The US’s Federal Deposit Insurance Corporation (FDIC) is reportedly looking at the possibility of scrapping quarterly call reports in favour of pulling data from the 3,000+ community banks it regulates in close to real-time, in a move that could fundamentally shake-up how the sector reports financial metrics.
The FDIC this week has quietly launched a competition involving 20 data and technology firms to develop a prototype mechanism for reporting and analysing the data, in a move that could point to the possibility of a shift in the 150-year-old approach of filing reports every quarter for regulators.
(Community banks hold approximately 12 percent of total US banking industry assets, but a significant 41 percent of the industry’s small loans to farmers and businesses, the regulators filings show, making them what the FDIC describes as “the lifeline to entrepreneurs and small enterprises of all types).
The regulator already collects daily data, but call reports, which banks file up to 30 days after the close of a quarter, can contain 2,200 data points; regulators can struggle to spot issues in these fast enough to prevent stability issues.
“What we would like to do is frankly make the call reports obsolete, and not because we wouldn’t have the data but because we would have better data and we would have more timely data,” FDIC Chairman Jelena McWilliams told the Wall Street Journal.
The regulator did not name the firms participating in the tech competitition.
McWilliams, who was sworn in as Chairman in June 2018, has made modernising the regulator a central effort. As she put in the FDIC’s 2019’s annual report, published February 2020: “Perhaps no issue is more important – or more central to the future of banking – than technological innovation”.
In 2019, the regulator also set up the “FDIC Tech Lab, or FDiTech” to encourage the market to “develop technology that improves the operations of
fnancial institutions” including via tech sprints and pilot programmes.
This competition is part of a wider project aimed at bringing the way government watchdogs survey risks in the market up to date. Modernising this element of the industry could also benefit consumer protection and help to strengthen resistance against financial crime.
Jo Ann Barefoot, a former banking regulator who now heads the Alliance for Innovative Regulation (AIR) told the WSJ: “These kinds of efforts are going to transform financial regulation. They can’t see most of what’s going on in the financial system in real time because they don’t have good enough data”.
ADA Currently Prohibits Fintech Innovation
As it stands, banks do have access to more streamlined ways of collecting data but, due to the ADA’s (the Anti Deficiency Act) prohibition on receiving goods and services, innovation staff are prevented from accepting such resources.
A white paper released this year by the AIR noted: “In one instance, an agency staffer stated that a company wanted to provide its regulator with free access to an online resource for evaluation purposes… The regulator was informed that mere access to this resource constituted a thing of value, and thus the ADA prohibited the regulator from evaluating the resource”.
Penalties for ADA violations are no joke in the US, bringing with them serious employment repercussions and criminal penalties.
The Anti Deficiency Act is a series of provisions incorporated into American appropriation law. It prohibits federal agencies from spending public funds without permission from Congress and from accepting voluntary goods or services, according to the AIR white paper.