Name: Future of Finance 2024: A Conversation with NYDFS Superintendent Adrienne Harris
Uploaded: 2024-05-16
Duration: 13 min 50 s
Description: Adrienne A. Harris, Superintendent, New York State Department of Financial Services Moderator: Leo Schwartz, Reporter, Fortune

Adrienne A. Harris, Superintendent, New York State Department of Financial Services Moderator: Leo Schwartz, Reporter, Fortune

Future of Finance 2024: A Conversation with NYDFS Superintendent Adrienne Harris

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I do love regulation. It's true. Yeah, it's an honor to be joined by you here today. So thank you so much for speaking with us. Um As a reporter covering the crypto industry, your department has taken on almost mythic status for being the sole regulator in the country to actually establish uh a regime for regulating digital assets. But I, I know that your remit extends far beyond crypto to also include little areas like banking and insurance and student loans. Um Before we jump into that though, as a New York regulator, I do wanna ask a very important question and I say this with the caveat of being a Bostonian, which I understand you have ties to as well. Do you think the Knicks are gonna make the finals? We're, we're optimistic about our New York team put it that way. Yeah. Well, none of that's out of the way. I do want to start with crypto because there's a number of key votes happening right now in DC, including one today to overturn key sec guidance. And it's created some strange political alliances where Democrats are now going against the SEC. And I know you've spent some time in DC advocating specifically for a Stablecoin bill. And I want to ask as a state regulator, how you approach your role in DC? Yeah, absolutely. Well, as you know, uh you know, I'm also a member of the so and so I spend a lot of time in DC and the state representative on. So, um but because we are the only prudential regulator in the country, state or federal with virtual asset specific authority, we, we weigh in a lot on these things. First, I will say we are very eager for there to be federal legislation on Cryptocurrency and unstable coins. I think the US really is falling behind and we need uh strong frameworks in place at the national level to make sure we remain competitive and that we protect consumers because these are risky assets. We have been advocating, of course, that any legislation that passes on the federal level maintains a strong role for the states because as you said, we've been at this now for almost a decade. Uh We are the gold standard in crypto regulation around the world. I have foreign regulators come to me and they say we know if a company passes new works standards, it's good for us because we are the only regulator that has licensing supervision, examination and then of course, also enforcement authority and real rules on the books. Uh So hopefully Congress will, will pass uh some good legislation both on crypto and on stable coins. But that'll maintain a rule for the state so that we can continue to lead in this space, be nimble and make sure consumers are protected. Yeah. And I assume not everyone in this audience knows that much about stablecoins, which are a fairly niche but important sector of crypto. And I'm curious from your standpoint, why you think Stablecoin legislation is so necessary and why it is an important sector? Yeah, I think, you know, there's a lot of history in the US if you go back a couple 100 years. So in addition to loving regulation, I like history and especially financial history uh about the tensions between public and private currencies. Uh And so I think it's important as this sector continues to get bigger and bigger, we see more uses, especially in the cross border context in trade finance. Uh as we start to see more tokenized assets that we are keeping pace and have a framework in place for stablecoins and, and Cryptocurrency, obviously, there's monetary policy implication should the space continue to, to grow and, and get much bigger. And so it's really important that there is a federal role here. Um And because again, I think just to be competitive, we see the UAE and France and the UK uh and Singapore really regulating and watching these industries grow in a responsible way and watching these innovations develop in other countries. And we want that here in the us as well. And you touched on this, but one of the central debates around stablecoin legislation is this balance between the role of the federal government and regulators and state regulators and how federal preemption will come in. Why do you think it's important to protect the rights of the states and regulation here? And, and what role do you think states should have? Yeah. Well, we have this in a lot of areas of financial law. I think banking is, is the most well known one where we have a dual regulatory system where both federal regulators and state regulators play a role. And we do that often. What you see is there's a federal floor in terms of compliance requirements and then states are at their leisure to exceed that if they want to have different standards to protect their consumers and protect their markets. I think in this case, it's particularly important because New York has been leading, we know how to do this very, very well. And that's evidenced by the fact that we didn't license FTX, we didn't license Voyage or we didn't license Celsius. We just got over $1 billion back for consumers from Gemini. We brought $100 million enforcement action against Coinbase. We, we're good at this and so to take that all away so that the federal government can then just start from scratch. I think both would lead to real chaos in the industry. Um But also just abandons almost a decade of, of expertise and good work by the DFS. So, from your talks in DC, do you think a deal is nearing? At least in the House for Stable Queen legislation? I'm very optimistic. I think there are deals to be had both in the House and in the Senate majority leader Schumer has been working very hard on the Senate side. So is Senator Gillibrand, Senator Lumus. So I think we will see deals come in the near future and then beyond stablecoins, what are you seeing as the main risks right now in the crypto industry? Obviously, you've had the approval and rise of the Bitcoin ETF S over the past few months. Are there other sectors that you're paying attention to? Absolutely, I think from our experience, the big risk that we see and it probably isn't a surprise to anybody in this audience are the BS A AM L compliance with the anti money laundering and illicit finance issues. This is industry really has a lot of room uh left to grow when it comes to AM L and, and BS A compliance. So that elicit finance those issues really are the big issues we see with our regulated Cryptocurrency, uh companies. The other issues that we see where they really struggle with compliances on cybersecurity. And as you know, DFS really is a leader when it comes to cybersecurity regulation, we published in the nation, cybersecurity regulation for financial services in 2017, we just amended the regulation last year to account for things like ransomware uh to do better tailoring across industries. Uh But crypto really is an area that I think for compliance. Uh The industry still really struggles with, with cybersecurity and making sure their institutions and their platforms are secure. So I know we could talk about crypto all day, but I do want to move on to other sectors and banking, in particular, the DFS took on a national spotlight last March when you took over signature bank. And we're now just over a year removed from that banking crisis. But I know that you've raised concerns recently over the risk exposure to commercial real estate in banks. And I'm curious how you're approaching the banking sector right now and if you do think there is continued risk of further collapses. Yeah. So I think in general, the banking sector is, is very stable. I think the uh the federal regulators did a wonderful job last spring when they invoked the systemic risk exception to, to contain the contagion that we were starting to see um across the banking sector from SVB and then to signature. So I'm grateful for them uh taking that action then, but there are still risks in the sector writ large. And I think a lot of regulators, federal and state are watching commercial real estate very closely. I feel good about our banks here in New York. They're very well diversified. So often when people talk about commercial real estate, there's obviously a lot of attention on office space, especially here in New York and the vacancy rates. Uh but commercial real estate is much more than that. It's affordable housing, it's market rate housing, it's construction loans, it's office, it's hospitality now and our banks are very well diversified. They have very conservative LTV S, they know how to underwrite uh this asset class. So I do think it is a risk for the sector overall, but regulators are doing a lot of work with institutions to make sure we're being mindful of those risks. I also think there's still some liquidity risk and the federal regulators are working uh to publish new rules on liquidity. But of course, what we saw last spring when you see 20% of deposits leave an institution in four hours, we've never seen something like that. And that's in part because the regulations we have around liquidity were written before a time that you could move millions of dollars from a tiny device in your hand while on the subway. And I think it speaks to the importance of having state regulators at the table because we are a little bit more nimble. And you see that with DFS and crypto cyber A I. Uh but it's time for us to update how we think about liquidity and liquidity regulations because the technology has changed since the financial crisis when those regulations were last looked at and how have you updated or, or changed the approach toward bank supervision in the wake of signature. Yeah, we've done really quite a bit of work, some of which was under way before uh signature collapsed. But we wrote a comprehensive report as did other regulators about the collapse of signature and really came out with a number of very practical regulations because in my mind, there's a lot you can do in the black and white of the regs. But so much of this comes down to the, the practice and the execution of the regs on the part of the supervisor. So we've gone back to revisit the training of our examiners and said, how do we make sure our examiners have the skills they need when they need it at certain parts of their career that they have the skills that they need. We went back and we wrote a new escalation policy. So signature, I think is a great of a bank that was getting c grades in liquidity risk management for for many, many years. And indeed liquidity risk management is what ultimately brought down the bank. So we went back and said, let's go look at the grades, the camel ratings that our banks have been getting over the last five years and where we have students that are getting C's in the same subject semester after semester after semester. How do we escalate that to executive leadership? And how do we memorialize that process change? So that those things are coming up to the executive much sooner before those issues, metastasize. And we see another issue like a signature. Uh We've also done operational stress testing with our banks. One of the things that happened with signature is the bank was really unable to give us accurate data in a timely manner and they were changing their estimates on the value of their collateral in particular very quickly. So now we're doing tabletop exercises with our institutions to, to emulate a crisis event like that and make sure that they can produce accurate data to us very quickly so that we don't run into the same sort of issues again. So it wasn't just their crypto exposure. It, it was not, it was not related to crypto exposure. Yeah. Uh you mentioned A I before and I know this is an area that your department has been looking closely at as has the rest of the world. Uh And I believe you've issued guidance recently on the role of discrimination specifically with insurance. So I'm curious how, how you're approaching A I and whether you do have any more guidance on the way. Yeah, absolutely. So we just proposed guidance on insurance pricing and underwriting, so not claims, not customer service and applied pretty standard anti discrimination principles. But I think added a couple more things that are particular to A I. One of those things being we're requiring outcomes testing. So it's not enough to say, oh, we don't think this is discriminatory. You gotta be able to test the algorithm and prove that it's no more discriminatory than insurance discriminates, right? As, as a business model. Um We also said third party vendor management is important here. It's not enough to say, well, we hired a firm, we outsourced, they wrote the algorithm, we don't know what's in it. Therefore, it's not our fault. Third party vendor management is a well known uh risk area for financial services, banking and insurance. And so that, that applies here too. And for this, I really drew on my own experience having started an insure tech company that was based in A I and I remember doing the tour of all 50 states and having to do the geography lesson of like which, which is every state capital. Uh I got some of them wrong to be sure and, but being able to explain to regulators what's in the algorithm, how do we know it's not discriminatory? I've been through that exercise myself. So I know it's possible we got a lot of great comments from, from industry, from academics and other stakeholders on the guidance and we should have it finalized in the next couple of weeks. How do regulators stay ahead of these emergent technologies? Like A I where I know a lot of the action is often retroactive. How are you able to have a foot ahead. Yeah. And it's really just about talent, right. I've, I've long since sort of advocated, I don't think regulators should ever front run innovation. But typically, what we see is that regulators lag so far behind innovation that then they have a tendency to have a knee jerk reaction when harm starts to crop up. So our goal is to shrink that timeline between when innovation is happening and when we can regulate it appropriately so that we can continue to foster responsible innovation. Uh but protect consumers and markets. What we see is when you have those transparent rules on the books, you actually can really have a flourishing marketplace and still protect consumers and markets, but you can't do it without experts. Uh So we, that's why we hired 60 people just in the crypto unit. It's the largest crypto regulatory un anywhere in the world. We have A I and data governance experts on staff. Now we've got uh lots of technology people throughout the department and then we rely on outside experts and stakeholder engagement as well uh very heavily. And I think it's, it's proving to be very beneficial for us. So one more quick question, uh I know you've spent a lot of time in DC, obviously, it's an election year. Do you see any future in national politics? Oh, no. Uh No. Uh I very much like the technocratic. Uh and I love my job now, I mean, as you said, we get to cover insurance, banking, crypto. Um and I really have a tremendous team, so I'm really honored to get to serve with them. Well, we're very happy to have you in New York and thank you so much for joining us here today.