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Banks are wanting to offer cryptotechnology services, so the Federal Reserve is studying how those activities should be supervised while reminding them to manage risks and act legally, said Michelle Bowman, one of the Fed’s seven members of the Board of Governors.
Bowman spoke Wednesday (Aug. 17) in Little Rock at the inaugural VenCent Fintech Summit. The summit is a gathering of banking and information technology professionals sponsored by The Venture Center, an entrepreneur support organization based in Little Rock. “Fintech” stands for “financial technology.” Bowman first spoke and then answered questions from Arkansas State Bank Commissioner Susannah Marshall and from the audience.
Bowman said banks want to better understand and potentially provide cryptotechnology services in light of consumer demand. Deposits are flowing to crypto firms, so banks want to offer those services themselves. But before a bank offers crypto services, it needs to consider the risks to itself and to its customers.
Bowman said the Fed is working to identify how it will supervise banks on a variety of digital asset activities, including crypto asset custody, purchases and sales, and loans collateralized by crypto. On Aug. 16, it released supervisory guidance reminding banks to have adequate systems, risk management and controls in place.
“We understand that everyone involved in this space is looking for clarity,” she said. “One of the most important tools that we have as regulators is the ability to articulate clearly our supervisory expectations. That’s our most direct path to encouraging and supporting responsible innovation.”
She said the Fed is taking a similar approach to artificial intelligence, which banks are increasingly using for credit underwriting, back office operations, risk management and customer service. The Fed last year joined four other financial agencies seeking comment on the use of AI and machine learning. Risks exist for explainability, data governance, cybersecurity, third party risk management and consumer compliance. She said regulators have received more than 100 responses that are helping them better understand questions banks have.
Bowman said the Fed’s developing FedNow Service will allow safe and instant payment services. Consumers and businesses will be able to make payments in real time any day and provide funds immediately to receivers. She expects the service to be available in mid-2023.
She said technology is changing how banks operate fundamentally. More and more banking is being done through digital channels rather than customers visiting a bank branch. New business models are arising where nonbank tech firms provide financial services and maintain the customer relationship while the bank provides the underwriting and underlying financial infrastructure. She said the Fed supports responsible banking innovations.
“Traditionally, banking regulators viewed innovation as a risk on a very long list of risks that need to be appropriately managed,” she said. “While that perspective won’t change, I recognize that evolving customer preferences require banks to meet these technology-enabled expectations.”
In response to a question from an audience member, Bowman said the Fed should not have the same risk expectations for community banks that it does for much larger financial institutions. She noted 20-50 new banks were created annually in the past, but since 2008 few have been.
“That’s something that we really have to revisit and take a much closer look at why are the requirements so incredibly onerous and difficult, and at what point would an investor even think that they might see a return on investment if the capital requirements are so incredibly high that maybe 10 years from now they might be able to get a dividend?” she said.
She said the Fed’s mergers and acquisitions framework is “incredibly antiquated and outdated,” which is causing problems with succession in family-owned banks.
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