The Fed’s announcement regarding its Novel Activities Supervision Program makes clear that some state member banks that partner with non-banks to provide banking products and services to end customers through APIs will be viewed as “complex.” It’s not entirely clear yet what this means for banks and their fintech partners. We polled our team - many of whom have deep experience on the regulatory as well as corporate front - on what they think we can expect.
Patrick Haggerty, former regulator at the OCC and in-house counsel at Discover, says the new program signals “a much higher degree of coordination within the agency and across Reserve Banks on regulatory matters pertaining to state member banks that engage in the listed activities.” He believes that on balance this will be a positive for the industry. “Although the regulatory stance on specific issues won’t always be perfectly calibrated, clarity and consistency are essential ingredients for sustainable growth. Having a dedicated supervisory program with specialized resources should lead to more constructive interactions between banks and their exam teams. Heightened scrutiny of the listed activities was already here or well on its way, but even tough standards applied consistently and proportionately are better than loose standards that are applied unfairly due to lack of coordination or understanding. It’s much easier to make most of your field goals when the uprights aren’t moving!”
Tracy Basinger, former Head of Supervision at the Federal Reserve Bank of San Francisco, agrees the guidance is a much needed step in the right direction. “Scrutiny of banks engaging in BaaS, crypto or distributed ledger activities has been increasing significantly as the risks of doing so were viewed as high. But, understanding of the business models and resultant risks was generally lagging in many areas,” she said. “With this new program banks will now have examiners on their supervisory teams who better understand the bank’s activities and can better assess risks and risk management practices. Banks should also benefit from these examiners having a broad national perspective on their activities in these areas, allowing them to better assess risks at each individual bank. What is most encouraging to me is that the Fed intends to engage broadly with external experts to better stay abreast of emerging issues. Making this engagement a formal part of the program is a great way to help regulators keep pace with change in the industry.”
Christina Hunt-Fuhr, former Chief Compliance Officer and SVP, Regulatory Affairs at Green Dot Corporation, highlighted the increased expectations banks should anticipate. She noted that while these banks won’t be moved to a separate supervisory portfolio, “their designation as “complex” suggests that the supervisory approach to these banks may now be more akin to the approach used for large banks, which includes continuous monitoring activities and target reviews (up to 3 target reviews per year, plus a full scope examination) versus the approach used for community banks, which typically involves one point in time review that is done as part of the full scope examination. In Christina’s experience, “the ‘complex designation’ also suggests that regulatory expectations for these banks will be much higher, particularly in the area of risk management.”
Mary Dent, former CEO of Green Dot Bank; former General Counsel of SVB Financial Group/Silicon Valley Bank, and Board Member, Banking Circle U.S., also noted the increased burden this program will entail in terms of the time, energy and resources the enhanced supervision will require from banks, but sees it as an opportunity: “It reminds me of the beginning of Great Expectations: Is this the best of times? Or the worst of times? If I ran a novel bank, I’d start doing all I could to make the former true. Why? Because I’d take a smart, well informed regulator any day. Yes, they’d challenge me more and take more time, energy, and resources. And yes, sometimes I’d chafe at questions that are hard to answer or that I don’t think get to the right point. But I’d take that pain in return for having a regulator who can help me see my blind spots and who’s focused on learning to see their blind spots. I’d take the pain for a regulator who’s less prone to unpredictable swings or going down unproductive rabbit holes. And I’d take the pain if it meant banks like mine were less at risk from a ‘race to the bottom’ by banks that aren’t serious about doing things right. Of course, consolidating supervision won’t inevitably lead to my optimistic outcome … which is why ‘the worst of times’ is a real possibility. But at least it creates a structure that’s more likely to get to a good outcome than regulating ‘novel’ banks like ‘normal’ banks, and hoping that individual supervisory teams are up to the task.”
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