GAO prods Fed to pick up the pace on accomplishing ‘priority recommendations’ in fintech, derisking, stress tests

Recommendations regarding fintech and consumer protection, derisking and stress testing remain unaddressed by the Federal Reserve, the congressional watchdog alleged in a letter to the agency’s chair last week, which also urged the Fed to start taking action.

In its letter from to Federal Reserve Board Chair Jerome Powell (dated April 20), the Government Accountability Office (GAO) said the Fed has seven priority recommendations outstanding from 10 identified last year; the letter acknowledges that the Fed addressed seven of the 10.

However, the GAO said the seven remaining priority items should be “given high priority.” The GAO also told the Fed in the letter that is was adding one more priority item to the central bank, related to stress testing, bringing the outstanding list of priority recommendations not addressed by the Fed to eight.

The GAO said the outstanding recommendations to be addressed revolved around three issues:

  • Financial Technology (fintech) and Consumer Protection. “We recommended that the Federal Reserve engage in collaborative discussions with other relevant financial regulators and stakeholders to address” issues related to whether consumer using financial account aggregators would be reimbursed for losses arising from unauthorized activity. “Bank and credit union regulators and the Consumer Financial Protection Bureau (CFPB) have been holding such discussions, but these collaborations have yet to result in any coordinated public outcomes,” GAO wrote. “To implement our recommendation, the Federal Reserve needs to continue to actively participate in these ongoing efforts to help ensure they result in tangible outcomes.”
  • Derisking: “We recommended that the Federal Reserve jointly conduct a retrospective review of BSA/AML regulations and their implementation for banks with the Federal Deposit Insurance Corporation (FDIC), Office of the Comptroller of the Currency (OCC), and the Financial Crimes Enforcement Network (FinCEN) and revise regulations or their implementation, as appropriate. This review should focus on how banks’ regulatory concerns may be influencing their willingness to provide services.” The GAO noted that Fed agreed with the recommendation and convened a working group in 2018 with FDIC, OCC, FinCEN, the National Credit Union Administration (NCUA), and the Office of Terrorism and Financial Intelligence that “has taken important steps toward improving the efficiency and effectiveness of BSA/AML supervision.” The working group, GAO noted, recently updated the examination manual for conducting BSA/AML examinations, which may influence banks to derisk. “However, to fully implement our recommendation, the working group needs to consider and evaluate the full range of other supervisory concerns, such as conducting a retrospective review of BSA/AML regulations focusing on how banks’ regulatory concerns may be influencing their willingness to provide services.
  • Stress Testing of Banking Institutions: The GAO noted that as of last month, the Fed had initiated projects such as developing processes to communicate information regarding post-stress capital ratio estimates. “However, it has taken no additional actions to fully implement the recommendations, such as designing and implementing a process to communicate uncertainty surrounding the post-stress capital ratio estimates and articulating tolerance levels for key risks and the degree of uncertainty in projected estimates. Completing the implementation of our recommendations can help the Federal Reserve identify and manage the risks introduced into its models and account appropriately for uncertainty and sensitivity of model results.”

GAO Letter to Fed Chair Jerome H. Powell: Priority Open Recommendations: Board of Governors of the Federal Reserve System

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