August 15, 2024
There is no lack of debate about regulating new technology, in general and specifically in finance. Legislatures all over the world are working on everything from AI to data privacy to digital assets. What we don't see much of, however, is policymakers focusing on the regulatory process, itself, and how technology should change it.
That is the topic of today’s show. My guest is Congresswoman Erin Houchin of Indiana. Representative Houchin is a member of the House Committee on Financial Services, and she has sponsored a bill called Fostering the Use of Technology to Uphold Regulatory Effectiveness in Supervision or, for short, the FUTURES Act, H.R. 7437. The bill has bipartisan co-sponsorship from Representatives French Hill, Brittany Pettersen, and Bill Foster (who will soon be a guest again with us on the show). It was approved by the Committee last spring by voice vote without opposition, and it’s likely that a comparable bill will be introduced soon in the Senate.
The FUTURES Act would require the U.S. federal agencies that supervise depository institutions to self-assess their own tech readiness to oversee the technological transformation underway in financial services. It calls upon the covered agencies — the Comptroller of the Currency, Federal Deposit Insurance Corporation, Federal Reserve Board, National Credit Union Administration, and Consumer Financial Protection Bureau — to evaluate their own tech capacity, confer with each other, and report back to Congress within a year about their needs and plans. The agencies would be expected to address their own IT architecture, including progress and plans for converting to cloud computing, as well as their ability to attract and train the tech talent they need, and to adopt the cultural shifts necessary for success in today’s fast-paced world of technology change.
As most listeners know, AIR is a nonprofit organization that does not engage in political activities or lobbying, but we are often called upon by members of Congress to make input on policy matters. In the case of the FUTURES Act, we have strongly supported the logic it embodies. The reality is that nearly all government agencies, in the United States and around the world, need to embark on a generational conversion from analog to digital technology.
For financial regulators, the need is acute, because today’s supervisory tools simply do not give financial agencies enough visibility into the markets they oversee. The problem is constantly worsening, too, because the tech is changing so fast — think about Silicon Valley Bank experiencing America’s first social media-driven bank run, or about the Robinhood/Gamestop events of a few years ago. While some regulators are well along in modernizing, most still rely on small samples of records to detect signs of risk and problems. In banking, regulators still rely on call reports as the main source of industry information… and they receive these reports only quarterly. There is also a related and enormous problem with regulators having information overload. They receive voluminous written reports from industry, and don’t even have enough personnel to read them. I like to quote former Bank of England Governor Mark Carney saying that to do so, every one of his people would have to do the equivalent of reading the Complete Works of Shakespeare every day, twice a day.
There is an urgent need for more complete and timely data; for converting information into digital form that can be readily ingested, combined and analyzed; and for using sophisticated analytical tools to understand what the data can tell us, including through artificial intelligence.
In our conversation, Congresswoman Houchin ties these challenges to the future of small banks. She shares a story of her own family being served by a community bank in her rural area of Indiana, and argues that these smaller institutions are at risk today. A key reason is the disproportionate regulatory burden they carry in comparison to both larger banks and fintechs that have more efficient technology.
Let me note, by the way, that AIR is engaged in a project focused on how the tech gap is threatening Minority Depository Institutions, which are a microcosm of the small bank and credit union ecosystem and are acutely impacted. It’s very significant, in my view, that while technology is driving the competitive threat for smaller institutions, it can also become the solution for them. It has the potential, through tech adoption by both regulators and industry, to level the playing field and make it cost-effective for smaller entities to compete.
Representative Houchin also serves on the House Financial Services Committee’s bipartisan working group on artificial intelligence, which just put out an important report. She talks about how she is looking at regulation of the major issues in AI and financial services, in terms of both risks and benefits. And she shares her views about the challenges arising from the speed of technological change, including how to protect children online.
It’s easy to underestimate the importance of process and system-building in public policy. I have worked for the U.S. Senate, myself. I well know the magnetic pull toward tackling the hot issues of the moment, the ones that are in the news, the ones that constituents are calling about. It’s so easy to neglect the seemingly less urgent – and often, frankly, more “boring” – question of whether we are building our government activities, including our financial regulatory systems, on foundations that are old and crumbling.
Despite all the good work of smart, dedicated regulators throughout the world, that is what’s happening today. This is why I cofounded AIR – to help people design and build new, better technology foundations for financial regulation… foundations that use, and can support, the better, more powerful and adaptable technology that we are going to need to do this important work effectively. When financial regulation fails, or underperforms, bad things happen.
It’s wonderful to hear from Congresswoman Houchin and her colleagues who are bringing leadership to this effort on Capitol Hill.
Congresswoman Erin Houchin represents the 9th Congressional District of Indiana. She serves on the House Financial Services Committee, the House Rules Committee, and the House Education and Workforce Committee. Previously, she represented the 47th District in the Indiana Senate for eight years and was also a small business owner, operating a PR company focused on helping law enforcement communicate the good work they do.
In addition to her private sector work, Erin held several leadership positions in her community. These included 9th District Chairwoman of the Indiana Republican Party, 9th District Chairman of the Indiana Federation of Republican Women, Vice Chairwoman of the Washington County Republican Party, and the Governor’s appointee to the Indiana Commission of Women. In 2011, Erin also served as Southeast Indiana Regional Director for U.S. Senator Dan Coats, a role that covered most of Indiana’s 9th Congressional District.
Erin graduated from Indiana University and has a master’s degree in Political Management from the George Washington University.
She and her husband Dustin in 2002 live in Washington County, Indiana, with their three children.
We have wonderful guests coming up. As a perfect follow up to today’s show, we’ll have AIR’s own Nick Cook join me to talk about our brand new Regulators’ Odyssey white paper, which is a must read for every financial regulator! We have a great show coming soon with Penny Lee, President and CEO of the Financial Technology Association, on the issues heating up in bank/fintech relationships. We’ll also have an episode with Jane Barratt, Chief Advocacy Officer at MX, and one on the rising levels of financial fraud with Soups Ranjan, CEO of Sardine.
Summer is here, but nothing seems to be slowing down. In June, I spoke at the Exchequer Club in Washington, DC, arguing that a new, AI-based regulatory paradigm is taking root and will change everything about how we perform financial regulatory oversight. We will soon be publishing several articles on this vision. I did an AI Celebrity Interview for AIR’s NextGen AI Shared Learning Initiative. In August I hope to see many of you at FinTech South.
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