A House Financial Services subcommittee hearing examined how much uncertainty banks must absorb as regulators overhaul their approach in real time.
Subcommittee Chairman Bryan Steil, R-Wisc., framed the stakes in his opening remarks. “The question before us is not whether this transformation will continue. It will. The real question is whether our regulatory framework is prepared to meet it.”
The Thursday (March 26) hearing, titled “Innovation at the Speed of Markets: How Regulators Keep Pace With Technology,” brought together senior officials from the Federal Reserve, the FDIC, the OCC and the NCUA. Witnesses described a shift away from blanket caution and toward integration, though the pace varied by agency.
James Gallagher, senior deputy comptroller and chief national bank examiner at the OCC, said the agency is updating how it reviews new products and partnerships. He described a supervisory model focused less on the type of technology and more on whether a bank can show it controls the risks involved.
At the FDIC, Ryan Billingsley, director of the Division of Risk Management Supervision, described a similar shift. He said the agency is reviewing whether some guidance has been applied to activities that “pose no material financial risk to banks.”
Randall Guynn, director of the Federal Reserve’s Division of Supervision and Regulation, said the Fed is working to make oversight more transparent. That includes publishing internal operating manuals so banks understand how decisions are made.
Amanda Parkhill, acting director of the NCUA’s Office of Examination and Insurance, said the agency is reviewing rules that may be outdated or too restrictive. She said that review is being shaped by feedback from institutions that feel compliance requirements are out of proportion to their size.
How Third-Party Risk Is Reshaping Bank Supervision
Third-party risk has moved from a compliance footnote to a core concern about how banks operate, panelists said.
Guynn said partnerships help banks reach new markets and launch products faster. But they also bring risks that traditional supervisory frameworks were not built to handle.
Gallagher said regulators are trying to tailor oversight to each institution’s risk profile rather than apply the same standards across all partnerships.
Rep. John Rose, R-Tenn., raised concerns about the burden on small banks from third-party rules. Billingsley said regulators are reviewing the 2023 interagency guidance on third-party relationships. “We’ve taken a more open-minded approach over the last 12 to 18 months,” he said, adding that the agency is looking at whether standards can be better tailored “particularly for our community banks.”
How Regulators Are Integrating Digital Assets and Stablecoins Into Bank Supervision
Digital assets came up across multiple witnesses.
Gallagher described the OCC’s work on a payment stablecoin framework. He said the goal is to create a supervisory environment where these activities can grow without putting institutions at risk.
Billingsley said the FDIC has removed prior notification requirements that had restricted banks from engaging in crypto-related activities. He also said a formal framework is coming. “We expect soon to propose prudential requirements — including tailored requirements related to reserve assets, capital, liquidity, and principles-based risk management requirements — for FDIC-supervised payment stablecoin issuers,” he told lawmakers.
Guynn noted that stablecoins and tokenized deposits could change how payments are processed and settled. He said there are potential efficiency gains but also new operational risks.
How Banks and Regulators Are Managing AI Risk and Governance
All four agencies addressed artificial intelligence.
Billingsley said current AI applications include fraud detection and credit underwriting. He noted that newer tools are also being tested for customer service and code generation.
Guynn said AI adoption is growing but most use cases are still limited. He cited unresolved challenges around explainability, data integrity and model risk.
Parkhill said credit unions are exploring similar AI applications. She raised concerns about whether smaller institutions can meet the same governance standards as larger ones.
Gallagher offered a note of perspective. “The current pace of innovation is much faster, but this is nothing new,” he said. “We’ve seen banks innovate throughout our history as an organization and throughout my career.”
