Financial stability is a multi-faceted concept and a moving target in the flow of financial innovation. Perhaps this makes embracing Big Data a necessity. But the promise of Big Data for financial stability hinges on the analytical capabilities and judgment which are applied to the wave of new data.
One area of great potential is the use of new data and analytics for early warning purposes. Looking only under the lamp post risks ignoring the area where the light does not shine; it is possible to be more creative and look at a broader array of data and methods, in and outside the domain of economics and finance.
It is possible that Big Data will help policymakers use the right framework to identify the mechanisms behind the herd behaviour that fuels systemic risk. It might be possible then to move from macroprudential instruments to nanoprudential tools, addressing individual customer behaviour.
Indeed, Big Tech firms tailor financial services to individual customers. Can this selectivity be adapted for use by supervisors and regulators (suptech and regtech) so that Big Data reduces the probability of financial crises?
The BIS is making a special effort to focus on “Innovation and the Digital Economy”. In the light of what was said, it is important to undertake policy analysis and research on how key innovations, such as machine learning, artificial intelligence, distributed ledger technology, and the increased availability of data, can inform policy and shape the responses of central banks.
When it comes to policy, there is need to develop tools to prevent or mitigate financial crises. More work should go into devising and testing macroprudential instruments to tame the financial cycle.
In parallel, developing comprehensive macro-financial models to explore policy trade-offs also deserves more attention. There is still missing a robust framework for understanding the endogenous forces fuelling financial crises, which would help to identify potential early warning indicators. Efforts along those lines help sharpen the lens for discerning what matters for financial stability.
Looking forward, attempts to identify crisis risks in real time will inevitably fall short – in spite of best efforts. Where prescience fails, resilience has to make up for it. Thanks to the G20 regulatory reforms, the core financial system is now more resilient than a decade ago. Ultimately, it has to be the combination of enhanced regulation, supervision and information-sharing that helps prepare us for the next financial crisis.
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