[1][LINK] _________________________________________________________________ [2]Business Section: the latest business headlines, company profiles and advice for managing your money. [3]Stocks Page: instant stock quotes, mutual fund quotes, market data and free personalized online portfolios. All Business stories and columns from [4]this morning's Washington Post and an image of the Business section front. [5][ISMAP]-[6][USEMAP] _________________________________________________________________ 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 [7]Back to the top _________________________________________________________________ WashingtonPost.com [8][ISMAP]-[9]Navigation image map [10][LINK] References 1. http://ads.washingtonpost.com/realmedia/OAS/rm/try-it.try?www.washingtonpost... 2. http://wp2.washingtonpost.com/wp-srv/business/front.htm 3. http://wp2.washingtonpost.com/wp-srv/business/longterm/stocks/stocks.htm 4. http://wp2.washingtonpost.com/wp-srv/WPlate/m-financial.html 5. http://wp2.washingtonpost.com/wp-srv/maps/navlong.map 6. 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