Fed’s Barr promotes responsible innovation through Novel Activities Program

Investing.com -- The Vice Chair for Supervision at the Federal Reserve, Michael S. Barr, emphasized the importance of responsible innovation in the financial sector during his speech at the Alliance for Innovative Regulation. He highlighted the role of the Federal Reserve’s Novel Activities Supervision Program, which was launched in the summer of 2023, in fostering responsible innovation in supervised institutions.

Innovation, when responsibly managed, can bring significant benefits to consumers, financial institutions, and the economy, according to Barr. It can improve financial products and services, making them more affordable and safer. It can also make banking more accessible, thereby promoting financial inclusion and modernizing financial infrastructures.

However, innovation also carries risks that need to be responsibly managed. Barr stressed that all stakeholders, including consumers, banks, fintechs, and regulators, have an interest in responsible innovation. He added that regulatory and supervisory frameworks should allow banks to understand and manage the risks associated with innovative activities.

The Novel Activities Supervision Program is the Federal Reserve’s dedicated supervisory function for novel activities. It was established due to the rapid pace of innovation and the benefits and risks stemming from innovation in the financial system. The program monitors and understands how these innovations and associated novel activities are used in banking and what benefits and risks they pose.

The program also aims to create a coordinated approach to supervising novel activities across the Federal Reserve System. It supervises firms based on their engagement in novel activities and aims to build a broad-based perspective of novel activities, their benefits and risks, and how those risks are managed.

Barr also talked about the importance of tiering supervision to the type, extent, and level of risk posed by the novel activities and varied business models of supervised institutions. The Novel Activities Program employs a risk-based approach to supervision, with the intensity of supervision matching the risk and scale of the activity.

The program serves as a central point of expertise on new and innovative activities, facilitating collaboration and communication between supervisors and stakeholders, and supporting coordinated and risk-based supervision.

Barr also discussed two important principles of the Novel Program—clarity and collaboration. He underscored the importance of early engagement between banks and supervisors to understand the technology and the risks and to provide a clear sense of their expectations.

As novel activities become more developed, the Federal Reserve can issue guidance and other resources to provide clarity on effective risk management for novel activities. For instance, in May 2024, the Federal Reserve, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation released a guide to assist community banks in developing and implementing third-party risk management practices.

Barr reiterated that the Federal Reserve neither prohibits nor discourages banking organizations from providing banking services to customers of any specific class or type, as permitted by law or regulation. He added that banks supervised by the Federal Reserve provide important services to the crypto-industry.

In terms of collaboration, Barr emphasized the importance of ongoing engagement and collaboration with the industry to gain insights into the evolving nature of novel innovations and developments. He also pointed out the importance of hearing from the public through tools like requests for information.

In conclusion, Barr stated that the Novel Activities Program has already improved the clarity and consistency of the Federal Reserve’s supervision related to innovative technologies and fostered collaboration as banks and supervisors seek to better understand the risks associated with these activities.

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