OCC’s proposal rightfully directs banks to upgrade

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The Office of the Comptroller of the Currency’s recent notice that it was considering rulemaking reflecting the increasing impact of technology marked an important inflection point in regulatory history, and acknowledgment of just how much fintech is reshaping the financial sector.

The June 4 advance notice of proposed rulemaking noted that for banks to remain competitive, they “should adjust their business models and practices to a new financial marketplace and changing customer demands.”

In just a decade, more than 1,000 nonbank cryptocurrencies have launched, supported by dozens of crypto exchanges. Facebook has intrigued and startled the world with its own attempt to launch one such digital currency.

At the same time, marketplace peer-to-peer lending has grown exponentially; artificial intelligence is seeping into every aspect of finance; and cloud and quantum computing are revolutionizing the movement, storage and transmission of data and value.

The OCC’s proposal asks the public to consider the role and purpose of special-purpose national banks, the digital banking activities that should be addressed and how cryptocurrency, crypto-assets and distributed ledger technologies are impacting banks and customers.

Notably, it also seeks input on how AI and machine learning could be used in credit underwriting, anti-money-laundering activities, fraud detection, customer identification, due diligence processes, trading and hedging activities, forecasting and marketing.

Acting Comptroller Brian Brooks and the OCC understand that technology is reshaping the landscape by changing not only the means of finance, but the rules of the game. In each of these new technological developments, trusted financial intermediaries are being replaced, often by digital peers.

This is a competitive sea change of huge proportions. Consider how another such sea change in the 1980s and early 1990s played a role in the failure of more than 2,500 commercial banks and savings and loan associations. At that time, these institutions lost their grip on low-cost consumer deposits to a growing mutual and money market fund industry.

Today, the registered open-end fund industry has attracted 104 million investors from more than 46% of American households and now eclipses the U.S. bank deposit market in terms of assets under management. Those are investors that otherwise might have deposited their $25 trillion in banks.

The current technology revolution has also had a significant impact during the coronavirus pandemic as everyone deals with a world where personal touch is all but vanishing. Consider the future role of branches, the nature of loan closings and the movement of money in this new world.

The pandemic is accelerating technological changes that might have taken 25 years to evolve. And traditional financial services companies will either stay ahead of the curve or, once again, disappear behind it.

Recognition of these moments by policymakers is critical to the evolution of a vibrant banking business and a prosperous U.S. economy. Sure, competitors will challenge anything that impacts their business, and all too often state and federal regulators needlessly fight over jurisdiction in a world that increasingly eschews boundaries.

But those who drive these moments and force everyone to think about where financial services and its regulation are headed are the unsung pioneers.

Let’s hope that this is also just the beginning of the reconstruction of the regulation of American finance. It is seriously out of date.

Nothing in the current economy resembles the financial landscape that existed when the regulatory structure was largely created in the 1930s. For that matter, financial services have changed markedly even since the enactment of the 2010 Dodd-Frank Act.

Banks are technology companies, or at least they must act like them to continue occupying a preeminent position in finance. And the OCC appears focused on staying in that race.

But, it’s not all rosy innovation. Congress and the regulators also must get in front of the curve in terms of defending against the significant threats that technology creates. They also must begin deploying technology to refocus regulation on long-term macroeconomic priorities, predictions and financial safety nets, rather than rules-based punch lists.

Simply put, the government must figure out how it can use technology to regulate more effectively. It’s going to need algorithms to regulate algorithms in this new world.

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