Comptroller Hsu Promotes Open Banking
Commentary by Steven Lofchie
Acting Comptroller of the Currency Michael J. Hsu evaluated the potential impact of open banking on the financial industry and consumers.
In remarks at the FDX Global Summit, Acting Comptroller of the Currency Michael J. Hsu emphasized the OCC's support of open banking which he defined as the "enabling of consumer-permissioned sharing of financial data with third parties." He underscored that open banking would allow consumers to access a wider range of financial service providers, as well as to move their accounts and transactions between financial providers more readily.
Mr. Hsu warned that open banking may increase liquidity risk or operational risk. He explained that while account portability in open banking can be "empowering" to consumers, it increases liquidity risk for banks’ retail deposits. With "instant and seamless" account portability, Mr. Hsu cautioned that banks may experience higher and faster retail outflow. He added that online and mobile banking is thought to have contributed to the "unusually large and rapid outflows" of deposits leading up to Silicon Valley Bank and Signature Banks’ recent failures.
As open banking introduces an increase in the "volume and complexity" of consumer-permissioned sharing, Mr. Hsu projected that new risks may surface which would require new controls.
Data and Access
Mr. Hsu said that focus on current data science and artificial intelligence has been "extremely powerful and enormously profitable" to the tech industry. He said that predictive data could be used within the banking industry to help consumers who have bank accounts, but lack credit scores, to improve access to lenders. While data can be used to help "people and communities...realize their economic potential," he warned that data is a tool, not an end. As an example, he said that predictive data can also be used as "prejudicial data" against people and communities by "overlooking their potential and the possibility of change and progress simply because of ‘what the data say.’"
Banking and Commerce
Mr. Hsu said that the OCC has tried to separate banking and commerce in order to prevent "excessive concentrations of power" and financial systemic risk. However, because banks require the support of data aggregators and FinTechs to accomplish open banking, Mr. Hsu said that it is becoming increasingly difficult to distinguish between banking and commerce within the digital space.
Commentary
Open banking represents the end of bank runs that create long, picturesque lines of frantic depositors standing outside bank doors. In the new world, it will be slow thumbs who lose out.
In contrast to securities regulators, banking regulators have generally been adverse to making public the problems that an individual bank was having, so as to prevent bank runs. But if the bank regulators expect depositors to bear the losses resulting from bank failures, it will be hard to keep a bank's problems secret and harder still to see how the regulators can justify keeping a bank's problems secret. With open banking, retail investors will be able to make their run just as fast as institutional investors, or maybe faster. Devil take the hindmost.