Bank Policy Institute: Capital, Crypto, Fraud: Highlights from the Prudential Regulators Hearing

Federal prudential banking regulators from the Federal Reserve, OCC, FDIC and NCUA appeared before the U.S. House Financial Services Committee on Thursday. The hearing, “Oversight of Prudential Regulators,” examined recent rulemakings and activities, including the Basel capital proposal, novel bank charters and fraud. Here are some highlights from the hearing. For a full overview, click here.

1. Master Accounts. Federal Reserve master account access for novel institutions like crypto firms should remain strictly limited and subject to robust regulatory requirements, Rep. Stephen Lynch (D-MA) said. He expressed concern about the risks posed by the Kansas City Fed’s recent approval of Kraken’s master account “that was granted even before we had the framework set up” for “skinny” or limited payment accounts. Vice Chair for Supervision Michelle Bowman noted that the approval was for a limited purpose and time period. “We look forward to understanding how that entity will be using its access, very limited access to the payment system, to understand how other similar entities might use an account as well,” she said.

2. BSA/AML and Illicit Finance Risks. Non-traditional entities accessing Federal Reserve payment accounts, often termed “skinny” master accounts, must be held to equivalent BSA/AML compliance and illicit finance standards as chartered banks, Rep. Sean Casten (D-IL) said. He asked if skinny account holders without Bank Holding Company Act requirements would have the same equivalent AML protections as other banks. “How are we protecting against making sure that people who get these skinny accounts can’t use that as a way to bypass some of our AML protections?” Casten said. “We did just issue a proposal which does require BSA/AML requirements as a part of that analysis,” said Vice Chair Bowman. “So it is not entirely accurate to say that there’s no requirement for BSA/AML procedures. There’s also not necessarily a requirement for a charter, a chartered entity, to be able to qualify for a master account, especially for one of the limited purpose ones, as we call them, skinny master accounts.”

3. Capital Overlaps. Future updates to the Basel capital framework must comprehensively address duplicative stress testing requirements to eliminate regulatory overlap, Rep. Mike Lawler (R-NY) said. “While I appreciate the consideration behind the agency’s approach, more comprehensive amendments to include stress testing would be needed to address this overlap fully. Vice Chair Bowman, how do you plan to more finely tune the requirements to optimize the balance between capital requirements and costs?” asked Lawler. Bowman responded that regulators welcome comments which are due June 18 on the Basel proposal, and the stress testing proposal will be finalized “hopefully by the end of this year.” “We’re optimistic that we will address the overlaps that existed between the original stress testing framework and the Basel proposals as we’re completing that work,” Bowman said. 

4. Fraud. Mitigating complex fraud requires expanded data sharing and cross-agency government cooperation beyond the banking agencies, Lawler advised. “We’ve seen a dramatic rise in fraud, from AI-generated impersonation scams to criminals exploiting gaps in the telecom and payments ecosystem,” Lawler said. “The reality is that fraudsters are innovating faster than the system built to stop them, and consumers and financial institutions are paying the price.” OCC Comptroller Jonathan Gould emphasized the need for a multifaceted, interagency approach. 

5. Cyber. Rep. Bill Foster (D-IL) highlighted the cyber risks associated with emerging AI models, such as Anthropic’s Mythos, and asked whether small banks received timely access to the model to scan for vulnerabilities. “I can’t disclose who has had access, but I can tell you that we’re working both with service providers and within the banking industry to work together to understand what impacts we may need to have them mitigate and address,” Bowman responded. “We have not ceased our cyber exams, in fact we continue to work with our institutions to understand how they’re planning to respond.”