Strengthened Banking Supervision and Potential Impact on Fintechs

Federal banking regulators are set to adopt a more assertive approach in supervising mid-sized banks following the collapses of Silicon Valley Bank (SVB), Signature Bank, and First Republic Bank earlier this year.

According to Mike Brauneis, a managing director and global financial services industry leader for consulting firm Protiviti, the regulatory environment will become tougher, with increased scrutiny and higher levels of scrutiny for risks. Brauneis states, "Risks will be reviewed in more detail. Issues will be escalated more quickly than they would have just a few years ago. There will be less tolerance for missing deadlines."

A report by KPMG on regulatory challenges for the second half of 2023 predicts that all financial services regulators will intensify their supervisory efforts over the next six months. The report advises financial institutions to anticipate increased demands from regulators in areas such as risk management, controls, data quality, processes, and management/board accountability. Amy Matsuo, principal and national leader of compliance transformation and regulatory insights at KPMG, emphasizes that banks will need to demonstrate dynamic risk management and issue assessment, quality risk data and measurement, and a sustainable and continuously improving program.

In response to the failure of SVB, the Federal Reserve Board's analysis suggests that heightened supervisory requirements will likely be reinstated for banks with $100 billion or more in assets. Brauneis suggests that increasing capital requirements for banks in the $100 billion to $250 billion asset range is the most probable step regulators will take. While a potential increase of up to 20 percent has been discussed, Brauneis believes the ultimate impact on most banks will likely fall in the 10 percent to 15 percent range. Additionally, regulators may require more mid-sized banks to conduct regular stress testing on at least an annual basis. Regulators may also emphasize individual accountability by linking some pay incentives for bank managers to their risk management performance.

To comply with the heightened regulatory environment, banks will need to enhance their transparency with regulators. Matsuo highlights that regulators will request more information and data on a more frequent basis, necessitating additional investments in areas such as data governance, technology, and reporting. Maryann Kennedy, a former senior deputy controller for large bank supervision at the Treasury Department's Office of the Comptroller of the Currency and currently a senior managing director at Protiviti, emphasizes the importance of open and honest conversations with regulators, stating, "Lay the groundwork in order to establish full transparency with regulators."

As for the potential impact on fintech firms, Sheetal Parikh, associate general counsel and vice president of compliance at Treasury Prime, suggests that increased regulatory scrutiny may extend to fintechs and other banking partners. Parikh believes regulators will focus on fintechs that provide financial services but are not subjected to the same level of regulation as traditional banks. Regulators might require fintechs to implement automated controls for areas like customer onboarding and transaction monitoring, similar to banks. Parikh notes that compliance teams at traditional financial institutions may lack the operational and technical background to effectively identify risks associated with fintech transactions, and improved collaboration between bank innovation teams and compliance/regulatory teams is necessary.

In conclusion, the increased supervision of mid-sized banks will entail stricter regulatory requirements, heightened scrutiny of risks, and a focus on dynamic risk management practices. Banks will be expected to demonstrate transparency, effective risk frameworks, and responsive risk practices. Fintech firms partnering with banks may also face increased regulatory scrutiny and could be required to adopt similar risk management processes as traditional banks.

By fLEXI tEAM