In its Spring 2019 publication Semiannual Risk Perspective, the Office of the Comptroller of the Currency highlights financial innovation and rapid technological developments as a special topic in emerging risks to the banking industry. The OCC’s report zeroes in on the various approaches to innovation that federal banks have adopted, including the pooling of resources to share costs associated with new technologies, increasing reliance on third-party vendors or fintechs, and adoption of a slower “wait-and-see” strategy. The OCC also notes that while bigger banks may have a financial advantage in keeping up with technology improvements, smaller banks may be more flexible in adopting those improvements through fintech collaborations.
The OCC recommends that banks focus on identifying fintech opportunities and adopting technologies that increase their efficiency, but emphasizes the importance of exercising due diligence to ensure that appropriate measures are in place for third-party relationships to avoid reputational, strategic, operational, and compliance risks. According to the OCC, new, powerful technology increases strategic risk where banks pursue innovation without proper governance and risk management, citing the burden of legacy technology systems, reliance on core-processing firms, and resource limitations as drivers of higher strategic risk to the banking industry.
The OCC’s report marks the first time that strategic risks associated with financial innovation or fintech have been highlighted since 2017 when sitting Comptroller of the Currency Joseph Otting took office, providing a clear signal that banks have an urgent need to address these risks due to the rapid pace of technological innovation.
Troutman Sanders will continue to monitor and report on important developments involving risk measures within the banking industry.