Risks, benefits need to be weighed in rise of non-banks; Innovation Office proceeding

Risks and benefits of financial services providers migrating away from roles as traditional banks to nonbanks should be considered by regulators and policymakers, particularly regarding systemic risk, the chairman of the Federal Deposit Insurance Corp. (FDIC) asserted Thursday.

She also provided some insight about the development of the agency’s new Office of Innovation.

In remarks to the Fourth Annual Financial Stability Conference in Washington, sponsored by the Treasury’s Office of Financial Research (OFR) and the University of Michigan’s Center on Finance, Law, and Policy, FDIC Chairman Jelena McWilliams said regulators and policymakers should ask a number of questions as more nonbanks assume financial services.

Among them, she said: What happens to the systemic risk in the financial system when banking activities migrate to nonbanks? Are prudential banking and market regulators adequately positioned to deal with such shifts? How much exposure do banks have to nonbanks engaged in traditional banking activities?

McWilliams acknowledged the positive aspects of such migration, citing increased consumer choice, positive consumer experiences, and potential for increased access to new innovations.

“On the subject of innovation, it’s safe to assume that banks will want to keep pace with the new technology and services offered by nonbanks,” she said.

To that point, she noted that FDIC continues to establish its new Office of Innovation. She said the agency is in the very early stages of “scoping out this office” and its mission. “We are looking at ways that the FDIC as a regulator can avoid getting in the way of beneficial innovations and technologies that will help our regulated entities stay competitive,” McWilliams said.

She told the group that, as a regulator, FDIC should encourage banks to innovate, especially in ways that can improve the customer experience, lower transaction costs, increase credit availability, and expand access to the banking system.

“This last point is particularly important to the FDIC: our latest survey shows that more than 8 million households do not have any relationship with the banking system,” she said. “Another 24.2 million households are underbanked, meaning they have a bank account but also meet some of their financial services needs outside of the banking system. Innovation and technology may provide inroads to bring these households more into the banking system.”

Remarks by Jelena McWilliams Chairman Federal Deposit Insurance Corporation at The Office of Financial Research and the University of Michigan’s Center on Finance, Law, and Policy Fourth Annual Financial Stability Conference, Washington, D.C.