OCC justifies charter permitting for fintech “shadow banks” and stablecoin providers

The chartering of fintech shadow banks as national banks is a desirable development. In the near term, this will occur in the form of unbundled, novel providers of payments or lending services. Some of their business models entail borrowing deposits, but some do not. All of them are banks.

They and their consumers stand to benefit greatly from coming out of the shadows and becoming chartered banks. For many shadow banks, the advantages of greater geographic reach and enhanced market credibility from OCC examination will outweigh the new costs of regulations they will bear. That is especially so if they are able to avoid unnecessary regulatory burdens on their organizations.

This is not about requiring fintech banks to obtain national charters, which would impose regulatory burdens on all banks, some of which would be less able to meet customer needs as a consequence. The point of chartering fintech banks should be to allow them to reap the net gains of a charter, if those gains are positive for them. This approach ensures chartering only occurs when the charter creates value. Furthermore, by permitting, but not requiring, FinTech banks to obtain charters, society reaps a further benefit: technology serves as a check on excessive regulation. If chartering authorities know that excessive regulatory burdens will discourage FinTech banks from coming out of the shadows, then regulators will be more mindful of the costs of regulation

Also, the externality argument often used to justify forcing traditional intermediaries that issue deposits to be chartered does not apply to unbundled non-depository fintechs. Traditional banks that use deposits to fund loans can magnify recessions as the result of the combination of deposit-taking and lending. Losses on loans create credit crunches when banks facing loan losses cut lending to maintain a low risk of default on deposits, and such banks can face a risk of runs if they are unable to keep deposit risk low. Unbundled banking does not create these sorts of externalities, and therefore, there are no obvious arguments for forcing fintech shadow banks to obtain charters unless doing so creates value for their enterprises.

When considering whether fintech shadow banks, including stable coin providers, will eventually become an important part of the chartered banking system, it is crucial to take into account the political power of the special interests who stand to lose from doing so. Whether consumers are able to realize the gains of a chartered FinTech future ultimately will depend as much on politics as it will on economics.

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