Acting Comptroller of the Currency Michael Hsu warned that widespread and increasingly complex relationships between banks and fintechs could set the stage for a financial crisis.
At a conference of bankers in New York hosted by the Bank Policy Institute and the Clearing House Association, Hsu said that he's concerned with the increase in complexity in business models that facilitate things like mobile payments, online lending and deposit-taking activities.
"The 'de-integration' of banking services that is taking place now has its roots in technology, data, operations," Hsu said. "It is affecting all banks, not just the large money-center banks. My strong sense is that this process, left to its own devices, is likely to accelerate and expand until there is a severe problem, or even a crisis."
Hsu said that while crypto has grabbed the most headlines, fintechs and large technology companies warrant more attention in the regulatory sphere. The rise of online banking has made banks and fintechs rely on each other's expertise in order to scale up operations quickly, Hsu noted.
"By partnering, banks can gain speed to market and access to technological innovation at lower cost, while fintechs seek to benefit from banks' reputations for being trustworthy, longstanding customer bases, and access to cheaper capital and funding sources," Hsu said. "As a result, bank-fintech partnerships have been growing at exponential rates and have gotten more complicated."
The issue is not just in large banks, Hsu said. A team at the OCC found that banks with multiple banking-as-a-service arrangements with multiple fintechs are largely institutions with assets below $10 billion. Nearly a fifth of those banks have total assets less than $1 billion, he said.
"Bank information technology" makes up about a quarter of cited supervisory concerns, Hsu said, with common issues including insufficient information security controls, changing management issues with emerging products and services, and informational technology operations.
"Of course, these are the 'known knowns,' " Hsu said. "I worry increasingly about the 'unknowns' and am concerned that the less familiar risks of this digital transition are unlabeled and thus unseen. As we learned from the 2008 financial crisis, risks that are unseen have a tendency to grow and later to be the source of nasty surprises."
Hsu also spoke on the OCC's efforts in managing climate risk among its banks.
He argued that regulators should approach the issue with "a clean sheet of paper and an open mind," rather than relying on the standard stress-test scenarios that they have used in the past.
"With climate-related risks, I believe we are much more exposed to failures of imagination — not asking enough 'what if?' questions — than we are to failures of stringency or consistency," he said. "I am concerned that the muscle memory of capital stress testing is more likely to handicap climate scenario analysis than to help it."
He suggested that regulators aren't necessarily striving for a uniform approach to testing large banks for climate-risk readiness.
"With regards to scenario analyses for larger banks, a strong emphasis on diversity of approaches needs to be maintained, lest banks and regulators gravitate toward miniature standardized stress tests," Hsu said. "With climate-related risks, I believe we are much more exposed to failures of imagination — not asking enough 'what if?' questions — than we are to failures of stringency or consistency."
Hsu said the OCC will name its new head of the Office of Climate Risk, reporting directly to him, "in the coming weeks."
