FDIC Walks Fine Line Between Regulation and Innovation

see here at the Fintech conference. We spent an hour on stage talking about the f d i C and its role in managing the growth of technology within the financial services of business. Elena, thanks so much for joining us.

You know, I think one of the big things we've talked about was, you know, certainly from your perspective, if the f d i C is trying to balance kind of the fostering innovation within the financial services industry through fintech, through crypto, all those cool things that we're reading about while at the same time protecting consumers, protecting the banks, protecting the system. Gives us how you walk that line. It's by the way, thank you for having me. It's

a pleasure to be here today. It's a fine balance we have to strike as regular regulatory bodies in Washington. You want to encourage innovation, You want to encourage entrepreneurship with these banking entities because you want the banking activity

to take place at the banks. And at the same time, if you overregulated, if you don't give banks certainty on how to innovate and engage with tech companies, the banking services and products are going to go outside of the banks and we will have a less of an ability to regulate them appropriately and provide for consumer protection if those things are done outside of the of the banking regulatory agencies sphere of influence and so there there's a

there's a dual purpose here. One is you want banks to innovate because they have to stay competitive. Especially for small banks, they're suffering from the economies of scale, basically decimating their ability to attract new customers and grow UH

and competely some of their much larger counterparties. And at the same time time you don't want so much activity to leave the banks that that you're increasing systemic risk outside of the banks and UH and unable to regulate it from a federal perspective, So it's a fine blunt balance. So which innovations are you talking about here? Is sort of online loans and sort of underwriting standards in that way? Is it uh bitcoin and cyber you know, different crypto assets? What? What?

What innovations are sort of the most exciting and the most dangerous from your perspective. So among the most exciting are the ability of banks now to reach the unbanked and underbanked customers through some of the fintech companies and the channels that otherwise would not would not have been

available to the banks or the customers. And so there's a potential for this new technology and and the banking services to be offered to millions of people that would have been left out of the banking system but for the fact that technology is now making the banking services and products accessible to them. On the other hand, you have to be careful about balancing the risk that some of these entities and products, including crypto uh assets and

cryptox changes bring to the system. Where you want to you want to encourage innovation, but you don't want to introduce so much risk in the into the system that you're unable to understand how that risk will percolate throughout the system and what the end products will be for the customer and financial stability as well. So how does that come to the attention to the f d i C. Is it there's some group of cool kids from Silicon Valley come to Washington, d C. And say, Hey, we've

got this new technology. We want to deploy it across the banking system. How does it come to the attention of the f d i C all this technological change, which it's a great question. Occasionally we do get folks in in hoodies and and the broken stocks showing up at the f d i C and and telling us

about the new technology. Um. Most often the way it happens is that a bank will consider a partnership or teaming up with a tech company, or they have already done some partnering with a tech company, and they will come to us and say, exactly, how do you want us to position ourselves visa v this company? And how do you how are you going to regulate our relationship

with that company. So then that's where the fda C steps in, and we want to understand how that the third party companies and technology companies in particular offer their products and services and how they're teaming up with these banks, and how banks are managing that risk. And in the end, we have to protect the deposit insurance system, and we have to protect consumers, and we have to make sure their safety and soundness in the system so that the

system functions well. And so it's it's a it's a constant find balancing act that we do as a regulatory agency. When you're talking about catering to the unbanked, I'm thinking about alternative measures of whether somebody's going to repay their debt, right the idea of looking at say Facebook, or looking at their interactions elsewhere online and using that as sort of a metric to determine whether they're going to be

credit worthy rather than just a FICO score. How much do you've used some of these measures as being insufficient and leading to people being getting loans that perhaps are not going to pay them back. It's it's it's always an issue whether people can repay their loan. If you're if you're getting into the alternative data and you don't have a good credit history behind this consumer traditional credit history.

Having said that, we have We have talked to companies that have pretty strong algorithms to analyze the ability of these customers there that for which they're using alternative data to respond to their credit needs and how likely are they going to pay their bills? And so we're looking at that the technology here as a great equalizer or as in the past you wouldn't look at the alternative data.

You would basically not considered a reputable enough data or not enough of a credit history per se to to uh to to substantiate somebody's ability to pay back the

loan on its terms and and and conditions. Having said that, I think we're now venturing into territory where technology can bridge that gap and tell us how consumers are going to behave And so we're looking at alternative data at the m DA I see and making sure we understand to the extended banks are teaming up at companies a due alternative data lending, how how that's being done and what's the end outcome for the consumer as well as for the entities. Yelena McWilliams, thank you so much for

being with us. Thank you the pleasure to be here today. Think about Eleni McWilliams is chair of the f d i C which is based in Washington, d C. But she is here with us at the Boston Fed for opening day of Boston Fintech Week nineteen, which is powered by Fintech Sam Box, after just having come off a panel which might comes, which survived, and evidently she is still speaking with him. This is good. I'm glad to see that. I'm very happy to say. I'm being joined

right now by Brad Leavey. He is global head of Loans and Chief executive Officer of Market Serve, which is I h S Market UH and he normally is based in New York, but he's here with us on site. So, Brad, I want to get started with the concept of data and how that is becoming intricately connected with the modernization of markets. So when you're talking about your world, what does it mean to have data that gives you that

kind of edge? Yeah, So in the loans market and the derivatives market, data is tremendously important, and not just data, but lots of different types of data, including what people term alternative data, which for me is just data that is not used in your traditional business day to day but may have some insights and be interesting. So, um, the data discussion is relative. It's relative to who you

are and what you're doing. It's relative over time, and more importantly, it's dynamic over time where data sets combine and create additional data sets on top of the fact that you're consuming either base data or alternative data, and then the combinations of those alternative data. Are you talking about yelp reviews and things like that, and you know,

is that sort of the concept here? I mean, Yelp reviews could be a form of alternative data for sentiment on some consumer product, but to an equities trade or credit the false swap might be as far as alternative data, because an equity trader typically will not be looking at credit derivative day to day to day. So it's i'd say it's on the edge of what is alternative data

to that particular instrument trading day to day. Are you trying to create data feeds that can then go into different algorithms that can then basically be streamed different traders, uh and and sort of submitted into their models. Is that the idea here? Yeah, So ultimately all data will be in feed form. A lot of data today is used in terms of people looking at it in action, but over time all data will become more digitized or

more accessible via feeds. When that happens, there's a lot of analytics that you can run at the time you're

consuming that data or after or before UH. Over time, those the modernization of the data through feeds allows you to do a lot more with it and then action that UH that insight that you may be gleaning from multiple streams of data, So it's not just one stream of data being digitized and the feed it's many streams of data being digitized, robust analytics being created around it, an insight that you can then action that may result in inequity trade you're shutting down a power plant or

getting into a risk position that you didn't want to be in the day before. So then how are people using these different feeds and sort of synthesizing them. How do they know how to wait all of the different points and bring them together. Well, I guess you don't UH at any given time, and it's relative over time. So today there may be a certain point of data that is not interesting at all tomorrow because it's an event in the market that could be the most important

information that you want to get to. So I do think there's an element of data both changes over time. What is commoditized today, alternative today is commoditized tomorrow. But also the macro backdrop of what is going on in the world may drive importance of data. And as we moved to cloud, as we modernize, as we digitize, as sensors proliferate on every device and every person and everything, you're going to have a huge amount of data that

is fed, analyzed, and action. We are in inning three of probably a triple header in the modernization of data in the world, including the financial services system. It's it's I'm smiling because I'm thinking about an article I once write about how the US government collects a lot of information and a lot of it could be completely useless, but with the AI that they sort of overlay on top of it, they can discover things. And that's a lot of how the big discoveries have been made, and

they've been made by accident. I want to shoo gears a little bit, because you do tabulate all of these data points, and you do have access to so many things. Do you have a sense of where credit quality is kind of leaning these days. Well, I look at the markets as a forty year bowl market in rates going down, and I would estimate a twenty year bowl market and

credit going up. We did have an interruption in the credit going up seven, eight and nine, or really O eight in line um, but it really wasn't a credit event, as it was a market event. In my view. It definitely manifested around credit, but the reality was there wasn't a huge wash out with the exception of several institutions in the financial services world. But in terms of a major credit event for the world, it felt like that, and it seemed to move on within a couple of years.

I would argue that since the late nineties were in that credit boom, and over time things get looser and cycles turn, everybody's trying to predict the turn of the credit cycle somewhat pinto a recession or some other geopolitical thing. Uh. I'm not trying to time anything like that, but I do think it's a bit long. I'm not sure things are loose as much as there's a lot of financing available, and over time those things tend to turn. The question will be will it turn gradually or will it turn Uh?

In a volatile way, or will it be multiple volatile turns that will add up over time to a credit event. If you don't think that two thousand and eight and two thousand nine was a major credit event, what would

a made or credit event look like. I think it was an event in trust in the markets, which is the broader concept of credit, maybe, but an actual credit event that drives a lot of defaults beyond just a few markets in housing, in other areas where they truly were major credit events in that market, but in the loans market and leverage finance, and the corporate bond markets and the student loan markets and consumer credit generally, things

did get tight. But I personally my view, I don't think it was the credit event that had I wash out and a reset like the late eighties, for example, which we could still experience at some point. Again, in the world of physics and chemistry, you would argue that things go up and then do come down, and that different combinations of elements with physics drives dynamic outcomes and

that's why it's so hard to protect. Just real quick here, we've been talking a lot about financial technologies here at the Fintech conference and I guess h when we talk about leverage loons, I don't think about a market that's particularly advanced technologically. Where are we in terms of moving away from fax machines into the modern area there? Yes, so there is no doubt that the loans market and

all markets need an amount of digitization and modernization. UH. There are some faxes in the industry that are utilized to distribute information around. That's been going on for thirty years. UH. In the last several years, we've moved dramatically away from faxes into proprietary feeds or more structured feeds that are

not facts based. But I would argue that there's many elements that need to modernize in the loan markets, whether it's the documents themselves, facts is being utilized, more direct connectivity, it's an heavier asset class that isn't um as digitized. But there have been major advances in the last five or ten years on incremental digitization that have taken some faxes out of our life, have moved more automations from

documents to a feed. More importantly, have combined many processes to take settlement times down from something that may have been in the mid twenties to be honest, in terms of days and parlans in the US down plus percent in the last couple of years, so we've made a lot of progress, post Dodd, Frank brad Levy, thank you so much for being with it with me today. Brad Levy is a global head of loans and chief executive Officer of Market Serve of I h S. Market Today.

We are so lucky to have Dr ellen Wald, President of Transversal Consulting. She does contribute also Bloomberg opinion columns. Uh and Ellen, you know, I want to start with this news that uh, well really frankly, that Saudi a Ramco is looking at the richest people in Saudi Arabia to basically provide a lynch pin of financing for its initial public offering. There seems to be a spate of news about this i P. Are we getting closer now, well, don't say that we're getting closer. And this is really

a bombshell of an announcement. Um this report that um that Saudi Arabia is looking for rich families essentially in the Kingdom to buy into this i P O either before or even even possibly after, but probably before it goes on on the local Saudi exchange and UM, what's what's really intriguing about the report is that some of these UM families, in these family businesses, had individuals who were arrested and held in the ritz UH in ri odd just just they think a few years ago. So

they say that they're not being pressured. But UM, in a country where UM the government is an absolute monarchy, can you really say that there's no no pressure there? And UH, it would seem to be a sign at least to me that international UH, any regulator for an international exchange needs to pay very close attention to this, because UM international exchange should not be party to anyone

being coerced in any way to invest. This does seem to be a potentially an attempt to maybe artificially prop up prices, and we do know that the Saudi's have definitely tried to prop up their exchange at certain times. I would certainly say that a regulator should be very wary of allowing a listing of a business that engages

in UM kind of a coercive type practices. So you raise a really interesting point, which is that it would seem that Saudi Arabia engages in practices that don't seem necessarily consistent with publicly traded exchanges in developed markets, which raises a question would any exchange actually push back on Saudi Aramical IPO given the fact that it's a huge boon to them to get it listed on their exchange, And this is an issue and we do we have

seen report. We do have reports that UM managers and funds in Saudi Arabia have been pressured to buy at times to help lift the to double the Saudi exchange. So so we do have have some evidence that this has occurred in the past, So don't not the only exchange. We We've also gotten similar reports from China as well. So it really begs the question of whether New York Stock Exchange or London Stock Exchange can really legitimately list

Saudia opponent. It seems almost that UM the Saudis are realizing that perhaps a big exchange like New York or London is really not the place for them. We do now see that they're potentially turning to Tokyo. But this issue of where to list and can they list, and are they willing to let go of the power that they want to have in order to get a listing on New York or London. It really seems like perhaps this is not meant to be. Yeah, well, and there have been a lot of signs of that over time.

One of them has been the drop in oil prices and sort of leads to another development overnight that came out, which is that Saudia Saudi Energy Minister uh Prince Abdulaziz bin Salmon, he is the new Saudi energy minister. The other one was basically pushed out. Can you give us some context to this? Well, I wouldn't. I would be hesitant to say that he was pushed out. We don't really know the reason why um Folly is no longer than energy minister either. He could have been pushed out.

He may have desired to step down at this point given what's been going on. So just because we don't know for sure what went down there, UM the way that they do this inside way was they just issue a decree. So it might look like he's been ousted, but we we don't really know the details there. But it does seem that UM the Saudis were potentially moving

in this direction. They did remove all Folly as chairman of the board of Saudi Aramco and they did um divide the Ministry of used to be the Ministry of Energy, Industry and Economy just before this, so um it does

seem like they were making changes in this area. One of the reasons I've I've heard is that they want to make more of a separation between the oil company and the ministry before uh they move on and move forward with this i p O. But people have also said that, you know, there's a problem with oil prices, there's been problems with this i p O. It would seem to me that Holida Folly is not to be

blamed for this. This is an oil market that's been ruled by speculation over demand, weakening demand, global economic data that is not positive, and the US China trade talks, and we look at oil climbing today. Well, there are a lot of reasons for it, but one of them is that there's some good news on the U S China trade talks that they're setting talks for October. So I wouldn't be surprised if oil is rising more as a result of this than the result of anything that

Saudi Arabia is saying or doing. It's really good perspective on especially because I'm looking at the wording of a lot of the stories and it's that that King Salmon dismissed the former energy minister and put in uh, this heir to the throne. So I mean, I think that I think it's important to be cautious about that and basically say, we don't know what happened, we don't know what the implications are, and that the price moves that we're seeing today are not necessarily reflective of this change.

Dr ellen Wald, thank you again for being with us, President of Transversal Consulting. She's also a nonresident Senior Fellow at the Atlantic Council's Global Energy Center and a Bloomberg Opinion contributor. We are broadcasting live from Fintech Week. We are currently in Boston at the Boston Federal Reserve. It is being hosted powered by the Fintech Sandbox, and I am so happy to say we have with us Dadine Shikar, she has head of Global Markets for State Street. Here

on site. We are going to be doing a panel together about human versus Machine in this evolving era of technologically fueled markets. And I was left with the question when I was really looking into this. Do humans matter in public markets anymore? Ultimately, well, machines, what the algorithms? Will the artificial intelligence sort of take over when it comes to decision making? First of all, good morning and Lisa, and thank you for having us to answer your question.

I think there's always going to be a role for humans, uh in the process. And um, you know, when I was preparing for this panel, I'm not creature. It's really man versus machine. Oh come on, but it's it's it's really gonna be. I think it's man plus machine because they compliment each other a lot better. Maybe beyond our combined lifetime, well we'll see humans being sidelined. But right now, you know, the big debate continues to be is artificial

intelligence really going to replace humans? Or will it augment human thinking? And from my perspective and what we look at, I think right now it's an augmentation says more than anything else. So I believe humans will continue to drive butt machines will make the process a lot better and faster and hopefully cheaper. All I know is when I walk out on a trading floor of any of the big New York investment banks, I see a lot fewer

people than I used to see. There used to be a hundred people trading corporate bonds, government bonds, and now there's a handful. So do you think technology So that's obviously one side effect, but just from the markets, the operation of the markets, do you think technology has generally been positive for the capital markets? I think it has.

There's definitely been a convergence between technology and in humans when it comes to trading electrific electronification has helped quite quite a bit, but you still need humans to write those algals to power those machines. And what we're seeing, especially at State Street, is what we look for now are traders that can code and quoders that can trade, and that's where you're really seeing that convergence coming through.

So yes, less humans manning the phones and more more algos taking over, but you still need humans to power that that acknowledging that thought process. I love this, the sort of Kumbaya moment between humans and machines, arm and

arm singing, you know exactly. I'm kind of thinking that it might be a little more terminator than Kumbaya, But indeed, I want to wonder I'm wondering about price discovery in this era of algorithms and artificial intelligence and a lot of the recent mark of volatility has raising risen questions about how smart it is. Right when we talk about the humans, at least on our show, they say they're long and they're just holding their positions. They're not trading

on every Trump tweet or every headline. Do you think the algorithmic trading has changed the idea of price discovery a little bit more? It has, I mean, it's still driven by the biases of the people that that that that, right, So there's that cognitant bias that's that's dear um. The machines make them a lot faster, right, so it helps us swift through peg up lots of lots of data at the same time, and and and assist with that.

On the flip side, though, it doesn't understand the subtleness of the tweets, if you will, right, So it is really the uncertainty that's causing people to sit on the sidelines, less of up price discovering and the machines. I've never really heard of the tweets described as subtle. Yeah, I mean that's not really normally the way that I would I'm not quite sure that tweets are subtle, but I think the machines being able to distinguish the subtlety of

the effect of those markets. But that's that's a good one with technology is certainly technology nating is certainly accelerated. I would say to some extent the you know, the passive management active management, the debate, I mean, kind of where do you think this is all going to shake that we've had, you know, relatively you know, strong market of the last ten plus years. Uh, you know the passive strategies worked well. Is that the future? Is it

the future? I don't believe so. Obviously passive A lot a lot of the flows aren't going into passive investments, and uh, there was a there's a debate other active investment is dead or not. But there's still um a lot of managers that that are making do out of it. Obviously State three is a big index index shop, and uh, we strive to achieve you know, our returns by doing things better, faster and cheaper for for our clients. But I do believe that there's still room for for for

both in the process. Do you feel like a therapist in chief when people are saying do humans matter? Do I matter? Humans do matter? Humans matter? But I think the the the the skill sets that we're gonna be looking for in the future are going to be a lot different. But humans definitely do matter, and we we treat them, you know, very very nicely. It's important. But you know, you're in Boston, the head of the mutual fun home of you know, the world, and so it's

been the biggest, one of the biggest employers. So humans really matter big enough. I'm strong enough in gosh, started matter. They do you with that Again, as I said earlier, without without humans, you can't you can't power the machinery, right exactly. Natie Shakar, thank you so much for joining us. We appreciate it. Nadina's head of Global Markets at State Street. Just talking a little bit about the kind of the

confluence of technology here in the financial services industry. It's obviously a big theme here at the Federal Reserve Bank of Boston here for this Boston uh Fintech Week ten powered by the Fintech Sandbox. You know, a lot of folks here thinking about the convergence of technology and finance, both at the corporate level and at the personal level as well. Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at

Apple Podcasts or whatever podcast platform you prefer. Paul Sweeney, I'm on Twitter at pt Sweeney. I'm Lisa Abram Woyds. I'm on Twitter at Lisa Abram Woyds. One before the podcast, you can always catch us worldwide. I'm Bloomberg Radio