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OTS Eyes Challenges of Rule-Making for `Virtual Banks'
By Cindy Skrzycki
Washington Post Staff Writer
Friday, September 5, 1997; Page G01
The Washington Post
The advent of virtual banking -- in which customers may deal with
their banks only through computers -- has prompted federal regulators
to begin revamping existing rules regarding electronic transactions.
Although banks have been dabbling in home banking and automated teller
machines for more than a decade, only about 4 percent of U.S.
households conduct their banking transactions online, and many of
those may be doing such simple tasks as checking an account balance.
Since 1995, two "cyberspace" banks have come online, offering services
such as the electronic transfer of funds between accounts and bill
paying on the Internet. Other more traditional banks are buying the
same sorts of software to offer more electronic banking services to
their customers, often as an adjunct to traditional services.
Banking regulators expect electronic banking -- and the forms it will
take -- to grow exponentially now that millions of Americans are
hooked into the Internet.
"We are examining whether there is anything in our rules that impedes
electronic banking and the use of technology," said Nicholas Retsinas,
director of the Office of Thrift Supervision, who is heading the
agency on an interim basis. The OTS regulates 1,270 federally
chartered savings banks and state-chartered savings and loans. "What
can we do to facilitate the use of electronic banking?"
Retsinas has written frequently about the expanding role of technology
in banking, pointing out the profitability of using computers: A
teller transaction can cost up to $2.93; an Internet transaction, 2
cents.
In April, the OTS began examining rules it has had on the books since
the 1980s covering home banking, automated teller machines and data
processing. "OTS is concerned that its current electronic banking
regulations do not adequately address advances in technology and may
impede prudent innovation by federal savings associations," the agency
said, promising it will have a proposal ready next month.
"We promulgated some rules where we wondered whether the language was
appropriate, let alone the rule," Retinas said, referring to "data
processing," a vintage term that hardly begins to capture the
potential scope of electronic transactions.
The agency also was confronted with an increasing number of questions
by its banking constituency. Was it all right to offer Internet
banking to depositors living abroad? Could savings and loans open
accounts for customers or issue loans from remote electronic
locations? What kinds of banking services could be offered over the
Internet?
These kinds of queries prompted the OTS to delve into several areas
where current regulations are murky, or nonexistent. For example, the
OTS is trying to figure out whether automated loan machines, which
allow customers to apply and receive confirmation for a consumer loan
at a site similar to an ATM, should be considered branches or
something akin to an ATM -- though loans cannot now be originated at
ATMs.
The OTS also wonders whether its current regulation on home banking
services covers transactions such as opening new accounts online or
processing credit applications.
The agency is considering the philosophical quandaries presented by
the borderless nature of banking in cyberspace. How does a bank with
no bricks and mortar define community for purposes of fulfilling
mortgage-lending obligations to minority groups under federal laws
such as the Community Reinvestment Act?
"How does an institution demonstrate that is serving the credit needs
of a widely dispersed customer base when there is little or no
geographic proximity between its deposit customers and its loan
customers?" the OTS asked.
Then there are questions of security. The OTS wonders whether it
should mandate a specific level of encryption to make transactions
impenetrable or "rely on general safety and soundness principles to
govern a safe system of operation?" Does it need separate regulations
for various forms of electronic banking that might be done over the
phone, with special software on a personal computer or on the
Internet?
Some of these questions the OTS has already had to answer.
Since 1995, the OTS has approved two "Internet" banks -- Security
First Network Bank (SFNB) in Atlanta and the Atlanta Internet Bank.
Both offer an array of banking services and rates that are highly
competitive with "real" banks.
One of the first concerns that the OTS had was the security of systems
used by the Internet banks. SFNB, for example, has about 12,000
accounts and $44 million in deposits.
To satisfy regulators that Security First could protect consumers'
privacy and the sanctity of transactions being done via the Internet,
the OTS asked Security First to "test the penetration capabilities,"
of the bank, said Eric W. Hartz, president of SFNB. That's another way
of saying the OTS wanted to make sure that Security First's Internet
banking operations didn't become a playground for hackers. Atlanta
Internet had to undergo a similar exercise to get approval from the
OTS.
Bankers, for the most part, think it's too early to write definitive
rules for an area dominated by changing technology, although they
would like some current OTS rules changed to accommodate different
forms of electronic banking. They also said they hoped to see
coordination between the OTS and other agencies that regulate banking,
such as the Office of the Comptroller of the Currency and the Federal
Reserve Board.
As Citibank noted in comments to the OTS, "We strongly encourage the
adoption of broad enabling regulations and policy statements," but "we
believe that the OTS should not at this time promulgate detailed
presciptive or, worse yet, proscriptive rules affecting electronic
banking activities."
� Copyright 1997 The Washington Post Company
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