A top Fed Reserve official has called for more regulatory efforts to match fintech innovations amid growing strain on the US banking system hit by the collapse of two key banks.
“Along with presenting new opportunities, innovation can introduce new risks and create new vulnerabilities,” said Governor Michelle W. Bowman in an address to the Independent Community Bankers of America (ICBA) Conference, Honolulu, Hawaii.
“Banks, and really, any business today that adopts new technologies must be prepared to make corresponding improvements to manage these risks and vulnerabilities, including improvements to risk management, cybersecurity, and consumer compliance,” Bowman said.
“Regulators must continue to promote efforts that are consistent with safe and sound banking practices and in compliance with applicable laws, including consumer protection laws,” the official added. “As I am sure you appreciate, this is not always an easy task, and the regulatory response to innovation must reflect the changes in how banks engage in this process.”
On March 10, the California Department of Financial Protection and Innovation closed SVB" target="_blank">Silicon Valley Bank (SVB). On March 12, the New York Department of Financial Services closed Signature Bank (SBNY). In both cases, the Federal Deposit Insurance Corporation (FDIC) has been appointed receiver. Disaster struck the two institutions after a run on the banks, specifically of uninsured deposits above the FDIC-guaranteed amount of $250,000 per depositor.
The Federal Reserve has also announced that it will make additional funding available to eligible depository institutions through a newly created Bank Term Funding Program (BTFP). This program will offer one-year loans to institutions that pledge U.S. Treasury securities, agency debt and mortgage-backed securities, and other qualifying assets as collateral.
The FDIC also proposes to protect all depositors, including uninsured depositors, of both Silicon Valley Bank and Signature Bank. The depositors were able to access all of their funds. The federal regulators, including the FDIC, the Federal Reserve Board and U.S. Treasury Secretary Janet Yellen have approved the actions to protect depositors.
According to the regulators, the facility is intended to provide an additional source of liquidity to banks and give them more breathing space without having to eliminate the need for institutions to offload securities during stress.
“It is absolutely critical that innovation not distract banks and regulators from the traditional risks that are omnipresent in the business of banking, particularly credit, liquidity, concentration, and interest rate risk. These more traditional risks are present in all bank business models but can be especially acute for banks engaging in novel activities or exposed to new markets, including crypto-assets…. Whatever the cause, many traditional risks can be mitigated with appropriate risk-management and liquidity planning practices, and effective supervision, and without stifling the ability of banks to innovate.”
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