(14 September 2022 – United States) Increasingly complex Bank and Fintech relationships could set the stage for a financial crisis, the Office of the Comptroller of the Currency (OCC) warns.
Acting Comptroller of the Currency Michael Hsu is concerned with the ongoing increase in business model complexity that facilitate mobile payments, online lending and deposit-taking functions. The issue is not confined to large banks with the OCC finding banks with multiple Banking-as-a-Service (BaaS) arrangements with numerous fintechs are mainly institutions with sub-US$10 billion assets. Nearly one in five of those financial institutions have total assets under US$1 billion.
Regulators should approach the issue with ‘a clean sheet of paper and an open mind,’ as opposed to relying on typical stress-test scenarios applied traditionally.
“The 'de-integration' of banking services that is taking place now has its roots in technology, data, operations. It is affecting all banks, not just the large money-centre banks. My strong sense is that this process, left to its own devices, is likely to accelerate and expand until there is a severe problem, or even a crisis” Hsu said.
“While crypto has grabbed the most headlines, fintechs and large technology companies warrant more attention in the regulatory sphere. The rise of online banking has made banks and fintechs rely on each other's expertise in order to scale up operations quickly. By partnering, banks can gain speed to market and access to technological innovation at lower cost, while fintechs seek to benefit from banks' reputations for being trustworthy, longstanding customer bases, and access to cheaper capital and funding sources,” Hsu said. “As a result, bank-fintech partnerships have been growing at exponential rates and have gotten more complicated” ”
“Of course, these are the 'known knowns’ and I worry increasingly about the 'unknowns' and am concerned that the less familiar risks of this digital transition are unlabelled and thus unseen. As we learned from the 2008 financial crisis, risks that are unseen have a tendency to grow and later to be the source of nasty surprises. With climate-related risks, I believe we are much more exposed to failures of imagination, not asking enough 'what if?' questions, than we are to failures of stringency or consistency. I am concerned that the muscle memory of capital stress testing is more likely to handicap climate scenario analysis than to help it. Regulators aren't necessarily striving for a uniform approach to testing large banks for climate-risk readiness” Hsu added.