In his opening speech at the Sixteenth meeting of the Financial Stability Board Regional Consultative Group for Europe, Governor Mugur Isarescu talked about Artificial Intelligence, Machine Learning and Big Data, „a topic which partially surprised me, as it is not a typical central banking issue”.
Here below are some remarks selected from the Governor’s opening speech.
„During my career as a central banker, I have not come across this topic in debates quite often. However, in recent years, I have seen that there has been an increasing interest in this matter. (…) So, it is not a real wonder that we talk today about Artificial Intelligence here, in Bucharest, at the National Bank of Romania.
It is good for central banks to review from time to time what they are doing. As Agustin Carstens, the head of the Bank for International Settlements, has recently said that central banks are ‘acutely aware of the need to adapt’ their frameworks. That opens the way to new ideas.
The interconnected use of new technologies is already a common practice in many operational fields, such as the defense industry, the automotive industry or the healthcare sector. It is, therefore, natural that new technologies would penetrate the financial sector.
Their applications are diversified in design and scope, examples of which are: algorithmic trading, portfolio optimization, scoring and pricing models.
Moreover, the use of these new technologies receives more and more attention in the financial and economic areas, as the transition from classical banking sector products and services is growing exponentially. In this context, the focus moves from the individual to more general issues and the question arises about the effects that the trinity described by artificial intelligence, machine learning and big data analytics, have on the financial system. Implicit answers to this question are formulated as considerations of financial stability. In other words, the key question is related to the costs and benefits that the new technologies listed above have on financial stability.
The answers to this question are quite varied, given that this issue has not been thoroughly investigated up to this moment. Among the best-known benefits, some of the areas where progress can be made by using the specified technologies are: regulatory compliance, systemic risk monitoring, fraud detection and supervisory effectiveness.
In contrast, the associated disadvantages could be linked to explanatory issues, the need for human resource adaptation, new data related concerns (privacy issues), or increased dependence on third parties. Nevertheless, as consumers and companies are embracing these new technologies, it is the policymakers’ role to identify potential risks and vulnerabilities and to formulate adequate policy responses and tools in order to adequately address them.
Then again, Big Data is not the only example where views have dramatically changed over time – other relevant cases are the negative interest rates employed by the European Central Bank, an unthinkable measure in the pre-crisis era, or the unconventional monetary policy programs implemented by central banks worldwide.
A valuable lesson to be learnt here is to always challenge preconceptions and the “status quo” in an ever-changing financial system.”
„Though Libra has met with fierce resistance from central banks and supervisory authorities and might never see the light of day, in many other cases tech firms (both start-ups and established big players) have successfully captured bits and pieces of universal banks’ traditional value chain. This trend may only intensify in the coming years. In this environment, European banks remain squeezed.”