ZHAW develops digital infrastructure for the financial industry
Following the 2008 financial crisis, new rules were drawn up to protect the banking system. Apart from still not having a uniform technical structure, however, these tools are both time-consuming and inefficient. The DaDFiR3 (Data Driven Financial Risk and Regulatory Reporting) BRIDGE project being run by the ZHAW School of Engineering, Lucerne University of Applied Sciences and Arts and the University of Zurich, is developing digital infrastructure which will enable automated real-time verification of financial institutions and markets.
When it comes to digitisation, the financial industry is still lagging behind the real economy in many respects. The reporting system used by banks to submit their regular reports to the government supervisory authorities is highly complex and non-uniform, and the required stress tests are often only of limited information value given that it frequently takes weeks or even months to evaluate them. The rules that were tightened in the wake of the 2008 financial crisis also incur high additional costs for the banks, while being of only limited use.
The chief reason for this is that the more stringent regulations, aimed at preventing a renewed near-meltdown of the global financial system, are still based on outdated technical structures. “Each bank has its own data formats, infrastructure and systematics”, explains project manager Wolfgang Breymann of the ZHAW Institute of Data Analysis and Process Design (IDP). This makes it impossible to automate the analysis and ensure effective comparability of the risk analyses for the financial supervisory authorities. It is here that the DaDFiR3 (Data Driven Financial Risk and Regulatory Reporting) project comes into play, under the lead of the ZHAW School of Engineering.
The project partners – Wolfgang Breymann, Tim Weingärtner from the IT Department of Lucerne University and Walter Farkas from the Institute of Banking and Finance at the University of Zurich – are setting out to develop the digital infrastructure required to standardise risk assessment and financial analysis for the banks and financial markets. This will automate the process and significantly speed it up, while simultaneously reducing costs. New, decentralised financial instruments (DeFi) are to be incorporated at the same time. Using big data technology, blockchain technology and smart contracts, an algorithmic infrastructure is being created which will allow automated bank reports to be generated in real time. “The system can be viewed as a weather forecast for the financial market”, explains Wolfgang Breymann in summing up the project. It takes as its basis the financial contracts, or the “atoms of the financial sector”, as Breymann describes them. These atoms have so far been structured differently at the individual financial institutes, but they can be standardised in technical terms. This is achieved by applying the algorithmic data standard for financial contracts, ACTUS, which has been under development by an international team led by Wolfgang Breymann’s research group since 2012 already. Not only can all the different types of financial contract be converted into a uniform digital format with the aid of this standard, but risk profiles can also be drawn up for the contracts. Working on the basis of an algorithm which similarly includes risk factors like interest rates and exchange rates, the future cashflows for the financial contract can be calculated and analysed. Taking the individual contracts, it is then possible to conduct a risk assessment of both specific banks and the financial system as a whole. This shortens cumbersome processes at the individual financial institutes and cuts costs.
The project is receiving funding of CHF 1.5 million from the BRIDGE programme run jointly by the Swiss National Science Foundation (SNSF) and Innosuisse. To ensure effective project implementation, the project team has taken on board a number of companies as implementation partners. These include Regnology (formerly BearingPoint RegTech), one of the leading providers of risk and regulatory technologies for banks and financial supervisory authorities worldwide.
The project is scheduled to run for 48 months. “In statistical terms, a financial crisis occurs about once every ten years. We can consider ourselves fortunate if the infrastructure we are developing is in place for the next crisis”, says Breymann referring to the timeframe ambitions for the project. While banks are still cautious about releasing data and supervisory authorities have a tendency to show restraint, Breymann predicts that the sector will not be able to get by without a culture change in the regulatory sphere in future. “The DaDFiR3 project could form the first pillar of a new financial ecosystem”, the professor of financial mathematics explains. This, however, would require a helping hand from the politicians. Over the long term, the project will then not only lead to lower operating costs for the financial institutions and more efficient banking supervision, but will also ensure transparency and hence greater stability in the financial system, from which society as a whole will ultimately benefit too.
Prof. Dr. Wolfgang Breymann, Institute of Data Analysis and Process Design, ZHAW School of Engineering, Tel: 0 58 934 78 14, e-mail: firstname.lastname@example.org
Prof. Dr. Tim Weingärtner, Department of Computer Science and Information Technology, Lucerne University of Applied Sciences, Tel: 0 41 757 68 20, e-mail email@example.com
Prof. Dr. Walter Farkas, Institute of Banking and Finance, University of Zurich, Tel: 0 44 634 39 53, e-mail firstname.lastname@example.org
David Bäuerle, Content Manager PR & Communication, ZHAW School of Engineering, Tel. 058 934 68 61, e-mail email@example.com