In the past few weeks, we’ve seen an OCC forum on financial innovation, the first Congressional fintech hearing, and continued global work finalizing the FSB’s first foray into what it fears could prove a new source of systemic risk. Based on these developments and our discussions with key policy-makers, we have reached the following conclusions about the likely direction of U.S. fintech policy for the balance of 2016:
- There will be no FDIC-blessed Utah state non-member bank charters for fintech firms absent parent-company capacity to demonstrate source-of-strength capacity. So far, the fintech firms most eager for a bank charter are unlikely to pass muster.
- The OCC will move slowly to craft a national-bank charter option for fintech firms that may include additional flexibility for incubator projects but will charge for these in terms of capital and other prudential requirements for perceived risks such as source-of-strength limitations and reputational risk.
- Worries about online marketplace lending (OML) are a bipartisan affair. Republicans worry about data intrusions and community-bank impact. Democrats add to this list a lot of angst about consumer protection and legislation favoring OML, such as newly-introduced usury exemptions, are no-gos for now.
- The OCC may agree to “safe zones” for limited fintech experimentation in existing national banks, starting first with innovative delivery models for traditional lending services and possibly even retail-payment tools. Structural innovations akin to blockchain outside the very preliminary pilot phase will advance only with inter-agency agreement. In any of these safe zones, participating banks will get a pass from enforcement actions resulting from system failure or unexpected loss, but not from otherwise applicable capital, liquidity, and prudential requirements.
- Blockchain interestingly troubles Members of Congress not just in terms of implementation policy, but also as to whether it should be allowed at all. The reasons for this vary, but a theme we keep hearing is that small banks could be frozen out of the payment, settlement, and clearing system. Closed-platform digital ledgers also spook asset managers and other major Wall Street players with friends at the Treasury as well as on the Hill.
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