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Attorneys suggest Federal Reserve ‘actively embrace and utilize’ Blockchain technology

A pair of Washington DC attorneys recently penned an open letter suggesting that the U.S. Federal Reserve’s Shared National Credit (SNC) review program should use a blockchain.

A pair of Washington DC attorneys recently penned an open letter suggesting that the U.S. Federal Reserve’s Shared National Credit (SNC) review program should use a blockchain.

The program was established in 1977 by the U.S. Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC). The aim is “to provide an efficient and consistent review classification of any large syndicated loan,” according to the Federal Reserve System’s website.

Federal Reserve logo“The program covers any loan or loan commitment of at least $20 million that is shared by three or more supervised institutions.”
— – The Board of Governors of the Federal Reserve System

Scott Lessne and Matthew B. Welling penned the open letter published in American Banker. They are both attorneys at Crowell & Moring LLP. The firm’s Government Contracts Practice is one of the largest in the U.S.

The duo describe the loans examined by the SNC program as a “discrete, though highly complex.” These syndicated loans are known to be plagued with bureaucracy, and could immediately make good use of blockchain technology, the authors assert.

Lessne and Welling pose a simple question, “what if distributed ledger and blockchain technologies could be used by regulators in offsite collection and analysis of bank loan data to reduce the time needed for onsite examinations?”

The current bi-annual process of collecting data for the SNC review involves bank examiners collecting information from banks in the field. “Examiners then review the SNC loan records of the participating banks as maintained separately by each bank,” the attorneys explain.

Naturally, the paperwork can pile up. The antiquated system costs everyone involved large amounts of time, resources, and underwriting fees.

Crowell Moring LLP logo“The examiners have to compare and analyze those records with all the others that participate in that loan.”
— – Lessne and Welling

Lessne and Welling propose that a blockchain, deployed by the Federal Reserve, the FDIC, the OCC, and their SNC reviewers could refine that bloated system dramatically.

The system would require “only one database,” they say, “containing near real-time information that examiners and all banks participating in a specific loan could view, add to and agree upon.”

“These technologies could significantly lessen the need to deploy armies of examiners to banks for onsite examinations when reviewing the largest of loans — saving both time and money,” the letter states. “And to the extent blockchain could enhance the quality of SNC exam data, the technology could effectively help regulators monitor safety and soundness.”

“Regulators should lead the charge where use of distributed ledger and blockchain technologies provide a significant opportunity to improve the examination process.”
— – Lessne and Welling

The process could use a gatekeeper, perhaps a regulatory agency agreed upon by all parties, to “determine which banks are properly network participants.”

“Each bank participating in a syndicated loan could then be given permission to access the shared ledger associated with that particular loan,” Lessne and Welling explain.

“As data is added to the ledger for a loan, each bank with access to that loan would see updated information on the ledger on a close to real-time basis,” they said. “The system would confirm the legitimacy of that information.”

Read access would be invite-only as well, “to prevent confidential information from being viewed by other loan participants, such as the credit rating that each bank establishes for the loan.”

“This would provide significant timing advantages in response to negative information received on a specific credit or to emerging negative industry or systemic economic trends. For the banks, reporting would become more efficient possibly resulting in less time consumed by onsite examinations.”
— – Lessne and Welling

While proponents of private, permissioned blockchains would agree with the attorneys, there are those that disagree. The famous bitcoin speaker and author, Andreas Antonopoulos, gave a speech on this topic late last year.

In “Bubble boy and the sewer rat,” Antonopoulos pointed out that the risk of such a network is that it will simply become a bloated intranet, in constant need of repairs and patches for the sake of security.

However, this isn’t the first time U.S. regulators have taken notice of the technology. It’s typically highlighted as a panacea for securities and payment systems. “Although banks and bank regulators are quickly becoming familiar with blockchain and distributed ledger technologies,” Lessne and Welling said, “there has been little focus on using them for actual regulatory oversight.”

The Financial Stability Oversight Council (FSOC) previously acknowledged bitcoin and blockchain technology.

department of the treasury logo“Like most new technologies, distributed ledger systems also pose certain risks and uncertainties which market participants and financial regulators will need to monitor.”
— – Financial Stability Oversight Council

Lessne and Welling noted this in their letter and pointed out that precious time is slipping by. “The Financial Stability Oversight Counsel, for instance, has taken a conservative wait-and-see posture regarding use of this technology for ‘safety and soundness’ reasons,” they explained.

“However, a cautious wait-and-see approach, as advocated by the FSOC, may be a missed opportunity,” the duo pointed out. “Providing examiners with a quicker mechanism to communicate and organize data around large extensions of credit will allow bank examiners and banks to detect credit weaknesses much earlier than is currently the case, resulting in enhanced opportunities to take coordinated proactive action.”

“Federal bank regulators should actively embrace and utilize these technologies.”
— – Lessne and Welling


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