In his comments last week about stablecoins, FRB Gov. Barr worried aloud about cracks in the banking/commerce barrier. How quaint. This barrier has been crumbling for years, but two decisions last week knocked it down. The big issue these days isn’t keeping commercial firms out of banking – give it up, they’re in. Instead, the big question is whether this nation also wants relationship-focused, regulated banks insulated from conflicts of interest and buffered against market shocks. If it does, then traditional banks need new powers, fast.
The most impermeable barrier between banking and commerce was supposedly erected in the 1956 Bank Holding Company Act along with the narrow set of permissible BHC powers allowed in 1970. These laws sought to keep insurance and commercial firms from controlling insured depositories much as the Glass-Steagall Act did in 1933 when it came to securities firms. However, Sears Roebuck took advantage of gaping loopholes, opening a bank in the early 1980s. Congress did little but legitimize these charters, allowing a class of “nonbank banks” in 1987 and broadening bank/nonbank affiliation in 1999.
FDIC Acting Chair Hill has now made it clear that he will go even farther. Next time a bank fails, look for a private-equity company or other nonbank to pick up the pieces. Mr. Hill stated that the FDIC will now not only cotton to these acquisitions, but even facilitate them with “seller financing” and a pre-qualification program akin to one established in 2024 by the OCC.
Would these nonbank owners need to become BHCs? Not necessarily – I can think of lots of ways these firms could enjoy the best of both worlds now that the “business of banking” is rapidly expanding to include all things digital.
This too was made manifestly clear last week in the new national-bank charter preliminarily approved by the OCC. In concert with opening the door to this “innovation” bank, Comptroller Gould expressly states that the OCC has set a precedent by defining a wide range of digital-asset activities as part of the business of banking and/or appropriately incidental. This provisional charter does not appear to raise immediate questions about the need for a parent bank holding company, but the precedent it sets will surely be picked up by others who will.
What will the Fed do then? Back in the day, it would do its best to insist on a BHC, generally quashing the interests of any company trying to own a full-service bank. Now, that’s far from certain. Banks of most sizes have rallied against these new charters, but the OCC is moving forward, and it seems likely that the Fed will do the same.
Where does this leave old-school banks and BHCs? Farther and farther behind. To a considerable extent, this is their own fault – banks are notoriously wary of innovation due to decades of dominant charters and balky regulators. There is no question that the banking agencies over the past decade have impeded innovation at almost every turn, clinging to the banking/commerce barrier even as it was demolished by powerful tech-platform companies and adroit NBFIs.
As with much else in the Trump revolution, the regulators have now done a 180, opening the doors wide for nonbanks seeking the best of what’s allowed in a bank charter without all the costly clutter of pesky activity, anti-tying, transparency, examination, and payment-system standards. Banks can’t stop this – even if regulators change course, the market won’t. New nonbanks also need new rules, but the odds are that they won’t get these until after something big and bad blows up. By then, it may be too late for banks to pick up the pieces.