Fed vice chair for supervision Michael S. Barr speaks on financial inclusion

[Music] [Applause] [Music] [Applause] [Music] okay well welcome to the FED uh it's a great day so I just want to um get our day started so good morning everyone my name is Art Lindo I'm a deputy director in the Federal Reserve board's division of supervision and Regulation and I'm the head of our policy efforts in that group I'm thrilled to be here today to help kick off the Federal Reserve board's first conference on financial inclusion now anyone who knows me knows that Financial inclusion is a topic that is near and dear to my heart given the fact that I am a first generation American and I believe that the US Financial system should be able to meet the needs of all Americans so efforts to address Financial inclusion are broadly align with the federal reserve's missions of fostering Optimal macroeconomic Performance improving improving Financial stability increasing Payment Systems efficiency and enhancing financial institution Integrity in general the financial capacity and capabilities of individuals households and small businesses are improved by broadening fair and affordable access to financial services such access can also create resid among households and small businesses in the face of unexpected expenses such as a southern Health event or an event that disrupts a local economy both of which disproportionately impact those who are already underserved by the traditional Financial system while the Federal Reserve board and the Federal Reserve System have been working on topics that have Financial inclusion implications for many years we humbly acknowledge that there is room for improvement today's conference is going to play an important role in helping us to move in the right direction throughout the day we are going to hear from two of our oversight Governors along with the range of experts who are here to expand our understanding of financial inclusion and its impact on individuals businesses and the US Financial system the fact that we are broadcasting today's sessions on our public website and YouTube highlights how important this topic is to the work we do here at the Federal Reserve board this conference shines a light on the importance of this topic and is a step towards a deeper understanding of factors that can improve inclusivity so here's a quick rundown of the day our first session today brings together academics to shed light on the intersection of financial inclusion and Bank safety and soundness areas that will be covered in this session include alternative data and credit underwriting and the implications of Bank practices on demand for alternative services such as payday loans and Innovations such as to earn wage access products I'm also looking forward to the second session this morning that will compare the implications of payments Innovations for inclusion in the United States and in other jurisdictions our last session of the day will provide important perspectives on the consumer related implications of financial inclusion Innovations inside and outside of the financial system now before we start today's sessions I would would be remiss if I did not thank the people who helped to make this conference happen specifically usma wahab Sonia danberg and David N nille um who have helped shate this work across the Federal Reserve System and the board in particular even though we are one happy family at the FED as you know there are squabbles between one another and they make all those sort of things go away so cados for them for pulling this together with no fewer than three divisions of the Federal Reserve being represented here today now I'd also like to acknowledge the work of the Federal Reserve board's Financial inclusion working group who continue to push the board's Collective understanding of the implications of financial inclusion on our daily work and finally the conference organizing committee which was led by Evan lefl and Kristen Nolan Drew pack Ria Son Wayne and PJ Tabit who have been working tirelessly to make this conference happen thank you all now it gives me great pleasure to introduce our first Speaker of the day Vice chair for supervision Michael bar Michael bar took office as the second Vice chair for Supervision in July of 2022 now prior to joining the Board of Governors Vice chair bar had a long and impactful career both in the public sector and in Academia while he's been a thought leader in many areas related to supervision and regulation of America's banking system he has also distinguished himself with numerous Works related to financial inclusion this work includes his book no slack the financial lives of low-income Americans that was written written in 2012 but has a number of insights that and ideas that are still worth embracing over a decade later Vice chair bar brings a lot of vision and en energy to his approach to financial inclusion and other topics here at the Federal Reserve board which has made the past two years of working with him very interesting with that please join me in welcoming Vice chair for supervision Michael [Applause] bar thanks art let me um just say how excited I am to be here um as part of the Federal Reserves inaugural conference on financial inclusion and Innovation Financial inclusion is Central to the federal reserve's mission of promoting a strong and stable Financial system and a healthy economy that works for everyone this event brings together academics practitioners and thought leaders to discuss how Financial products and practices are evolving to better meet the needs of individuals and businesses historically underserved by the financial system I have spent much of my career in the public sector in Academia working on topics related to financial inclusion I found that projects that bring together public private academic and nonprofit perspectives are often the most productive since we all approach the issue differently and can learn from each other's perspectives forums like these provide good opportunities to form connections and Spark collaboration looking over the past few decades significant progress has been made in improving Financial inclusion including progress on many of the issues that will be discussed at this conference and yet we still have further to go continued support for responsible innovation in this space is needed and can benefit from engagement across industry Academia and Regulators this morning I'll touch on how approaches to financial inclusion have evolved where things stand today and how we can continue to make progress towards a more inclusive Financial system the goal of financial inclusion is to improve access to Affordable financial services that meet the needs of individuals and businesses banking the unbanked is part of that but we also need to make sure that both bank and non-bank products and services are designed to meet the financial services needs of low and moderate income households and we need strong consumer protection to guard against abuse banks are playing a pivotal role in innovating to serve low and moderate income households sometimes in partnership with financial technology companies or fexs for example we've seen a growing number of banks offering small dollar loans expanding the use of alternative data to underwrite and price their credit products and investing in tools to help better understand consumers Financial Health when adopted in a responsible and well-managed manner with systems processes and policies in place to Monitor and manage related risks these Innovations can broaden access to Fair affordable and transparent credit this in turn can create Financial resilience among small businesses and help help individuals and families become homeowners build wealth and become financially empowered Innovations in banking services are important to improving Financial inclusion but to have durable impact on society Innovations must be adopted responsibly Banks must have controls to manage risks and prevent violations of Law and their approach must keep Pace with the growth of new products and services complexity can exacerbate risks and requires Banks to pay particular attention to ensure that laws are followed and consumers protected to the extent banks are working with fintech Partners banks have a responsibility to manage the risks associated with the third parties they partner with to serve their customers we have unfortunately seen examples of failures of banks to effectively manage the rests of Partnerships with other companies that support services to their end customers and these failures have resulted in customer harm in communities where people are living on tight budgets or with limited access to financial services disruptions of this kind can be catastrophic these examples are a reminder that providing Innovative Financial Services comes with responsibilities to ensure that risks are appropriately controlled durably supporting Financial inclusion means ensuring that necessary controls grow in step we do see great promise to improve Financial access when Innovation is done with appropriate risk controls in place one such promising Avenue is the use of alternative data in credit decisions involving small dollar loans historically access to the financial system was limited for many households and small businesses that lacked key financial credentials for example traditional credit models favor an applicant that already has a sufficient credit history and a file from a credit reporting Bureau to qualify for Lending this leads to a catch 22 where lower income applicants with scant credit history but ample ability to repay are denied access to credit because they don't have a credit history as a result many low-income households both banked and unbanked end up using a range of formal and informal Services outside the banking system that too often keep households in a cycle of debt actions by the Federal Reserve have supported the opportunities as well as identified potential risks associated with Innovations in Bank products and practices marketed to those who otherwise have limited access to the financial system in 2019 the federal reserve's alternative data statement highlighted the benefits and risks when Banks and non-bank firms leverage alternative data in credit underwriting particularly for borrowers that have been locked out of conventional borrowing this Guidance underscored the potential benefit of using data that has a clear connection to creditworthiness such as information on inflows and outflows from a bank customer's deposit account with a share of households with bank accounts much larger than the share with credit scores and especially with prime or near Prime credit scores this information has the potential to allow underwriting of a much larger pool of potential reliable Borrowers in addition in 2020 the Federal Reserve issued principles for responsible small dollar lending typically uncollateralized loans of less than $2,000 that often leverage alternative data while being underwritten this guidance has encouraged the spread of these types of loans to households and small businesses that otherwise would have had limited access to Credit in addition given the small but growing number of banks partnering with fintex for alternative data in small dollar lending among other things the Federal Reserve issued guidance in 2023 and in 2024 on how to responsibly manage these third-party relationships taken together these statements are helpful resources to ensure that banks are using the technological innovations from third parties in safe and responsible ways as noted in the alternative data guidance alternative data can be sourced from A bank's own relationship with its customers and evidence from research and Industry experimentation suggests that information on cash flow from an individual's bank account can help predict credit risk and expand credit access we are already seeing progress in this space Banks and Credit Unions of all sizes are starting to use alternative data to offer small dollar loans to their existing customers with short-term liquidity needs given the early promise of these loans this area seems particularly suitable for Banks to innovate and experiment safely and fairly within the confines of safety and soundness standards and consumer protection laws in addition Banks and others have done extensive work over the past few years to measure the impact Bank products on the financial outcomes of customers among these metrics are a set of financial health indicators around a customer's cash flow and payment history that capture their ability to meet their own short-term liquidity needs build Financial capacity and affordably Access Financial Services over time such indicators can help Banks better understand the impact of their products and services on their customers so that they support their customers longer term Financial resilience these indicators can also equip customers with the transparency and tools to assess Financial Services offerings I'd also like to highlight the potential for real-time payment system including fed now and private sector systems to Advance Financial inclusion these services will enable Banks to offer customers the ability to send and receive money immediately which can help customers weather income disruption and unexpected expenses by reducing payment delays and the high cost for consumers associated with those delays fed now can over time improve access to the financial system and lower costs I'm also interested to see how increased access to Consumer authorized data will change the landscape for Innovation as the rules regulations and practices related to expanded access and sharing of customer permission data flows evolve consumers May benefit from having a fuller picture of their financial life to better understand ways to improve their Financial Health customer permission data access alongside innovation in digital identity also has the potential to allow Banks to better assess a borrower creditworthiness increase customer access to financial services offer customized and Innovative Financial products and Empower individuals to move more freely in the emerging digital Financial landscape of course Bank adoption will play a key role in unlocking the power of such Innovations as with most Innovations Regulators will need to Ure appropriate measures are in place to protect consumers and promote Financial stability for example Regulators will need to be diligent so that the entities to which consumers Grant access to their data Safeguard privacy and data security let me now turn to the importance of the community reinvestment act or CRA in its role in advancing Financial inclusion as we all know access to financial services and credit is fundamental to Economic Security and vital to strong communities this this access is the foundation of home ownership education Small Business Development and other economic activities that improve our lives and our neighborhoods I want to relate these values to the CRA and the federal reserve's commitment to encourage access to Credit in low and moderate income communities Congress enacted the CRA in 1977 as one of a set of laws together with a home wage disclosure act the Fair Housing Act and the Equal Credit Opportunity Act to address redlining other forms of racial discrimination and lack of access to Credit in low and moderate income communities fear lending laws set the unequivocal standard that there is no place for such discrimination in the financial system Federal Banking agencies reinforce this standard by Taking A bank's Fair Ling record into account when assigning a CRA rating and evaluating whether Banks meet the credit needs in low and moderate income communities consistent with safe and sound lending through the enactment of the CRA Congress charged the Federal Reserve and other Federal Bank Regulators with responsibility of assessing the performance of banks in meeting the credit needs of low and moderate income communities throughout the cra's nearly 50 years of supervisory history the agencies have strived to provide guidance idance that reflect the dynamic changes in the financial landscape and at some point in time revise the regulations to do so last October the Federal Banking Regulatory Agencies issued a final rule to strengthen and modernize the regulations implementing the CRA prior to the issuance of the final rule the regulations had not been significantly updated since 1995 throughout the rul making process bankers and Community groups consistently emphasize the need for greater Clarity consistency and transparency than was provided under the existing rules and guidance in response much of the detail in the final rule is designed to provide that additional Clarity the final rule standardizes the evaluation approach so that it is more consistent across the agencies and more transparent to Banks and the public it does this in a way that builds on how CRA examinations are conducted today the final rule includes several Provisions intended to Advance Financial inclusion for example it emphasizes the work that Minority depository institutions and Community Development financial institutions do to expand access to credit and opportunity in underserved communities it also provides a focus on activities that serve native land areas persistent poverty areas and other high need areas we take our supervisory responsibilities under the CRA seriously knowing that it helps to Foster Real opportunity for consumers and communities the CRA has served as a critical tool to support Financial inclusion across the country since its passage and will remain a vital tool for bankers and Community organizations to work together to promote Financial inclusion and economic development in low and moderate income communities given the importance of innovation to the goal of financial inclusion I'm grateful that we've been able to gather so many experts on the topic related to it while we've made considerable progress we need to continue our efforts to support greater inclusion in a financial system that meets the needs of all Americans at the Federal Reserve we will continue to work to improve our understanding of the Innovations in financial inclusion and the intersection of payments Innovation and financial inclusion among others we'll also use our position to monitor innovations that have Financial inclusion in impc ations such as alternative data use and Financial Health measurement and keep the public informed on the evolving industry practices that help meet the needs of the financially underserved for example we expect to provide additional resources on alternative data use in the coming months in addition the fed's partnership for Progress programs helps minority depository institutions and women depository institutions navigate the unique business challenges provid MD and wdis with resources for technical assistance and conducts research on the unique challenges faced by low and moderate income communities we also actively partner with Native American communities but to better understand their financial services needs in addition to the federal reserve's role the private sector is a key source for financial Innovation and we encourage businesses to responsibly innovate so that new tools can increase Financial inclusiveness that are safe for customers and consistent with financial stability we would all benefit from additional research in this area for instance how do we help ensure that expanding access to fair and Affordable Credit advances safe and sound lending empirically which Innovations are best able to meet customer needs safely and affordably maintain bake safety and soundness and promote a healthier economy and how can we leverage Concepts in behavioral economics to improve the effectiveness of credit products I hope the conversations in today's conference can spark productive dialogue and spur potential research in these areas in closing my hope is that these kinds of efforts as well as continued innovation in the banking system can bring us closer to a time when all families and communities in our country have adequate access to credit and financial services on Fair affordable transparent and accessible terms thank you very much thank you yeah I'd be happy to take a couple questions if you have them okay take a couple questions we have a mic floating out there if you have a question for the vice you like to this is financial inclusion participate right anyone okay we got hands here in the front and over there we'll take two questions good morning Governor bar thank you for your remarks um I appreciated the mention of Financial Health measurement as an important opportunity both for banks to understand their own customers and for customers to understand their own situation I'm curious if you could imagine a day in which Financial Health measurement actually becomes part of the way in which banks are supervised that's a great question um I I don't know the answer to it uh it's possible so the the question is can Financial Health metrics be an important part of how we think about supervising institutions you know right now we have two kinds of approach approaches that we use for supervision of banks we supervise for their essentially the inputs into Financial Health that is are they following the rules and regulations under consumer protection and we also supervise separately for safety and soundness for the uh for the health of the banking system our our safety and soundness approach is kind of a principle based approach uh we're looking not only at compliance with the law but also at how an institution actually manages uh its um its relationships and its um its uh capital and its liquidity and its other adequacies so we can have an institution that complies with the law in a narrow sense but doesn't comply with the law in a broader sense that is it's not meeting it's the principle of safety and soundness and we we do cite violations of that um um uh under our existing Authority so in the consumer protection space if we were using Financial Health as a metric we would need to in under existing law embed that in the system of rules and regulations that we um that we comply for but it's really an interesting thought because the purpose of all those laws is so that consumers have good outcomes in the world or at least that they're protected from the very wor worst outcomes so it's a great question uh Vice chair bar if you had to prioritize um how would you um tell banks that um what's the best way to tell an institution that yes you have to worry about safety and soundness and you have to worry about consumer protection um but how do we move them to say but you can be Innovative the cfpb had no action letters for example for a while to give people you know Safe Harbor um we don't do that anymore they don't do that anymore we don't do that what would you do to push institutions to say hey it's not it's not so bad well you know let me start with the the basic you know proposition feir lending is safe and sound lending those two things are not in conflict with each other they're mutually reinforcing for each other if you're engaging in Fair lending you're engaging in safe and sound lending so at a at a very high level I would start with the proposition that if you're serving your communities well you are of necessity engaging in behavior that is consistent with what we want you to do both from a consumer protection perspective and from a safety and soundness perspective if you're serving your consumers well if you're meeting the needs of low and moderate income communities in a responsible way you are engaged in safe and sound lending so that that's where I would start it's been great talking with you all um thanks for having me here enjoy the rest of your conference and uh look forward to hearing the results okay thank you by Shar

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Length: 28min 55sec (1735 seconds)

Published: Tue Jul 09 2024