Kansas Fed to revise community bank strategy

By Rebekah Tunstead | 4 November 2019

The Federal Reserve Bank of Kansas City needs to reconsider its approach in encouraging innovation within community banks according to Jackie Nugent, assistant vice president, supervision and risk management, at the state regulator.  

“One thing that we have been doing at the Kansas City Fed, is we will go out on a road tour and last year we talked about innovation and tried to encourage it and highlighted some things,” said Nugent on the side lines of Money 2020 US in Las Vegas last week. “So, yes educational efforts are out there, but I’ll be honest with you, when we did that there were a lot of glassy eyes.”

The recent introduction of a new category of state-chartered Special Purpose Depository Institution (SPDI) in Wyoming - which will specifically focus on digital assets - has motivated the regulator to be more proactive with regards to technology, according to Nugent.

 “A few years ago, we would have said, ‘we are leaning in on fintech, learning, listening, observing,’ and actually over the last year or two we can no longer lean in, we are being pulled in. That is partly because of activities that are happening in our district,” said Nugent. “We cannot keep doing what we did a few years ago, we’ve got to do something different.”

“We would like to get some of our organisations to be a little more like a CBW Bank, to think more innovatively - that by itself is an effort,” said Nugent.

In late October the chief technology officer at Kansas-based CBW Bank told bobsguide that although the bank had been successful in its creation of fintech partnerships, there was a lack of assistance from the regulators in aiding innovation.

"If I, as a bank, need support for the  innovation that I am doing, I don’t know who to call,” he said.

“We have zero support. In fact, we end up with higher scrutiny because we are considered to be something new, which slows down what we are doing,” he said. “If we don’t have these rails and the infrastructure on which you can innovate, you can only innovate around the fringes.”

The Federal Reserve Bank of Kansas City supervises the Tenth Federal Reserve District which is made up of banks from Colorado, Missouri, Kansas, Nebraska, New Mexico, Oklahoma, and Wyoming. 95 percent are community banks.  

The Federal Reserve conducts point-in-time examinations on community banks every 12 to 18 months. But this, Nugent said is not enough of an interaction between the regulator and the banks to foster innovation. 

“If a community bank is going to partner with a fintech firm or develop in-house some sort of innovation, we want to be able to have this conversation with them along the way to get ahead of any challenges or issues to help them. A once a year, or once a year and a half exam is not going to be conducive to that, so we have to rethink how we are working with those organisations."

Nugent said the Kansas City Fed is thinking about the possibility of introducing an innovation hub.

“That is a thought in our minds - what can we do at our regional level to foster that in a formal way? So, I can’t make any promises, but we are thinking about something like [an innovation hub].”

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