later time.

Between them, Credit risk and Liquidity risk are the major business risks that banks face because they are the major part of the business of banking.

Over the last few years there has been a growing awareness that Operational risk is another source of danger to a bank. This was given “official” voice and form in the Basel Accords, where Operational Risk has been defined as “the risk of direct or indirect loss resulting from inadequate or failed internal processes, people and systems or from external events”. Take note of this definition – it is very important.

Operational risk in terms of the Basel Accords has been subdivided into seven separate categories. We examine each of these categories and briefly explain what types of risks they cover.

• Internal Fraud. By and large this covers fraud by bank staff such as the stealing of assets, theft of client information, covering up errors, intentional mismarking of positions, bribery etc.
• External Fraud. This occurs where non-bank staff is involved such as in computer hacking, third-party theft, forgery.
• Employment Practices and Workplace Safety. Inequitable staff policies, workers compensation claims, employee health and safety issues.
• Clients, Products and Business Practice. This is a very wide field and generally covers market manipulation, antitrust issues, improper trading activities, bank product defects, fiduciary breaches, account churning. The sub-prime Mortgage debacle is a clear example of a product defect. The huge LIBOR rate rigging scandal which has dominated the news these past few years falls into this category as well.
• Damage to Physical Assets. This covers things like natural disasters, terrorism and vandalism – anything that results in actual damage or destruction of the bank’s physical assets. These actions may be deliberate or purely accidental.
• Business Disruption and Systems Failures. Power failures, computer software and hardware failures. A hurricane or a flood that results in banking services being disrupted also falls into this category.
• Execution, Delivery and Process Management. This covers things like data capture errors, accounting errors, failure to meet legal reporting requirement, negligent loss of client assets.

There are other risks too, such as legal, reputational, market – the list goes on. But that is another story.

Basel Committee on Banking Supervision issues consultative document on the implications of fintech

The Basel Committee on Banking Supervision has released a consultative document on the implications of fintech for the financial sector. 

 

"Sound practices: Implications of fintech developments for banks and bank supervisors" assesses how technology-driven innovation in financial services, or "fintech", may affect the banking industry and the activities of supervisors in the near to medium term.

Various future potential scenarios are considered, with their specific risks and opportunities. 

 

In addition to the banking industry scenarios, three case studies focus on technology developments (big data, distributed ledger technology, and cloud computing) and three on fintech business models (innovative payment services, lending platforms and neo-banks).

Although fintech is only the latest wave of innovation to affect the banking industry, the rapid adoption of enabling technologies and emergence of new business models pose an increasing challenge to incumbent banks in almost all the scenarios considered.

Banking standards and supervisory expectations should be adaptive to new innovations, while maintaining appropriate prudential standards. Against this background, the Committee has identified 10 key observations and related recommendations on the following 

supervisory issues for consideration by banks and bank supervisors: 

1. The overarching need to ensure safety and soundness and high compliance standards without inhibiting beneficial innovation in the banking sector;
2. The key risks for banks related to fintech developments, including strategic/profitability risks, operational, cyber and compliance risks;
3. The implications for banks of the use of innovative enabling technologies;
4. The implications for banks of the growing use of third parties, via outsourcing and/or partnerships;
5. Cross-sectoral cooperation between supervisors and other relevant authorities;
6. International cooperation between banking supervisors;
7. Adaptation of the supervisory skillset;
8. Potential opportunities for supervisors to use innovative technologies ("suptech");
9. Relevance of existing regulatory frameworks for new innovative business models; and
10. Key features of regulatory initiatives set up to facilitate fintech innovation.

The Committee says that it welcomes comments on all aspects of the consultative document. 

 

Comments should be uploaded by Tuesday 31 October 2017 via the following BCBS link.

The Evolving Role of the Front Line in Risk Governance

From GARP –

“The risk responsibilities of front-line units at financial institutions have increased significantly. The front line must now cover the risks associated with their activities, and should therefore be held accountable by the CEO and the board for effectively assessing and mitigating those risks, according to the Office of the Comptroller of the Currency (OCC).

Until recently, it was largely the second line of defense (the independent risk management team) that led the risk management exercise, while the front line focused more on sales and revenue targets. The latter’s risk responsibilities were largely limited to not breaching risk thresholds.”

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2016 – What cyber threats are in store?

Threat analysis: a review of top potential threats and emerging crises for 2016

From Continuity Central –

“Geary W. Sikich looks at the emerging business and political risks which organizations need to be aware of and make plans for.

It is December 16th 2015 as I write these lines. Today is Beethoven’s birthday, we are at the yearend and as Christmas approaches it is time to look at what 2016 may bring us. How well will we do, or, how poorly will we perform when, and if, unplanned for crises emerge from threats that we continue to overlook?

My top picks for threats, emerging crisis issues and high impact risks in 2016 and their current status are:”

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