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Today, I'd like to address the Federal Reserve's approach to thinking about technology and tools like blockchain in context of bank supervision, including recent developments, the cost of supervisory focus on "reputational risk," and principles for a tailored regulatory framework that accommodates technology.
Reframing the Regulatory Mindset
Bank regulators work to promote safety and soundness in the financial system through regulation and supervisory practices. Our goal is not just a safe and sound banking system, but one that also serves its intended purpose of supporting consumers, businesses, and communities, and fostering economic growth. To accomplish this goal, regulators strive to strike a balance between managing risks that threaten safety and soundness, while also creating an environment that allows new technologies to take root and grow.
Innovation outside the banking system often complements the development and use of technology within the banking system, and often far outpaces that growth. As you're all aware, many groundbreaking tech innovations have been pioneered by developers outside of the traditional banking system.
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In late June, the Board announced that reputational risk would no longer be considered in our supervisory process.4 To implement this lasting change, we are updating guidance, examination manuals, handbooks, and other supervisory materials to ensure the durability of this approach, which is a critical step in addressing the problem of de-banking. I am also considering whether we need a regulatory change to provide greater transparency and certainty about this approach. It is not the role of examiners or policymakers to direct which customers or industries to serve or which products to offer. That decision lies solely within the purview of bank management, limited by the safety and soundness of the institution,, the legal activities of its customer, and risks, if any, to financial stability.
Over time, "reputational risk" emerged as a priority area that policymakers emphasized for examinations. Exams or reviews focused on reputational risk have often lacked a sufficient nexus to financial risk and safety and soundness considerations that are the appropriate focus of our supervisory activities.
Let me be clear. We must adopt an approach that does not penalize or prohibit a bank from banking a customer engaged in legal activity. This approach must allow and encourage banks to provide banking products and services to any legal business, without disfavoring any particular viewpoints, businesses, or industries.
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