Bowman says Fed, agencies taking steps to help community banks integrate innovation into operations

Steps the Federal Reserve is taking to help community banks integrate innovation and technology into their operations were outlined by the agency’s board representative of the smaller banks in remarks Friday.

Gov. Michelle W. (“Miki”) Bowman said the Fed will be publishing a white paper on community bank-financial technology firms (fintechs) partnerships, developing (with other federal banking agencies) a “vendor due diligence guide,” evaluating guidance for third-party risk management, and considering how to address supervision and regulation regarding the use of artificial intelligence (AI) in banking.

Addressing the Independent Community Bankers of America (ICBA) conference “ThinkTECH Policy Summit,” she also said the Fed will begin distributing to banks it supervises in the first quarter of the new year supervisory assessments of key service providers.

“It is important that reports of supervisory assessments be readily available to banks that rely on service providers so that banks can use the reports to support their third-party risk management,” she said. “Since I last spoke about the program in February, the federal regulatory agencies have made notable progress in creating a process to automatically distribute those reports to all client banks.

“Proactively sending reports to community banks removes the inefficient step of each bank hunting for reports on their own,” she said.

Regarding the other additional actions, the Fed governor said:

  • Early next year, the Fed plans to publish a white paper documenting examples of community bank partnerships with fintech companies and outlining effective practices for managing those arrangements. The white paper, she said, would describe a range of distinct options for such partnerships and seek to identify benefits and challenges of the different approaches. She said the Fed is also continuing to pursue a range of community bank projects to “provide pathways to innovation.”
  • In an attempt to encourage innovation, but to help community banks ask the right questions in order to ensure appropriate due diligence, Fed staff (working with other federal banking regulators) has been directed to develop a “vendor due diligence guide” that she said – “aligned with existing supervisory expectations” – would include sample questions for vendors and guidance on appropriate responses. She said the guide would be specific about documents and information community banks need to successfully complete their due diligence.
  • Federal banking regulators are collaborating on interagency guidance for third-party risk management to eliminate “the need for community banks to navigate multiple supervisory guidance documents on the same issue.” She said she expects that a combination of “refreshed and aligned interagency guidance” and the community bank due diligence guide will “meaningfully enhance clarity on supervisory expectations for community bank partnerships with fintech companies.”
  • On AI, Bowman said the Fed is considering whether the use of it and machine learning in banking requires an adjustment in regulation and supervision. “AI is becoming more prevalent in customer service and machine learning can offer real opportunities to assess risk and find new customers,” she said.

“Community banks face limits on the resources they can dedicate to researching and evaluating third party providers of these new services,” Bowman said. “Regulators and supervisors should consider ways to encourage innovation by simplifying the process of third-party selection, due diligence and monitoring.”

Gov. Michelle W. Bowman: “Technology and the Regulatory Agenda for Community Banking”