FRB Governor Bowman Calls for "Transparent" Regulatory Approach to Facilitate Innovation

Federal Reserve Board Governor Michelle W. Bowman addressed the need for a "transparent regulatory posture" in order to foster innovation in the banking system and address concurrent risk.

Supporting Responsible Innovation

In an address before the Independent Community Bankers of America, Ms. Bowman stated that regulators must (i) be aware of the impact regulatory actions have on banks’ ability to innovate and (ii) ensure that regulation and supervision do not create unnecessary burdens on small banks. She also emphasized that it is "incumbent" upon regulators to provide banks with clear expectations in order to facilitate technological innovations while also ensuring that the banking industry implements change responsibly. Ms. Bowman warned that the lack of such regulatory transparency could cause new products and services to migrate to the shadow banking system. Ms. Bowman highlighted several areas where the FRB has worked to provide transparency to banks.

Crypto asset activities. Ms Bowman noted that there are a multitude of use cases for distributed ledger technology and crypto assets which create challenges for banks. She stated that the FRB has worked to set clear regulatory expectations for banks on addressing these challenges, including issuing guidance on the risks associated with crypto and the proper procedures to take before engaging in crypto asset activities.

Third-party service providers. Ms. Bowman also referred to preliminary steps taken by the FRB to help banks mitigate risks created by engaging in third-party service providers. She stated that the FRB is examining the possibility of whether utilizing a standards-setting organization could help expedite due diligence on FinTech service providers.

Cybersecurity. Ms. Bowman made clear the FRB’s commitment to working with banks to report incidents, mitigate further risk, and update management practices to account for new risks.

Innovation Challenges Unique to Small Banks

Ms. Bowman described some of the unique challenges that small banks face in incorporating technological innovation. She stated that small banks’ reliance on third-parties to help facilitate such innovation exposes the banks to operational risk and data security and cybersecurity vulnerabilities. She acknowledged that while small banks’ use of third parties does not exempt them from their compliance requirements, it does create "ambiguous" regulatory expectations. She stated that the FRB is continuing to develop tools and provide additional resources tailored to assisting small banks with compliance.

Ms. Bowman recommended:

• examining the financial implications of proposed amendments to the Community Reinvestment Act (see previous coverage) for financial institutions;
• considering the costs and benefits of guidance put forth on climate change risks, specifically regarding recent risk-management guidance for large banking entities;
• acting on merger applications in a more timely manner so that banks (see previous coverage), in particular small banks, do not have to face the serious consequences of operational risk and increased expenses; and
• placing emphasis on preserving minority ownership of minority depository institutions in addition to providing technical assistance through the FRB’s Partnership for Progress program.