On a Thursday in mid-March, $42 billion was withdrawn from Silicon Valley Bank. Had California regulators not shuttered the bank, officials say, another $100 billion of deposits would have left the bank the next day.
Two days later, regulators pulled the plug on New York-based Signature Bank. The decision to close the bank on a Sunday was driven by a heap of online withdrawal requests that had piled up over the weekend.
Both the Federal Reserve and the Federal Deposit Insurance Corp. have identified social media as a driving force behind the collapses. Depositor concerns fomented on Twitter and Slack. Through email threads, they coordinate their exits.
Unlike bank runs of the past, the primary issue for the banks was not a line of customers, but rather a queue of pending transactions initiated through mobile apps and computers. These tech-fueled failures have led some to wonder what the episode would have looked like if the banks never closed, if they did not have the reprieve of Thursday night or the weekend to regroup, weigh their options and, ultimately, fail in an orderly fashion.
Such a scenario is not entirely hypothetical. At least it won't be for long. This summer, the Fed's long-awaited real-time payment system, FedNow, goes live. The service is expected to make round-the-clock banking a staple of U.S. financial services. Such a development is expected to benefit merchants and consumers alike.
But some worry the 24/7/365 nature of FedNow, which promises cleared transactions in 20 seconds or less, could supercharge future bank runs.
"You're working on a real-time payment system that's ripe for a problem like this with Twitter," Rep. Blaine Luetkemeyer, R-Missouri, told Fed Vice Chair for Supervision Michael Barr during a March 29 House Financial Services Committee hearing on the bank crisis. Barr, the central bank's chief regulator, did not comment on FedNow, but said the nexus between banking, social media and technology is a "critical" topic of exploration. Other regulators have also noted the need for regulation to keep pace with technology.
"I don't think there's a way to put the genie back in the bottle," Consumer Financial Protection Bureau Director Rohit Chopra said during an April 11 webcast. "When it comes to 24/7, fast communication, it's a reality we must accept and incorporate accordingly."
Many of the specific requirements and best practices around FedNow will need to be worked out over time. The Fed expects adoption of the system to be gradual and it has signaled that it will adapt its policies and provisions around it over time.
That said, it will not be caught flat-footed on the regulatory front. It already has experience overseeing the more than 300 depositories that offer instant transactions through the privately operated RTP network. It also has consulted with various firms that have operated in countries that have had fast payments for years, including the U.K., India and Brazil.
"To some degree, we've done this, we've seen this story, we've seen where it's going to run into challenges, we've got some idea of where the obstacles are and the things that will need to be overcome," said Scott Harkey, executive vice president of financial services and payments at the U.K. software company Endava. "There's a lot of work being done as an industry to bring that into it."
Because of the resources at the Fed's disposal, Young Kim, a regulatory lawyer with the firm Clifford Chance who specializes in technology and payments, said he expects FedNow's impact on financial stability and supervision to be a "mixed bag." On one hand, he said, the speed and accessibility of the system creates new outflow frontiers to defend. On the other, banks and regulators are aware of these risks and have systems in place to address them.
At its onset, FedNow will feature tools to help protect banks against the type of calamitous runs that felled Silicon Valley and Signature. These include a $500,000 cap on transactions, which individual banks can lower to suit their own needs, and a $100,000 default limit.
Still, Kim said, the recent failures and the upcoming launch of FedNow highlight the need for the industry and its supervisors to adapt to a rapidly evolving world.
"On a broader scale, I view FedNow as just the latest in a series of technological improvements — alongside mobile banking, same-day ACH and even social media — that accelerate the velocity of deposit runs and introduce new risks to the banking system," Kim said. "Banking is increasingly digital and payments are increasingly frictionless, and it really seems we're just now discovering one of the hidden costs to that convenience."
FedNow has officially been in the works since 2019, though the idea of adding a real-time platform to the Fed's selection of payments offerings had been bandied about since 2015. The system is set to go live in July.
While instant payments will be new territory for the central bank from an operational perspective, it will be familiar ground for its regulatory and supervision arm. The Fed has supervised banks with access to instant payment technology since The Clearing House — an organization owned by 22 of the largest banks in the country — launched the RTP network in 2017. The Fed bases its policies on activities, not specific systems, so any supervisory practices crafted for the RTP members will be applied to FedNow users, too.
Yet, for all their similarities, there are some key distinctions between RTP and FedNow that will impact how banks engage with the system and how supervisors set expectations for it, Harkey said.
Unlike RTP, for which participating banks maintain their own accounts for cash to settle payments, FedNow funds will be moved directly from participants' master accounts at their regional reserve bank.
Harkey said he will be watching to see what kind of requirements the Fed puts in place regarding fund availability for instant payments. Once those standards are established, he said, banks will have a lot of latitude in the governing mechanisms they put in place to protect their solvency.
"On any payments methods, banks could build controls to prevent a mass liquidation of funds. They could limit it by the hour, they could limit it by the day, they could do all sorts of things … it's not a technology problem," Harkey said. "In the light of these real-time systems, it is absolutely something banks will consider within the bounds of what they're legally allowed to do."
While bank runs are top of mind at the moment, they are not the only safety and soundness concerns raised by the impending rollout of FedNow. Dealing with fraudulent or misdirected payments is another consideration. So is the possibility that banks — even those that don't use FedNow — will be required to make funds available to their customers immediately.
Marc Trepanier, principal fraud consultant at the real-time payment software provider ACI Worldwide, said instant payments do present an inherently greater risk, but the speed at which these transactions move mean old mechanisms for identifying and stopping bad transactions have become obsolete.
Because fraud and other financial crimes are becoming more sophisticated, Trepanier said, the onus is not only on banks to prevent funds from leaving customer accounts, but also, in some instances, to keep money from coming in. This is because of an uptick in schemes in which individuals are duped into unwittingly helping bad actors launder money.
Unlike with the Fed's automated clearing house, or ACH, system, banks no longer have multiple to stop bad transactions. This means banks need to have robust systems to analyze customer activity and recognize aberrations and flag problem transactions in real time. These systems exist, Trepanier said, but it's up to banks to make sure they have them in place.
"The fraud risk investments that the banks are doing need to be done now. They can't be early adopters or fast followers and think, 'Oh, I'm not going to put protections in place. We'll get to it eventually,'" he said. "That will not go well for them."
For banks that can identify bad actors, the Fed will offer a "negative list" feature, which allows institutions to block entities from transacting with their customers or put a temporary hold on funds so additional vetting can be done.
FedNow participants will also be able to restrict what types of transactions they participate in. For example, a bank could join as a receive-only participant, allowing it to only deal with risk management in one direction.
While the Fed has a lot of lessons from other central banks and their stakeholders, some issues in the faster payment space have to be resolved.
One is around liability for fraudulent behavior. Trepanier said the leading proposal on this subject can be found in the U.K., where the regulators are weighing a 50/50 split liability on fraudulent transactions by the banks on either side, with customers being made whole in all but the most grossly negligent circumstances.
"That's a massive shift and it goes straight to the conversation around incoming credits," he said. "If I accept this incoming real-time payment, I'm 50% responsible for it in the U.K. That's a serious implication. Banks have never been liable for that before, so that changes the game."
If the 50/50 model becomes the global standard, Trepanier said, that could require a change to the Fed's Regulation E, which governs liability in electronic transfers.
Trepanier said he has encouraged the Fed, through advisory groups, to implement safeguards such as central fraud protection, or encourage banks to adopt technologies such as confirmation of payee. But it is unclear if the central bank will adopt such policies.
The introduction of a government-run instant payment system also raises the question of whether banks will be forced to process certain transactions more quickly under provisions of the Expedited Funds Availability Act of 1987. Implemented through the Fed's Regulation CC, the act sets timeframes within which banks must make funds available to their customers.
Aaron Klein, a senior fellow at the Brookings Institution, former Treasury official and payments expert, said the act calls for the Fed to require certain payments — including checks and other forms of electronic fund deposits — to be made available to customers "as soon as technology allows."
In practice, the Fed has generally not required the funds to be made available immediately, he said, even though doing so would not require the immediate settlement of a transaction.
"The Fed has long refused to implement the law, instead waiting for its own technology to catch up," Klein said. "The launch of FedNow eliminates one of the Fed's bogus arguments for not implementing the law."
The Fed has not said whether it will make any changes to Regulation CC or its requirements around instant fund availability. Klein said if it does not, the central bank would be in violation of the law.
"The Fed will face a critical test right off the bat whether they will properly implement the Expedited Funds Availability Act and require banks to give people faster access to their funds," he said. "If the Fed fails to do that, it is thumbing its nose at Congress and taking money out of the pockets of people living on the edge and handing it to banks in profit."
Then, there is the unknown factor. Banking at the speed of the internet has already proven difficult to supervise in a crisis. Moving forward, regulations will have to both address the issues of the past, while also keeping up with the rapid pace of future changes likely to be spurred by the faster payments.
Former Comptroller of the Currency and CEO of Ludwig Advisors, Gene Ludwig said regulators should not attempt to stifle this innovation. Instead, they should focus on developing systems of their own to counter adapt.
"Modern technology that makes things more efficient and faster, whether it's in payments like FedNow, or in other tools, like communications, has had and will have profound effects in terms of banking," Ludwig said. "The issue is evaluating the ways in which it is going to impact us as best we can, and developing modern tools that will allow us to control our fate, irrespective of the increase in speed."
