U.S. banking regulator warns ‘open banking’ could impact deposit outflows

By Hannah Lang

(Reuters) – The evolution of “open banking” in the U.S. could impact how regulators supervise banks, as seamless account portability between financial institutions could lead to increased deposit outflows, a top banking regulator said on Wednesday.

While data portability will likely be empowering for consumers, it could also increase the liquidity risk of retail deposits for banks, said acting Comptroller of the Currency Michael Hsu in prepared remarks.

Open banking describes the process of banks and other traditional financial institutions giving customers and third parties easy digital access to their financial data.

Consumer Financial Protection Bureau Director Rohit Chopra has said his agency expects to propose a rule this year requiring financial institutions that offer transaction accounts to set up secure methods for data sharing, a move that could dramatically boost competition in the consumer finance industry.

While such rules could ultimately increase the ‘stickiness’ of retail deposits and lower liquidity risks by encouraging banks to take steps to retain customers, the transition to such a state “warrants careful monitoring,” Hsu said.

“Already, there is a sense that online and mobile banking may have facilitated unusually large and rapid outflows of wholesale deposits at Silicon Valley Bank and Signature Bank (OTC:) last month,” he said.

Depositors at SVB withdrew $42 billion in 24 hours, according to regulators, who shuttered the lender shortly thereafter.

Hsu said while it would be an “overstatement” to attribute the bank run solely to social media and the ease of mobile banking, regulators would be remiss to ignore the impact that both have had on the banking industry.

“We, bank regulators, need to pay closer attention to how changes in technology and associated practices may impact risks in banking,” said Hsu.