Main regulator moves forward with plan to overhaul the banking sector, sparking clash with states

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“We made sure that we don’t need a new regulation or a new law on this,” Brooks said.

A charter would give these companies the ability to operate beyond state borders with a single set of rules, as well as expand the range of financial services they offer.

While the action of the Office of the Comptroller of the Currency is welcome to those who might apply, it is giving banks and credit unions heartburn, which have come together to urge the agency to “proceed with caution.” , deliberately and transparently ”.

The push to expand who receives bank charters touches on hot debates such as whether non-depository institutions should have direct access to U.S. payment rails – giving them the ability to transfer money without going through one. bank – and what is the appropriate separation. between banking and other types of commerce.

And another major question arises from these: Could this give tech giants like Google and Amazon the ability to bypass banks altogether if they were looking for a charter?

“If you consider that you don’t have to be a depository, it’s hard to understand what the limiting principle would be, that not only could PayPal be a national bank, but any US business could be a national bank. , ”Said Greg Baer, ​​President and CEO of the Bank Policy Institute, which represents the big banks.

Brooks – who might not be in office for long, depending on the outcome of the US presidential election – did not disagree with the possibility, but said large conglomerates had not shown interest in a charter. . (PayPal, which serves more than 300 million consumers and businesses, has also not publicly indicated that it is interested.)

“But if Amazon showed up, or Google came up and said, ‘Damn, we want this company to be a bank,’ I mean, we would look at it substantively,” he said.

Financial Innovation Now – a group that represents Amazon, Apple, Google, Intuit, PayPal, Square and Stripe – praised Brooks’ “leadership and vision” in a statement.

“The United States needs a more flexible and modern regulatory system that fosters more new entrants, competition and a wider range of choices for consumers and small businesses,” said Executive Director Brian Peters. “Payment products for FIN members are already heavily regulated by states, and we will not necessarily seek an OCC charter.”

Brooks said offering the charter to these companies has the potential to transform the way others perceive what it means to offer banking services. Institutions that do not take deposits are not covered by the Bank Holding Company Act, he said, so the parent company would not face the kind of restrictions that normally prevent banks from also holding deposits. non-financial corporations.

“If we stop thinking of banks as entities and start to think of banking as a service, you can imagine that businesses are going to stop thinking about whether they want to be a bank and start talking to the bank. up if they want to have a bank, ”he said.

“I think more and more of this agency as a business regulator, not an entity regulator,” Brooks said.

Still, there is considerable uncertainty as to what exactly a “payment bank” would get out of the deal. Bypassing several different licensing processes in various states would certainly reduce costs. But it’s not clear whether the Federal Reserve would allow them the biggest price from an account at the central bank, which would allow them to settle their own transactions.

The multi-state licensing system is “a barrier to entry, so we support a charter for these reasons,” said Nick Catino, policy manager at TransferWise, a multi-currency payment transfer company who did not say whether she would pursue a charter.

“But where there is further access to Fed services, like payment systems, this is where consumers really benefit,” he added, noting that the Bank of England gave to his business a settlement account. “Think of banks as an expensive middleman. Customers eat these costs.

The Fed has yet to express its openness to expanding the types of institutions that are directly connected to the payment system, which is highly regulated to prevent fraud and ensure accurate money transfers. That – along with the ongoing litigation with the states – suggests that this is an issue that could go on for years.

The Fed declined to comment for this story.

Brooks guessed “it would take one to two years to [the Fed] watching these companies operate before they are comfortable, which is appropriate. “

More generally, he said his agency should regulate activities that fall under the definition of banking – taking deposits, making loans or facilitating payments.

“If you go back 10 years, the OCC regulated about 100% of payments,” he said. “And then because of a bunch of technological innovations, some of that work that was being done in the banks started leaking out of the system.”

“I can supervise the payment activity of JPMorgan, but I cannot supervise the payment activity of Square,” he added. “Sounds really weird to me.”

There’s another flaw in Brooks’ plans: A federal judge ruled last October that the OCC cannot issue bank charters to institutions that don’t take deposits, a victory for the Department of Financial Services of New York, which argued that the national agency cannot charter such institutions without congressional action. The OCC is appealing this decision.

Brooks said the decision does not apply nationally.

“We are certainly not going to violate his order in the Southern District of New York,” he said. “But with all due respect, if a California business, which is not under the jurisdiction of the Southern District of New York, wants to do it and has a business plan that does not work in the Southern District of New York, we’re going to be looking at that in our capacity as regulator of the national banks. “

Margaret Liu, deputy general counsel at the Conference of State Bank Supervisors, said states believe the OCC is going beyond its authority by trying to charter non-depository institutions.

She highlighted efforts by state regulators to harmonize their licensing processes and argued that a license is better suited to many innovative companies.

“When you entrust a charter to an entity, it is in a way a validation of its economic model. It’s like, ‘I think you’re going to be successful,’ ”she said. “A state license is not a value judgment on a business model. A state license is a determination that you have met a set of objective criteria. You might be successful, maybe not.

But Miller Whitehouse-Levine, who manages industrial relations at the Blockchain Association, which represents crypto companies, said a national regulator is better suited for payments, a service that is inherently borderless.

“Especially in the case of crypto companies, these are all services that are provided over the internet and therefore are not limited by geographic boundaries,” he said. Some in the group would likely be interested in the charter, he said.

Seven groups representing banks and credit unions of all sizes said in a letter on July 29 that the OCC should ensure that “any contemplated changes” for the new charters are subject to public comment.

“The issues examined have broad implications for the banking system and long-standing political decisions,” they wrote.

Brooks said the public will have an opportunity to comment on any official request.

He also said that chartered payment companies would be subject to the same rules as a traditional bank, but its actual activities would determine how those rules would apply. He pointed out that their business model would always entail certain capital and liquidity requirements.

“Payment banks will certainly be subject to capital rules,” he said. “Applying these rules to a payment bank will result in a different number than applying this rule to a bank that, for example, takes a credit risk because a payment company that does not make loans has no credit. exposure.”

He expressed the urgency to strictly regulate banking activities, regardless of the company that carries them out.

“If we continue like this for another 10 years, half of the financial services business that is currently done in banks will be done by someone else,” he said. “And I will not be able to guarantee its safety and soundness.”

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