Fed’s Bowman pushes more transparency on supervision of third-party providers as way to ease community banks’ burden

Publishing the list of third-party service providers examine by banking regulators, sharing some of the examination information with banks, and easing the due-diligence process are among the steps espoused by the Federal Reserve Board’s community banking representative Monday for easing smaller banks’ workload and regulatory cost burden related to their work with core providers.

“I believe that we can create a regulatory environment in which community banks are empowered to innovate, in which supervisors leverage their own knowledge to help banks understand what to look for in a service provider,” said Federal Reserve Board Gov. Michelle (“Miki”) Bowman. “It’s a regulatory environment in which guidance is clear and supervisors are appropriately flexible, and due diligence and third-party evaluations are appropriately scaled.”

Bowman, during her speech Monday before the Conference for Community Bankers sponsored by the American Bankers Association in Orlando, Fla., pointed to a 2019 survey that showed community bankers want more transparency about third-party service providers to help them decide whether to enter into contracts with providers and what type of contracts would be appropriate.

Bowman said the Fed should consider steps to meet this need, such as exploring the possibility of publishing the list of service providers subject to supervision by the agencies. “This could provide a starting point for community banks by sharing information about the types of companies providing services to a large number of financial institutions,” she said.

Some of the other things regulators should consider, she said, include sharing some of the information from their examinations of key third-party providers with banks (it’s already shared with banks that are clients of the providers). “This could take a number of forms, such as being more transparent about who and what we evaluate,” she said. Bowman said she has asked staff to work with other agencies to develop and propose workable options for sharing such information about potential providers with banks.

To help ease the burden of due diligence, she said, regulators could implement clear third-party guidance that is consistent across all regulatory agencies. She said the Fed, as a starting point, should move toward adopting the Office of the Comptroller of the Currency’s (OCC) guidance. “It is incredibly inefficient to have banks and their potential fintech partners and other vendors try to navigate unnecessary differences and inconsistencies in guidance across agencies,” she said.

Bowman said this guidance should allow banks to conduct shared due diligence on potential partners and should explain what due diligence looks like for a potential fintech partner. Noting that many fintech companies don’t have the kind of long financial histories that more traditional bank vendors may have, she said the guidance, or handbook, “should reflect some supervisory flexibility, and not impede prudent, strategic partnerships between community banks and potential partners.”

Noting the burden of ongoing monitoring of third parties, Bowman also said she has encouraged Fed staff to consider options for further tailoring the Fed’s expectations for community banks with assets of less than $1 billion in this area.

The American Bankers Association also reported that, during Q&A, Bowman indicated the Fed would soon roll out a new, “tailored” Bank Secrecy Act exam process that would scale the process to an institution’s risk. She said she hoped this would roll out by the end of the first quarter, the group reported.

“Empowering Community Banks,” Federal Reserve Board Gov. Michelle W. Bowman at the Conference for Community Bankers sponsored by the American Bankers Association, Orlando, Fla.