The Office of the Comptroller of the Currency is pulling together a new team to consider the regulatory implications of new advances in the banking sector.
In a speech delivered last Friday, OCC director Thomas Curry talked at length about various advances in financial services and the risk management challenges they are starting to pose. Curry said he is assembling a group of in-house examiners, lawyers, and policy analysts, to look at everything from what new technologies might allow, to new players offering financial technology, to new processes that might make financial services operate more efficiently.
“We’re still early in the process, so I can’t tell you exactly where we’ll end up,” Curry said. He did speculate that OCC might create a new office devoted to reviewing banking innovation.
Curry cited the explosion of new mortgage products in the 2000s—and the lax review of those products, ultimately leading to the 2008 financial crisis—as what he wants to avoid. Virtual currencies, “neobanks” that exist only online, crowdfunding, and mobile payment services like ApplePay or Google Wallet all might raise similar risks, he said; right now, regulators and bankers simply don’t know.
Curry also stressed the difference between banks developing new technology to improve banking (say, ATM machines), and outsiders developing new ways to conduct financial transactions without banks.
“Some of these products represent only incremental changes that don’t present major regulatory concerns,” he continued, “but others signify real points of departure that will require a significant amount of scrutiny to ensure that they can be offered safely and soundly, consistent with applicable laws and regulations, and in a way that ensures adequate consumer protections.”
Curry singled out the virtual currency Bitcoin as one example, since the anonymous nature of Bitcoin raises the risk that it could be used for money-laundering, terrorism, and the like. “This is basic risk management, and it’s no different from the diligence we expect from traditional account management,” he said.
Several times in his speech Curry evoked the potential for real disruption that new banking technologies might bring. Historically, banks have been the intermediary between borrower and lender—which gave regulators such as the OCC a convenient way to apply regulatory oversight. But innovations such as peer-to-peer lending cut banks out of that chain, and regulators along with them.
Curry was not entirely alarmist in his speech. He did praise innovation’s ability to develop new processes for banking, such as mechanisms to better help community banks package loans together into the secondary loan market. “In my mind, this is an example of a financial win-win made possible by creativity and innovation,” he said.
Ultimately, Curry said, he wants the OCC and other regulators to embrace innovative ideas while preserving traditional risk management practices.
“I do see considerable merit in the traditional bank model, where bankers who know the businesses and families they serve are willing to lend money and stand by borrowers in good times and bad because they know the character of those customers. That’s an important piece of the American economic fabric,” Curry said. “However, it’s not the only approach to financial services, and it’s important that regulators view new ideas with an open mind and not dismiss them as either sorcery or voodoo.”
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