FEDERAL GOVERNMENT RELATIONS
OCC’s Hsu: Crypto Regs Need ‘Strong Guardrails and Gates’
During a roundtable discussion Tuesday of cryptoassets and international financial systems, Acting Comptroller of the Currency Michael Hsu addressed the OCC's continuing development of an appropriate regulatory framework for crypto. He said that many bankers, regulators and policymakers “have admitted to me that they don’t really understand or trust crypto as it exists today and that they see lots of risk,” but don’t want to get left behind or be perceived as anti-innovation.
Likewise, regulatory bodies should resist lowering standards when dealing with crypto, Hsu said, adding that regulators must “learn and smartly adapt” to “ensure safety, soundness and fairness and encourage responsible innovation.” Regulators should have learned a lesson from attempts to regulate shadow banking 20 years ago. “Instead of shielding the regulated banking system from the risks of structured finance and shadow banking, the approach of pushing those risks outside of the bank regulatory perimeter ended up simply masking the problem,” he said. “We don’t want to repeat that mistake.”
Hsu said that while interagency collaboration is making strides toward supervisory pathways, the banking sector needs to develop “guardrails and gates,” identifying three areas that need clarity around supervisory expectations in the near term: liquidity risk management of deposits from cryptoasset companies, including stablecoin issuers; finder activities, especially related to crypto trade facilitation; and crypto custody.
“The more novel and riskier an activity, the tighter a bank’s limits and controls need to be to meet supervisory expectations,” he said. “Banks seeking to engage in crypto activities may want to carefully consider the scope of what they want to do, start with what can be most readily risk managed, and impose gates, through limits and other controls, to prevent uncontrolled expansion and growth into higher-risk activities. Banks interested in engaging in crypto will have to develop good brakes by fashioning strong guardrails and gates. Those able to do so will be positioned to grow and expand in the future.”
Regulators Stress Importance of Third-Party Due Diligence
The Federal Deposit Insurance Corp. is “working diligently” to issue updated guidance to financial institutions on third-party risk management, agency official Lisa Arquette told attendees Tuesday at the Las Vegas conference of ACAMS, a professional association representing anti-money laundering specialists. The FDIC has issued a request for information on the 2008 guidance, and while Arquette did not signal when updated guidance would be issued, she flagged several areas that banks should be thinking about in the meantime.
Among other matters, Arquette said banks should consider:
- risk management planning associated with the third party;
- due diligence for third-party selection;
- contract negotiation;
- ongoing monitoring of that third-party relationship;
- possible termination of the relationship;
- risk governance;
- independent reviews and
- documentation to make sure that each party knows what they’re responsible for.
“If a bank is relying on a third party to do any part of its core processing, maybe some of the AML compliance, it’s important to really evaluate the details of that relationship,” she said.
Recognizing that banks are increasingly looking to partner with third parties to offer novel banking products and services, the Federal Reserve’s Suzanne Williams emphasized that bank compliance officers need to ask questions like: “How are we going to meet Bank Secrecy Act/Office of Foreign Assets Control obligations? How will OFAC be screened? How will those entities be identified? Who will be screening for suspicious activity? Do we, at the bank, have sufficient information to identify suspicious activity?” Banks need to ask these questions, she said, because "those are the questions we’ll be asking in the examination.”
ICBA, ABA: Data Show Assessment Hike Not Needed
The American Bankers Association, Independent Community Bankers of America and other groups shared new deposit data with the Federal Deposit Insurance Corp. demonstrating that its proposal to dramatically increase deposit insurance assessments is unwarranted. In a new joint letter, the groups asserted that the FDIC’s proposal to raise deposit insurance assessment rates by 2 basis points is based on a faulty assumption that the Deposit Insurance Fund will not meet its minimum level by as late as 2034. In fact, the latest Quarterly Banking Profile suggests the statutory minimum is likely to be satisfied as soon as the first quarter of 2023, they said.
In the letter, which follows a previous joint letter calling on the FDIC to halt its proposed rate hike, the groups explained that the plan would impose procyclical assessment rate increases that would reduce access to credit and amplify economic stress amid challenging conditions.