Fed's Bullard warns bank regulators are 'complacent' over fintech risks

WASHINGTON (Reuters) - U.S. banking regulators must accelerate efforts to address the risks posed by fintech companies to the banking sector which could be “eviscerated” by these innovative new players, St. Louis Fed President James Bullard said on Thursday.

Growing competition from fintech players has become the “number one issue” for large financial firms and regulators are “fighting the last war” by focusing on tweaks to post-crisis financial rules, Bullard told Reuters in an interview.

“We need to speed up our consideration of the fintech issues and think harder about what is the regulatory environment that is going to be appropriate. I think we have been complacent so far,” Bullard said.

“That is the battleground for the next ten years. It is not the same as the battleground for the previous ten years.”

Technology-driven non-bank firms are increasingly moving into the traditional banking space offering services such as peer-to-peer lending, crowdfunding and robo-advisory.

In the lending sector alone, Goldman Sachs GS.N estimates that $11 billion of annual profit is at risk of leaving the banking system, according to research cited by the Fed.

Many deep-pocketed banks including Goldman, Citi C.N and Morgan Stanley MS.N have been scooping up fintech assets through direct investments and acquisitions, while national bank regulator the Comptroller of the Currency has proposed directly regulating fintech firms.

Bullard warned that if regulators were not more aggressive, however, they could “wake up one day and most of the big banks have been eviscerated and most of that activity has moved elsewhere,” adding this could create the risk of a financial crisis because regulators had lost sight of the activity.

Republican President Donald Trump has pledged to cut red tape for financial firms, saying it could promote economic growth. However, Bullard said not enough had been done to ease the burden on small banks that have been hard hit by the Dodd-Frank Act introduced following the 2007-2009 global financial crisis.

“I think a lot more should happen to help these smaller banks,” said Bullard. “To have Dodd-Frank rain down on these smaller banks has been a tragedy of the whole legislation.”

Reporting by Michelle Price