Introduction
It’s no real secret that the United States has an interesting relationship with banking. In the wake of the Great Depression, many Americans felt skeptical about banks and their ability to safely store their life savings. Even to this day, certain older Americans carry this skepticism with them.
The financial crisis of 2008 renewed these suspicions, as major American banks were certainly not blameless in the collapse.
While some Americans may have been tempted to terminate their accounts, there was really no viable alternative. Whether we like it or not, we all have to entrust our savings to financial institutions.
If people have learned a lesson from the 2008 crisis, it’s that they need to educate themselves with regards to how banking actually works, and what steps major banks are taking to ensure the security and stability of customer accounts.
This practice is especially relevant to those of us working within tech. For one, we tend to have more to protect, and second, banks are relying on tech tools and systems to prevent potential mishaps.
With the help of an expert insider, we’ll be able to gain a more in-depth understanding of how banks can protect their customers and the role regulation plays in guaranteeing account safety.
The Enforcer
Federal regulations exist to make sure that banks, especially large banks, are doing all they can to prevent problems.
In addition to these regulations, there are a number of internal efforts that have the same goal.
To put it plainly, there are many different regulations and considerations to keep track of. This poses a challenge, as many banks are enormous entities, and as we all know from the recent history of Silicon Valley giants, big companies with a broad sphere of influence can be slow to adjust and adapt to the changing needs of the market and its customers.
Aditya Lal has worked in finance for many years, and he currently holds a number of prominent certifications, including both PfMP (Portfolio Management) and PgMP (Program Management) certifications.
He also serves as a CCAR (Comprehensive Capital Analysis Review) professional, a crucial step in preventing financial crises that we’ll be discussing in detail later in this piece.
At the moment, much of his work surrounds FDIC 370, a measure that Lal helped us to understand in greater detail.
We also used this opportunity to ask Lal about a few other topics in banking including how federal fines can affect individual customers and how well-equipped banking executives are to deal with much-needed adjustments and improvements.
FDIC 370 and Why We Should Care
Let’s start off by discussing a specific regulation: FDIC 370. The ultimate goal of this measure is to make sure that each account owner can be protected in the case of a banking institution’s failure.
The nuts and bolts of this measure focus on accurate recordkeeping and reporting, which, in effect, requires banks to make sure that their system is capable of keeping accurate, up-to-date records for every single account holder.
As Lal pointed out, the regulation also ensures the health of the economy as a whole, since economic stability depends so heavily on the extent to which banks can be trusted and relied upon.
“The basic objective of this regulation is to determine insurance deposits in a timely and accurate manner in case of the bank’s failure. However, in doing so, it will also bring economic and financial stability by disbursing the correct amount to a depositor as soon as possible. In fact, the FDIC wants to receive all aggregated and calculated data from the bank within 24 hours of its failure.”
If the measure sounds strict and demanding, that’s because it is, and with good reason. If followed to a T, then this kind of accurate reporting and dependable insurance could prevent a large-scale financial crisis.
Executive Involvement in Regulation
So have banking executives been up to the task thus far?
Members of the public have reason to feel a bit tentative about the wisdom and expertise of banking executives, given the stark reality of recent American history.
Thankfully, Lal explained how executives are often heavily involved when new regulations are being devised. This kind of roundtable discussion gives those at the top the opportunity to express potential challenges they may face, thus assessing the practicality and timeline of each regulation.
We’ll let Lal elaborate on how executives can contribute positively to the discussion.
“These executive are supposed to bring in real-time challenges that a bank may face while implementing new regulations. It also gives them an opportunity to learn and understand the new regulation so that they can keep their regulatory department up to date and provide enough information about the upcoming regulators to their mid-level managers.”
This kind of understanding has to start the highest level. Should executives not have a full understanding of changes that need to be made, then it’s much more likely that these changes will suffer from miscommunications.
Executives need to be on the ball at all times, and according to Lal’s extensive experience with banks and banking executives, they are more than capable of rising to the challenge.
“To my knowledge, executives, management and mid-level managers are adequately knowledgeable in the regulations of their area.”
The Ripple Effect of Bank Fines
“Customers get hit directly when banks receive fines. It is imperative to mention that these practices and fines bring further instability to the financial sector and the economy in general. The 2008 crisis was all about malpractice within banks, leading to one of the greatest recessions in recent history. To curtail these illegal practices, regulators have to create even more regulations, which require millions of taxpayer dollars to implement.”
Why CCAR Remains Crucial
Stress testing is a concept that gets discussed quite often during media coverage of banking scandals and new forms of regulation, but it is rarely explained in detail.
Let’s take a brief look at the true purpose of financial stress testing, referred to as CCAR, and why it’s an absolute necessity in the financial sector.
“Stress tests are ‘what-if’ scenarios defined by the Federal Reserve Board as Baseline, Adverse, and Severely Adverse scenarios.”
In essence, it’s the practice of a financial fire drill, accounting for fires of different sizes and intensities.
What would happen if the economy encountered another major recession? What if the American economic system collapsed entirely?
CCAR testing guarantees that individual banks would be capable of handling quite severe situations.
“It ensures that banks have the ability to absorb losses, even in severely adverse scenarios. Also, it ensures that large and complex banks should have enough funds and can provide access to those funds, even in adverse and severely adverse scenarios.”
It should be clear now why stress testing is one of the most important steps that can be taken to prepare for potential financial disruption in the future. Without it, we would run the risk of suffering yet another crippling financial crisis.
Making Emerging Technologies Accessible
In closing, let’s discuss Lal’s view of emerging technologies and how they can offer immense benefits to industries of all stripes, from finance to emergency response, and everything in between.
Lal previously worked with GE in the early 2000s, and during this time he saw a major opportunity, one that would require a serious overhaul of existing practices.
Specifically, Lal worked within GE roadside assistance. In 2006, he recognized a consistent problem. Namely, if someone was traveling and wasn’t familiar with the immediate area, then that person would not be able to identify their location to roadside service representatives.
This poses a clear conflict, as precise location is an absolute necessity when providing roadside service.
“In the early 2000s, we partnered with a number of cellular service providers. It is important to recall that GPS was a privileged service at that time and not many customers wanted to pay for GPS services. After a lot of discussions and IT, we were able to use the caller’s coordinates to find the correct zip code and determine the nearest provider using analytics.”
This represented a huge step forward in an industry where time is a major factor, especially in emergency situations.
So how does this relate back to current initiatives within banking? It serves as a powerful reminder that tech, especially emerging technologies, can offer solutions to many pre-existing problems, even problems that may not seem dire or in need of an immediate fix.
In particular, Lal and other financial professionals like him are using updated IT systems to protect consumers. Without these tech tools, adhering to recent federal regulations a daunting challenge, to say the least, and many banks would be at risk of failure, unable to guarantee their many accounts.
Even if you don’t work within finance, we implore you to look for ways in which tech can ensure the safety and satisfaction of the public in your own industry, whatever it happens to be.
Tech is the way forward in all sectors, not just in banking. It doesn’t necessarily decide what our goals should be, but it does determine how, and when, those goals are achieved.
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