Olli Rehn: Data-driven financial stability - challenges and
opportunities
Opening remarks by Mr Olli Rehn, Governor of the Bank of Finland, at the "Data-driven financial
stability" conference, Helsinki, 28 November 2019.
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Ladies and Gentlemen, dear friends,
It is my great pleasure to welcome you all to our conference entitled Data Driven Financial
Stability here at the Finlandia Hall. We have recently had quite busy "tech weeks" in Helsinki. Just
a few weeks ago Helsinki hosted one of the leading startup and tech events in the world - Slush.
The programme of this year's Slush was particularly topical, as it focused on the ethics and
regulation of technology.
Likewise, we at the central banking community consider ethics and regulation vital. Hence, we
are working hard to form a solid understanding of all the potential consequences that the
widespread use of e.g. artificial intelligence and mass volume data may have on finance.
From this angle, I will address three issues regarding the role of advanced technologies in
finance. First, I will ask how advancements in technology could be used to provide new digital
products and services. Second, I will turn to risks related to the widespread use of new
technologies that may hamper the proper functioning of markets. Third, I will finish by looking at
how the potential impact of new technologies on competition and diversity do call for greater
domestic and international policy coordination.
Let me start with a question: What do we mean when talking about artificial intelligence and big
data?
In the absence of a generally agreed definition, artificial intelligence can mean anything from a
simple script to a very complex combination of automated processes and machine learning
models. What comes to massive or big data, there are no universally accepted criteria on how
large of a volume of data counts as 'big'.
Yet, while emerging technologies have some novel features, they are still largely based on the
same technologies and statistical methods that we've been using for years. Hal Varian recently
described artificial intelligence and big data as "just doing the same sort of thing we did before,
but at a much larger scale".
From where do the potential benefits then stem? Firstly, with the help of new technologies,
companies improve their existing processes and create new products, services and distribution
channels. The low marginal cost of software solutions allow digital products to be customized,
and thus to satisfy the unique preferences of each individual client. Secondly, the digital footprints
that customers generate allow companies to better understand when and where digital products
are consumed.
Central banks could use artificial intelligence and big data to improve their economic forecasts
and enhance the quality of official statistics. The Eurosystem and the euro area authorities have
worked extensively on new projects involving highly granular data. The AnaCredit, i.e. the
analytical credit dataset on individual bank loans in the euro area, and the EU-wide derivatives
data collected under the EMIR, European Markets Infrastructure Regulation initiative, are good
examples of these.
The impact of fintech and bigtech challengers
Let me move to financial technology companies, or fintechs, that are especially agile in deriving
value from data. They have had an opportunity to start from scratch and design their information
architecture based on modern principles of collaboration, connectivity and iteration, without
having to bear the burden of legacy systems. Modern data architecture gives these fintechs an
advantage in data processing.
In this context 'platform economics' is particularly intriguing. The Bank of International
Settlements has recently paid special attention to large technology firms with established user
bases that enter finance. The crucial question is, how the entry of these large technology
companies, or the so-called bigtech companies, is going to affect competition, financial inclusion,
data protection and financial stability?
Will their entry pave a way to more resilient financial markets? Or will the bigtech companies
ultimately exploit their efficiency on data collection and processing to gain market dominance and
a monopoly position?
However, while these new entrants are efficient in processing data, it is premature to declare the
beginning of the end of traditional financial intermediation. Banks will continue to be challenged by
new entrants, and, thus, they need to invest heavily into new technology. This may compress
profitability in the short-term. However, banks and other traditional financial intermediaries still
have a long-term competitive advantage over new entrants that do not have long operating
histories, and who may have less skills in business expertise, such as credit and risk
management.
New forms of interconnectedness and systemic risk
When regulators say they worry about financial stability, they usually mean that they are
concerned about how resilient the banking and financial system is to shocks. For instance, how
would the market react if a large financial institution would encounter a breakdown that would
make it unable to fulfill its promises to its clients and other relevant parties? How would the
weakness in this financial institution impact functioning of the financial markets or the real
economy?
Platform ecosystems create new challenges to financial stability, as they comprise of a highly
complex matrix of digital products and services. Firms may offer advanced solutions that are
built on a product of one key supplier, or may be heavily dependent on processing data on the
information architecture that is rented from one key infrastructure provider.
The more complex these networks become, the more vulnerable these ecosystems become to
more unconventional security risks. Vulnerabilities in data have so far been less pronounced,
largely due to the fact that most datasets have been so-called structured datasets, where the
relationships between different data points are clearly defined and specified.
Massive datasets are usually less rigidly specified, and encompass much less structure. For
example data obtained from the web by scraping websites, or by reading in social media feeds,
are good examples of modern unstructured data. There are no simple ways of certifying the
authenticity and origin of these unstructured datasets, which makes them highly vulnerable to
manipulation.
These types of security issues are also vulnerable to hybrid security threats. It is therefore
extremely important that we stay vigilant to new developments in technology and understand
what kind of security vulnerabilities these create. Central banks can also play a role in
maintaining a high level of cybersecurity by promoting cybersecurity awareness and knowledge
in among the financial market participants.
Ladies and Gentlemen,
Let me conclude. All in all, the financial industry is going through a major transformation, driven
by the whole range of digital technologies and the explosive growth of data. Regulators, including
central banks, are aiming at finding the right balance between regulation and innovation, so that
consumers and businesses can benefit from new possibilities, while maintaining financial
stability and a level playing field.
We also want to make sure that the society remains inclusive. That's why we want to look at
digital transformation from the citizens' point of view, in order to identify what is real and what is
only hype. From that angle, we can see that there are different developments going on:
those that clearly increase societal welfare and should be benefitted from, such as mobile
and real-time payments - as long as we also take care of enhancing financial literacy;
those that should be watched, or even prevented, such as booms and busts related to
crypto-assets; and
those that can be further developed, such as machine learning and artificial intelligence.
This makes up a very challenging policy agenda for the central bankers, regulators and
legislators alike, and for the financial industry. Let us approach it with an open mind for innovation
and technology development, but at the same time mindful of financial stability and social
inclusion.
With these thoughts, I thank you for your attention and wish you an exciting and useful
conference!