Significant Regulatory Shifts Are Coming for Banks and Fintechs

The flurry of activity from the new presidential administration — often in the form of executive orders — touches on every major sector of the U.S. economy, including financial services. These EOs, combined with leadership and structural changes at the federal banking agencies (FBAs), signal that significant changes are expected for the regulation and supervision of banks, including over their partnerships with fintechs.

Executive Orders

Two EOs signed by President Donald Trump seek to exercise the executive branch’s oversight over independent agencies, including the federal banking agencies. The first EO requires that all independent agencies, including the FBA, submit strategic plans and “significant regulatory actions” prior to publication to the Office of Management and Budget’s Office of Information and Regulatory Affairs. This EO applies to the regulation and supervision activities of the Federal Reserve and will likely, at least initially, slow down the flow of new regulatory burdens and new interpretations of existing law.

The second EO requires all independent agencies, including the FBA, to collaborate with their designated Department of Government Efficiency (DOGE) team leads and the Attorney General to, among other things, identify regulations that are potentially unlawful, harm national interests, impose burdens on small business and impede private enterprise, or impose significant costs that are not outweighed by public benefits.

Office of the Comptroller of the Currency

Jonathan Gould, former OCC chief counsel, has been nominated to be the next comptroller of the currency. Gould’s nomination to lead the OCC has been welcomed by the banking industry as he was a critical part of the team that, among other things, took an accommodative approach to the digital assets industry. While Gould’s nomination is pending, Rodney Hood, former chairman of the National Credit Union Association, is serving as acting comptroller of the currency. Hood is not acting as a mere caretaker — he recently gave a speech setting out his agenda, which includes clarifying and facilitating fintech partnerships.

Federal Deposit Insurance Corp.

Travis Hill, former vice chair of the FDIC, was promoted to acting chair. Hill has stated that his priorities for the FDIC include, among other things, “[a]dopt[ing] a more open-minded approach to innovation and technology adoption, including (1) a more transparent approach to fintech partnerships and to digital assets and tokenization, and (2) engagement to address growing technology costs for community banks.”

Recently, former FDIC Director Jonathan McKernan was nominated to lead the Consumer Financial Protection Bureau, despite mass staff layoffs and losing its headquarters facilities after its lease was terminated by DOGE. If confirmed, McKernan would once again become an FDIC director.

Federal Reserve

Although Chair Jerome Powell is not expected to leave his role at the Federal Reserve, Vice Chair for Supervision Michael Barr stepped down from that role on Feb. 28. However, Barr remains a governor of the Federal Reserve Board. Current Governor Michelle Bowman has been identified as the mostly likely successor to Barr as his continued service on the board requires that his replacement be from the existing governors rather than an outsider.

Bowman has recently given several speeches on her priorities for the regulation and supervision of banking organizations, which includes facilitating innovation. At a recent congressional hearing, Powell questioned the need for a Vice Chair for Supervision, noting that, since its creation as part of the Dodd-Frank Act in 2010, there has been more volatility in the regulation and supervision of banking organizations. Moreover, of note to fintechs, in that same hearing Powell noted that “reputational risk” will no longer be a factor evaluated in connection with an application for a Federal Reserve master account. This statement could signal more openness for digital assets companies to have Federal Reserve master accounts.

In addition to the leadership changes, recent chatter among the political class has included merging the FDIC’s supervisory functions with the OCC, which technically would require legislation given so many laws refer to and define the appropriate FBA. While restructuring the FBA has been a mainstay of policy wonks, the current environment may be the opportunity to finally implement fundamental changes toward creating a more rational regulatory structure. However, as evidenced by a major trade group representing community banks coming out against such consolidation, it will not occur easily.

New leadership at the FBA will likely shepherd in a more accommodative approach to innovation in the banking system as compared to their predecessors. This includes federal regulators taking a lighter touch to regulation and supervision as well as the end of regulation through enforcement. (We note, however, that state regulators may seek to pick up the torch.)  While the impact of these changes likely will benefit bank partnerships with fintechs, such partnerships will remain subject to safety and soundness concerns. Moreover, banks with outstanding supervisory issues must continue to focus on fully remediating the issues identified, as banks with sound risk management and corporate governance and strong compliance programs will be best positioned to take advantage of the opportunities presented by the anticipated change in priorities at the FBAs and what follows.

 

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This article was first published to BankDirector; for further in-depth analysis, please visit Bank Director: Significant Regulatory Shifts Are Coming for Banks and Fintechs