Following this spring's banking crisis, NYS top financial regulator, Superintendent Adrienne Harris, discusses the takeover of Signature Bank, and the lessons learned on the resiliency of America's banking sector. Nearly two years into leading the Department of Financial Services, Harris shares how she is modernizing the supervision of the state's banking and finance sectors, while also setting the standard of digital currency regulation.
Transcript:
Chana Schoenberger:
Hello, and good morning. I'm Chana Schoenberger. I'm the editor-in-Chief of American Banker, and I have with me here Adrian Harris, who's the superintendent of the New York Department of Financial Services, which makes you the top banking regulator in New York State, which is the most important state for banks.
Adrienne Harris:
We think.
Chana Schoenberger:
So you've had this job for a little over two years. Walk me through how that's gone. Good things, bad things.
Adrienne Harris:
Yeah. Well first I'd say, of course we are the banking regulator for the state, but as I think most people know, but it's worth restating. We also regulate insurance, health, property, and casualty and life. We're the only prudential regulator of cryptocurrency in the country. We regulate debt collectors, student loan, servicers, mortgage servicing. So it really is quite a broad purview inside DFS. As you know, we're a little over two years in to my tenure, had some really great successes managed as you know, some challenging times, but it has turned out okay. So it's really been an interesting two years.
Chana Schoenberger:
So, okay. We'll start with the thing that most people think of when they think banking and New York, which is, we had a bit of a banking crisis here last spring, and one of the banks was a signature bank, which was regulated by your office. So that was an interesting situation. How did that go?
Adrienne Harris:
Yeah, I think all things turned out well when the story was done. I'm so grateful to the federal regulators for taking the action that they took invoking the systemic risk acceptance to make sure that the depositors had their funds. I think what's important to remember about Signature is unlike Silicon Valley Bank that had this industry concentration and a number of other issues, the depositor base at Signature was quite diverse. Lots of small law firms, lots of escrow accounts, the wholesale food vendors from Hunts Point, a lot of small businesses. And so making sure that they were protected I think was a really good outcome. Not just for the bank itself, but for the broader system. And of course now we see much more stability in the regional banking sector and the community banks, and that's so important for economic activity in communities all around New York and all around the country.
Chana Schoenberger:
There's been this, well after
Adrienne Harris:
I don't know. I think we're going to continue to have a real diversity across banking institutions, and I think that's important because you need the smaller institutions to service smaller markets, really know their communities, be in the places where the big banks aren't necessarily there. I think having the mid-size and regional banks is important. They get the scale that the small banks don't serve, and you can see that in how they service their customers and can maybe offer a broader array of products, have different fee structures, and then of course, the big banks. And we regulate 17 GSIBs and 120 foreign institutions. So we get to see really the whole diversity within DFS from the very smallest institutions to in rural communities upstate to the largest institutions in the world. But I think having that diversity is incredibly important for the health of the system.
Chana Schoenberger:
Yeah, it's an interesting state because we have both all the big banks you can see from this office and then the much smaller ones. So in terms of regulation, what are you doing to make sure this doesn't happen again soon?
Adrienne Harris:
Yeah, so we published a report like the other regulators did as well. I think there's a number of things both from a regulatory perspective but also from an operations perspective that we are now doing differently. A lot of that work was in process before the banking crisis, but the crisis just proved the need for that. Of course, like others, we are doing a lot of monitoring and for CRE risk, we continue to monitor liquidity risk, look at our institutions with higher percentages of uninsured deposits, all the things that people have been talking about since March. And we feel very, very good about the strength of our New York institutions. But I think the thing that's gone maybe under explored in the larger conversation is not just the regs and the black and white of how regulators do their job, but the process and operational points behind this.
When we think about, if you're going to examine a bank for 2020 and that exam maybe happens in 2021, and then there's a time period where the regulators are writing the report and then presenting findings to the bank, and then the bank has some time to remediate, that operation is not necessarily consistent with a 21st century economy and the speed at which money moves. So we've been spending a lot of time at DFS thinking about, how do we shorten the feedback loop, the time in which it takes us to examine, give feedback to the banks, and then really hold their feet to the fire and have true accountability in the remediation, shortening that feedback loop so that we're not seeing issues persist year after year after year, as was the case with SVB and with Signature. So I think that's an important thing. The other thing that came out of the crisis for us was, and we've talked about this in our report and in my congressional testimonies, in the case of Signature, the bank's inability to produce very basic data during that weekend in a crisis.
And one of my favorite examples is some of the collateral that they had valued at $6 billion and within 12 hours revised that estimate down to $500 million, which is a big difference.
Chana Schoenberger:
It's a problem.
Adrienne Harris:
It's a problem when you have that big a delta in your estimates of your asset valuation. And so we've been talking about how do you do operational stress testing? How do you run the fire drill with your institutions to make sure that they've got that data handy, that they can produce it quickly in a crisis situation? That's not something that's about the black and white of the regs, but it's about how we as regulators do our jobs and hold banks accountable. And the last thing I'll say on the operations point is also I think one of the lessons that all regulators have learned is, how do you escalate what the examiners are seeing in the institutions every day to the leadership of the regulatory institution?
Because if you look at the exam reports of all of these institutions, you can see the issues particularly around liquidity risk management, persisting year after year after year. But if those issues are not making their way up to the leadership in the organization so that somebody can say, we need to take more action, we need to escalate to enforcement more quickly, then those issues are just going to persist. And that's what we saw in the failure of these banks. So we are revising our internal escalation protocols as well. So again, I think for us, this is really twofold. How do you think about the black and white of the regulations, but how are you operationalizing regulation in a 21st century economy?
Chana Schoenberger:
So if you do it faster, how long should it take?
Adrienne Harris:
Well, it really depends on the size and complexity of the institution, but certainly a year later, and then waiting for remediation, is too long. So if you've got these supervisory recommendations, depending on how big and small they are, we should be thinking about, okay, bank, you have 30 days to fix what should be a very basic issue, or you have 60 days, or if you have a large supervisory recommendation, how do we hold their feet to the fire and make sure they're at least accountable in making progress? The other thing all regulators I think are now using is how do we use targeted exams between the full scope examinations? How do we think about using interim downgrades for the camels or Roca rating? So those are other tools that I think also help tighten that feedback loop.
Chana Schoenberger:
So it's sort of like a pop quiz in school?
Adrienne Harris:
Yeah, exactly. Exactly. Or when there's an issue or there's a broader market trend taking hold, how do you go into a bank and look at that particular issue between the full scope exams? Okay,
Chana Schoenberger:
So one thing that you're known for is regulating crypto. A lot of regulators are afraid of crypto banks have been saying, please regulate crypto because we really want to do it, but we're afraid to go anywhere near it before you say it's okay. So how is that going to play out?
Adrienne Harris:
Yeah, so we at DFS have been regulating crypto since 2015 when the bit license was put in place. So we have a lot of experience and history in the space. It wasn't necessarily operationalized well before the last couple of years. So when I came to DFS, the crypto division in the department was very small and didn't necessarily have the expertise for the complexity and the risk in the space. We have now built a crypto unit of over 60 professionals coming from the technology sector, coming from academia, coming from some of the federal regulators. And so it's really a diverse group of experts that we have who spend all day every day thinking about crypto. It's the largest crypto unit that I know of in a regulatory setting anywhere in the world. We also have the most robust requirements of anywhere in the world. So the same cyber rules that apply to our banks apply to our crypto companies. The same BSA AML rules that apply to our banks, apply to our crypto companies. We don't permit rehypothecation. We have robust disclosure requirements. We have very, very conservative capitalization requirements, which is why you didn't see our regulated entities go bust during the crypto winter and why we did not license FTX to do business here in the state of New York.
Chana Schoenberger:
Well, that's good to know,
Adrienne Harris:
But I will say too, we can't do it alone. I'm very proud of the things we've accomplished in New York with regulating crypto, but we are eager for there to be a federal partner and a federal cop on the beat like us using all the tools that we have. So it's not a space where you can effectively regulate just through enforcement action. Of course, we've brought enforcement actions including $100 million against Coinbase, $30 million against Robinhood. But what's more important is having transparent, rigorous rules of the road on the books, then being able to supervise and examine issue guidance. And we've issued nine pieces of guidance in my two year time, and then where you still see issues with compliance to bring enforcement actions.
Chana Schoenberger:
So in a world like the crypto world where there are so many lightly or completely unregulated exchanges and crypto companies offshore where US rules really can't touch them, and there are plenty of Americans and New Yorkers who are putting their money with these companies either because they truly believe that they're safe and sound or they don't care and they just want to gamble. What can we do about that?
Adrienne Harris:
Yeah. Well, there's a couple of things. One, we do a lot of work to try and educate consumers and let them know what the differences between regulated and unregulated companies. So we list our regulated entities on our site so New Yorkers know. we spend a lot of time through our consumer assistance unit trying to answer questions of consumers. We spent time at the state fair last year talking to consumers about virtual currency, and that's one of the amazing things about DFS. We're clearly a global regulator because we regulate New York. We're also a local regulator, so we do things like go to the state fair and talk directly to our constituents. So that's on the education piece. We also have the ability to go after unlicensed entities. So if we find that you are serving New Yorkers without ADFS license or charter, we have the ability to bring enforcement actions. And we've started working with the legislature to strengthen that authority to deter people from doing business here when they're not supposed to.
Chana Schoenberger:
Crypto is such an interesting area because I get the feeling that not many people truly understand it and how it works.
Adrienne Harris:
I think that's right, and that's why we have the disclosure regimes that we do. That's why we have the conservative reserving requirements that we do. We can do everything we can to try and educate consumers, and again, we spend a lot of time and energy doing that, but having a robust prudential framework is also another way to help protect consumers even when they're engaging in activity that they may not fully understand.
Chana Schoenberger:
Right, okay. Which dovetails very nicely with the question of cybersecurity, which has been a huge thing here at American Banker. We cover cybersecurity very closely, and one of the things, of course everyone in the banking sector has noticed is that crooks get smarter and smarter and smarter, and they exploit pretty much anything that they can. So as banks become more digital and every bank is trying to be more digital now there's a ton of fraud and what's going to happen with that?
Adrienne Harris:
Yeah, well, so just as we've been leading in crypto, DFS has been a leader in cyber security, and going back to 2017 when we published some of the first regulations for financial services for cybersecurity, that original regulation then became the model for the NAIC for other states around the country. And for federal regulators, fast forward six years and a six-year-old reg might as well be a 100 year old reg when you're talking about cybersecurity. So we are now in the process of amending our cybersecurity regulation. We did three rounds of notice and comment, so expect more very soon on the finalization of that reg. But what you'll see in the final reg is tailoring for our institutions because we regulate on the one hand GSIBs and on the other hand two-person insurance brokerages. So you have to have a rule that fits the diversity of business model of size and complexity and risk, but you'll also see multi-factor authentication requirements across the board.
You'll see new rules and requirements around ransomware and extortion payments, which in 2017 existed, but not, it wasn't the same threat to your point that it is today. So the regulations have to be updated to meet the threats and risk of the current environment. And I'll say to you, it's another virtue of being a big state, but a state regulator is our ability to be agile and nimble and issue new regulations quickly or to do guidance, FAQ, to be on the ground with our regulated entities and with consumers. That nimbleness and agility allows us to keep pace with risks and update our regulations accordingly.
Chana Schoenberger:
Is there a way to really protect consumers from some of these risks around fraud that they could take more closely in hand themselves?
Adrienne Harris:
Yeah, I think education is really a key there. I mean, we think now when we look at the current environment, one of the things we're looking at very closely is mortgage fraud. When you have rates where they are and you think about access to capital and some of the challenges that consumers are starting to face there, how do we protect them against mortgage fraud? Part of that is educating the consumer. The other part again, is holding the regulated entities proverbial feet to the to say, you are responsible for vetting those transactions, those mortgage loan applications, and making sure they are not fraudulent, to make sure that the materials that are submitted as part of underwriting are accurate and verifiable. You are responsible for making sure that the landlord in the multifamily housing unit is not using the loan to put people on the street in a way that's inconsistent with our regulations and guidance.
So it is always that twofold of holding the institutions accountable while trying your best to educate consumers. But I think it's one of the really important things about technology that also goes under explored. Historically, when you think about things like consumer education and mortgage lending, once upon a time you would go to a seminar, somebody would give you a cool pamphlet or brochure that you would take home and you may or may not read, but it was probably pretty divorced from a timing perspective from your purchasing decision. So you try to educate yourself about getting a mortgage, but it may or may not be close in time to when you're actually going through that mortgage paperwork. One of the things we're thinking a lot about through our research and innovation division is how do you shrink that timing gap between financial decision-making and financial education? How do you use digital tools or have your companies use digital tools so the information is at the consumer's fingertips when they need it, when they are making that loan decision or that purchasing decision.
Chana Schoenberger:
Especially in a world where you can now open an account in 60 seconds, get a mortgage almost instantly online.
Adrienne Harris:
Right. That's absolutely right. And I think this goes back to the banking crisis as well. How do you think about regulation in a world where one can move lots of money from a device that fits in your hand and you can do it between local subway stops here in New York where you have cell access, right? If you can move lots of money in the time it takes you to get from one local subway stop to the next, are our regulations fit for that technology, that speed and that sort of economy?
Chana Schoenberger:
It's very scary. And you of course were an attorney during the 2008 financial crisis. I was a journalist then, and it was such a different time because it was very analog. And I remember someone told me about in New York, people were going from bank branch to bank branch trying to put their money out in FDIC insured parcels. But that was a thing you could do physically and now it would be an app.
Adrienne Harris:
Yes, now it'd be an app. Although interestingly, we still saw people lined up outside of bank branches in March.
Chana Schoenberger:
Right.
Adrienne Harris:
It's an interesting concept because I think there still is that that analog piece of it. And when we talk to consumers, you still hear people say, I want to be able to go to a branch. I want to be able to talk to a teller. So it really is how do you balance that? One of the things we've done recently in New York, we have a basic banking requirement, so we require our chartered institutions to provide low cost accounts. We compared the requirements in the statute to the Bank On initiative and found that there were really slight differences between a bank on certified account and what was a basic banking account set of requirements here in New York. And we said, well, wait. They're both low cost accounts. We think that banks should be able to either meet the requirements in the statute or get a Bank On certification and offer those accounts. It makes it easier for banks to comply with our basic banking requirements, gives them more ways to do that. And as a result, we've seen 23 new banks offer affordable accounts, but to our discussion about the analog face-to-face nature of banking, we learned even with that success in adding 23 new banks, we were hearing from the advocates that the consumers don't know. They don't know that these accounts are available. So we've now asked banks to say, you have to train your frontline staff. So when somebody walks into a branch, the frontline staff, the teller needs to be prepared to talk to that consumer about the low cost accounts, and it needs to be immediately visible on your website or mobile app so that it's not 20 clicks in, but easy for the consumer to find. So it's both the analog and the digital.
Chana Schoenberger:
It's an overarching question. We have a lot about banking, especially as it goes into wealth management, which is banks, there are so many banks that don't find it profitable to serve underserved customers. It's why they're underserved in the first place, and yet as almost a public utility, people need to be able to do some basic banking.
Adrienne Harris:
Yeah, absolutely. It's why the low cost accounts are so important, but also why it's so important that we regulate some of the non-bank financial institutions. One of the first things I did when I came into the seat was to set a new check cashing regulation. When I came in, the governor appointed me in September of 2021. By January of 2022, when I was confirmed, the team put in front of me the approval for the annual automatic CPI indexed check cashing fee increase. And I just said, no, we're not doing this annual automatic and tagged to CPI, which was going up and up and up still really during the pandemic. I'm not increasing check cashing fees because we know that people use and need them for liquidity. So we did a lot of work looking at what happens in other states, talking to all of our stakeholders, and we wrote a new reg to say, your fees don't need to be tied to CPI. That is not a good estimate of your cost as a check casher. So we created a two tier system. We rewrote the rights. We're currently in court litigating this, but this is a rule that I will defend as long as I am here in this job and able to do, because of the importance of all these financial institutions and people to be able to use their money and get liquidity when they need it, but do so affordably.
Chana Schoenberger:
That's really interesting. So that sort of brings up my last question, which is about AI. So
Adrienne Harris:
Yeah. I think that's very well put. We have to be cognizant of the risks. We talk about discrimination, market manipulation, all these other things along with some of the benefits in terms of some of the benefits in underwriting or customer service. So I think it's going to be a lot of work for regulators to find that balance between the usefulness of these innovations and the risks that it presents. We're working on some AI things now, mostly on the insurance side with respect to underwriting, so stay tuned for that. But
Chana Schoenberger:
So can you give me an example of a way that your office is using AI?
Adrienne Harris:
Yeah. One of the cool projects we're working on now is we're looking at weather data, insurance data and mortgage underwriting data. And overlaying that because we know that communities of color and LMI communities are disproportionately affected by climate change. I created the climate division at DFS and we proposed banking guidance late last year. But how can we ensure that our climate goals don't come at the expense of our fair lending goals? And one way to do that is to start to overlay very complex data sets about weather, insurance and mortgage underwriting, and try and draw some insights that you couldn't draw without the use of large computing power.
Chana Schoenberger:
Oh, that's really interesting.
Adrienne Harris:
More to come on that.
Chana Schoenberger:
Okay. Well, thank you so much. Really appreciate you coming out with us today.
Adrienne Harris:
Thanks for having me.
Chana Schoenberger:
And happy Halloween.
Adrienne Harris:
Happy Halloween.
