Blockchain risks, alt data requirements remain outstanding ‘priority recommendations’ for Fed action, GAO reminds

Coordinating with other regulators to address risks posed by blockchain technology, and requiring use of alternative data in underwriting loans made by financial technology (fintech) lenders are two outstanding “priority recommendations” to the Federal Reserve from the congressional watchdog, the agency said Monday.

In its report of priority open recommendations made at the end of last month for the Fed, the Government Accountability Office (GAO) said by attending to these areas, the regulator “could significantly improve its efforts to oversee risks to consumers and the safety and soundness of the U.S. banking system.”

The GAO was following up on four recommendations made to the central bank last year. Two of the recommendations have been addressed by Fed actions, the congressional watchdog said. Those were that the regulator enhanced its ability to effectively manage its model risk, ensured that the agency is informed of significant model risks when making decisions based on stress test results.

However, the other two remain outstanding, the GAO said. It also said it had no more priority recommendations for the Fed, at least for now.

Regarding blockchain, the GAO said that “volatility, bankruptcies, and instances of fraud in the crypto-asset markets illustrate the harm consumers and investors may face without adequate protections.” GAO noted that, about a year ago, it recommended that the Fed and other financial regulators jointly establish or adapt an existing formal coordination mechanism to identify and address risks posed by blockchain-related products and services.

Regarding Fintech, GAO contended that lenders may analyze large amounts of alternative data on borrower characteristics (including information from bank accounts) when determining borrowers’ creditworthiness. “We recommended that the Federal Reserve, other federal banking regulators, and the Consumer Financial Protection Bureau (CFPB) communicate the appropriate use of alternative data in the underwriting process with banks that engage in third-party relationships with fintech lenders.” The GAO said Implementing the priority recommendation in this area could better position federally regulated banks to manage risks associated with “partnering with fintech lenders that use these data.”

Priority Open Recommendations: Board of Governors of the Federal Reserve System