Big Data: future of bank oversight is crunching the banks' exposure details

As I was reading an Economist magazine article on how banks are using the information they have about their customers to unlock value in their relationship, it became apparent that the same computer capabilities could be used to support oversight of the financial system.

Specifically, I have talked about the need to create the 'Mother of all Financial Databases' that includes each financial institution's current asset, liability and off-balance sheet exposure details.  These computer capabilities could turn this data into information that would be useful for investors in exerting market discipline on the banks and for regulators engaged in oversight of the financial system.

A BIG BANK hires a star analyst from another firm, promising to pay a substantial bonus if the new hire increases revenue or cuts costs. In banking this happens all the time, but this deal differs from the rest in one small detail: the new hire, Watson, is an IBM computer. 

Watson became something of a celebrity after beating the champion human contestants on “Jeopardy”, an American quiz show. Its skill is to be able to process millions of documents quickly by reading and “understanding” ordinary written language. Computers have no trouble with searching data neatly sorted in databases. Watson’s claim to fame is that it can do the same with “unstructured data” such as those found in e-mails, news reports, books and websites.... 

Citigroup has hired Watson to help it decide what new products and services (such as loans or credit cards) to offer its customers. The bank doesn’t say so, but Watson’s first job may well be to try to cut down on fraud and look for signs of customers becoming less creditworthy. 

If so, Watson will be following other computers designed to deal with “big data”. Across a slew of new firms in Silicon Valley and in big banks across the world, a range of new ideas is being tried to crunch data. Some have the potential to change banking from the bottom up.... 

The firm that has perhaps gone furthest in finding useful connections in disparate databases is Palantir Technologies ... Its speciality is building systems that pull together information from different places and try to find connections. Some of its earliest adopters have been spy agencies.... Its other main market is in banking, where big firms such as JPMorgan and Citi use it for a range of activities from structuring equity derivatives to reducing loan losses.