More supervisory information provided by Fed for dealing with ‘novel activities’ at all banks overseen by agency

Novel activities at banks — including “complex, technology-driven partnerships with non-banks to deliver banking services to customers” –received some additional supervision information late Tuesday from the Federal Reserve.

The “novel activities,” the agency added, also include crypto-assets and blockchain technology.

“The goal of the novel activities supervision program is to foster the benefits of financial innovation while recognizing and appropriately addressing risks to ensure the safety and soundness of the banking system,” the Fed said in a release. “The program will be integrated into the Federal Reserve’s existing supervisory processes, with program experts working alongside current supervisory teams to oversee banks engaged in novel activities.”

According to a supervision and regulation letter released by the Fed in conjunction with the program, the supervision information applies to all banking organizations overseen by the agency (including those with $10 billion or less in total assets).

The Fed said the focus of the supervision will be on:

  • Complex, technology-driven partnerships with non-banks to provide banking services (partnerships where a non-bank serves as a provider of banking products and services to end customers, usually involving technologies like application programming interfaces (APIs) that provide automated access to the bank’s infrastructure).
  • Crypto-asset related activities (activities such as crypto-asset custody, crypto-collateralized lending, facilitating crypto-asset trading, and engaging in stablecoin/dollar token issuance or distribution).
  • Projects that use distributed ledger technology (DLT) with the potential for significant impact on the financial system (that is, the exploration or use of DLT for various use cases such as issuance of dollar tokens and tokenization of securities or other assets).
  • Concentrated provision of banking services to crypto-asset-related entities and fintechs (such as banking organizations concentrated in providing traditional banking activities such as deposits, payments, and lending to crypto-asset-related entities and fintechs).

“The Program will work in partnership with existing Federal Reserve supervisory teams to monitor and examine novel activities conducted by supervised banking organizations,” the agency said in the letter. “Supervised entities engaging in novel activities will not be moved to a separate supervisory portfolio. Instead, the Program will work within existing supervisory portfolios and alongside existing supervisory teams. The Program will leverage current supervisory processes to the extent possible to maximize efficiency and minimize burden.”

Additionally, the letter stated, the program will be risk-based with the level and intensity of supervision varying based on the level of engagement in novel activities by each supervised banking organization.

Also Tuesday, the Fed offered more information on its process for a state bank it supervises to follow before acting in certain dollar token or stablecoins, including demonstrating to its Fed supervisors that it has “appropriate safeguards to conduct the activity safely and soundly.”

The agency said that, to verify that requirement, a state member bank should receive a written notification of supervisory nonobjection from the Fed before engaging in the proposed activities.

Federal Reserve Board provides additional information on its program to supervise novel activities in the banks it oversees