Banks want to offer cryptotech services, so the Federal Reserve is studying how such activities should be overseen while reminding them to manage risk and act legally, said Michelle Bowman, one of seven members of the Board of Governors of the Fed.
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, a Little Rock-based entrepreneur support organization. “Fintech” stands for “financial technology”. Bowman spoke first, then took questions from Arkansas State Bank Commissioner Susannah Marshall and the audience.
Bowman said banks want to better understand and potentially deliver cryptotech services in light of consumer demand. Deposits are flowing to crypto firms, so banks want to offer these services themselves. But before a bank offers crypto services, it must consider the risks to itself and its customers.
Bowman said the Fed is working to identify how it will oversee banks on a variety of digital asset activities, including custody of crypto assets, buying and selling, and crypto-backed lending. On August 16, it issued prudential guidelines reminding banks to put in place adequate systems, risk management and controls.
“We understand that everyone involved in this space is looking for clarity,” she said. “One of the most important tools we have as regulators is the ability to clearly articulate our oversight expectations. This is our most direct way to encourage and support responsible innovation.
She said the Fed was taking a similar approach to artificial intelligence, which banks are increasingly using for credit underwriting, back-office operations, risk management and customer service. Last year, the Fed 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 received more than 100 responses that helped them better understand the banks’ questions.
Bowman said the Fed’s developing FedNow service will enable secure and instant payment services. Consumers and businesses will be able to make real-time payments any day and provide funds immediately to recipients. She expects the service to be available in mid-2023.
She said technology is fundamentally changing how banks operate. More and more banking is done through digital channels rather than customers visiting a bank branch. New business models are emerging where non-bank technology companies provide financial services and nurture the customer relationship while the bank provides underwriting and the underlying financial infrastructure. She said the Fed supports responsible banking innovations.
“Traditionally, banking regulators viewed innovation as one risk on a very long list of risks that need to be managed appropriately,” she said. “While this outlook will not change, I recognize that changing customer preferences require banks to meet these technological expectations.”
In response to a question from an audience member, Bowman said the Fed shouldn’t have the same risk expectations for community banks as it does for much larger financial institutions. She noted that 20 to 50 new banks were created each year in the past, but since 2008 few have been.
“That’s something we really need to revisit and take a closer look at why the requirements are so incredibly onerous and difficult, and at what point would an investor even think they could see a return on investment if the capital requirements are so incredibly high that maybe in 10 years they could get a dividend?” she said.
She said the Fed’s mergers and acquisitions framework is “incredibly outdated and outdated,” causing succession issues at family banks.