California Banking Perspectives, Sacramento Business Journal
By Kevin Gould – President & CEO, California Bankers Association
Before Sacramento regulates banks again, look at what’s already required
With the California Legislature in recess and Gov. Gavin Newsom completing his review of bills that reached his desk, we now turn our attention to issues that could be a priority in the next legislative session. Lawmakers will return to Sacramento on December 7 for an organizational session. While this will be the first opportunity to unveil new legislation, we know that most measures will be introduced closer to the February bill introduction deadline. Based on history, we anticipate nearly two thousand new legislative proposals.
On the two issues most likely to touch banking, fraud and artificial intelligence, the California Bankers Association (CBA) shares the Legislature’s goals. Our request is that new rules reach everyone who is part of the problem and account for what banks are already required to do.
Bankers and policymakers have been sharply focused on advancing solutions to deter financial fraud and scams. While we haven’t always agreed on the direction of legislation, we are aligned on the seriousness of the issue and its consequential impact on their constituents and our customers. A recently signed law increases a bank’s existing reporting obligations when it knows or suspects financial abuse of an elder or dependent adult is occurring and requires mandatory employee training.
We know there is still more to be done on this topic. And if we want meaningful change, it will require a more sophisticated, whole-of-government approach that brings other stakeholders to the table to do their part. Focusing solely on banks as the last line of defense is misguided and misses important opportunities to thwart fraudsters earlier in the process before the customer is persuaded. Therefore, we will continue to advocate for a greater role of the telecommunications industry and social media platforms given the extent of fraud and scams that begin and flow through these mediums.
Identifying the appropriate level of regulatory support to wrap around artificial intelligence has been a multi-year legislative conversation. While the discussion was poised to continue next year, recent announcements by leaders in the technology sector have only intensified the debate over what is the right amount of regulation.
The banking industry has methodically deployed artificial intelligence. It is commonly used to assist with fraud detection and to gain efficiencies in back-office functions, such as extracting information from documents to make loan underwriting more efficient. These types of use cases are intended to benefit customers by protecting them from modern fraudsters and reducing friction in loan processing.
While California legislators will consider ways to put controls around artificial intelligence, they should take into consideration how banks are under constant supervision and routinely audited by bank examiners. Laws and regulatory expectations specific to banks already add layers of consumer protection, through laws like the Equal Credit Opportunity Act. Regulators also expect banks to adhere to established third-party risk management rules, meaning that banks have due diligence requirements when using third-party solutions and can’t simply assign away liability. Ultimately, when a bank uses a tool, they are expected to understand it, explain it, and to ultimately comply with relevant laws.
We expect ongoing conflict between leaders at the state and federal level causing the Legislature to move measures that reflect California’s values. Some of these measures will be framed as protecting consumers. CBA remains committed, as we always have, to rolling up our sleeves and working constructively with policymakers to solve for real problems in a way that is sensible, achieves the objective, and avoids unintended consequences that make serving our communities more difficult.
Meanwhile, policymakers should be sensitive to how new rules impact regulated industries, like banks, and how that influences providers of financial products and services that lurk in the shadows. Entities that provide bank-like services should be subject to bank-like rules.
With the next legislative session commencing in just a few short months, we urge the Legislature to take into consideration the statutory and regulatory infrastructure applicable to banks. We are a highly regulated industry. But those regulations can take a toll. Consider that in 2008, there were nearly 220 California state-chartered banks. Today there are under 100. The cumulative impact of regulation is a factor in consolidation.
We need banks of all sizes. It’s what makes our American form of banking unique and special, and it allows us to support our customers and communities in their pursuit of economic success. After all, you don’t get to be the fourth largest economy in the world without a solid banking industry behind it.