Bowman: Fed Weighing Expanded Transparency on Core Provider Exam Info

As part of its efforts to facilitate community bank innovation, the Federal Reserve may provide banks with information about core processors and other critical third-party vendors that the banking agencies supervise directly, Fed Governor Michelle Bowman said today at ABA’s Conference for Community Bankers in Orlando, Florida.

“I believe we can take a step further with increasing transparency on our supervisory program by making information that may be useful about our supervision of key service providers available to banks,” she said. “This could take a number of forms, such as being more transparent about who and what we evaluate.” Currently, the agencies make service provider exam reports available only to banks that are already clients, but she said she has directed Fed staff to propose options for more transparency.

Bowman also outlined reforms that she said would improve the due diligence process, including consistency across regulatory agencies. Specifically, she said, the Fed should adopt guidance the OCC has issued. Other steps should include allowing banks to share due diligence instead of duplicating work, tailoring due diligence requirements to different situations and tailoring ongoing monitoring requirements for banks with assets of under $1 billion.

Bowman also emphasized the importance of core banking platforms being flexible and adaptable. “Even when new product offerings emerge from service providers that already serve the bank, contract terms can be complicated to adjust, adding to the costs of obtaining technologies, which may ultimately be prohibitive,” she said. “Flexible core systems are important for this reason. Collaboration between a bank and its core system provider is critical to ensure that technology solutions can be integrated quickly and cost effectively within the core system.”

The Fed will soon roll out a new tailored Bank Secrecy Act examination process, Bowman added during Q&A with ABA President and CEO Rob Nichols. “If you are a low-risk institution, we will scale our examination process, requirements and models to tailor for that risk,” she said. “My expectation is that we will see a significant reduction in the number of hours that we spend in your institutions.” Bowman said that she hopes to roll this out by the end of the first quarter.