The CEO of a high-flying conglomerate named Textron once quipped that his investment bank’s c-suite had a long wall of his deal-done plaques and another facing wall just as replete with his deal-undone announcements. The investment bank made money on the way up and down, as did he. The big losers: investors. Is this a lesson for our times as stablecoin issuers line up for bank charters? Banks hope so, but I fear not.
The difference between Textron then and all the nonbanks gunning now for bank charters is that, in the way-back, Textron competed on the proverbial level playing field. The reason most of its acquisitions went bust is because the economies of scale and scope Textron touted were mostly chimeras since technology and data then did not reward consolidation. Now they do.
Even more importantly, the firms Textron bought were also under the same rules – such as they were – as their competitors. Now, of course, this isn’t anywhere close to the case for bank competitors such as auto manufacturers, tech-platform companies, payment entities, and nonbank stablecoin issuers.
We have written before about how regulatory and merger-policy obstacles make it hard for all but the biggest banks to innovate as well as of the inequities of the pending legislation’s stablecoin regime. We’re not the only ones who know this. Nonbank issuers are already looking for additional avenues of regulatory arbitrage and they don’t have to look far.
Last week’s news brought announcements of national-bank applications from Circle and Ripple. The apps aren’t posted yet, so it’s hard to verify if Circle wants a national trust charter and Ripple a full-on national bank, as reported. But whatever charter they seek, Circle and Ripple will get a lot if they get it.
As I noted last week, stablecoin’s value proposition in the U.S. rests as elsewhere mostly on the quiet allure of illicit finance and the gullibility of crypto traders. However, the U.S. also offers an important add-on when it comes to lowering the cost of retail payments. Even here, though, stablecoins have a challenge compared to tokenized deposits: anyone making payments in stablecoins has to find a way onto the platform with dollars and cash out into dollars on the way out. Stablecoins may well be friction-free; getting the dollars that make them useful for law-abiding payers is anything but.
Without bank charters, stablecoin issuers need to use banks for these on- and off-ramps into the real world. Indeed, even if the Fed gives them access to master accounts with a depository – very much to be seen – frictions within the stablecoin ecosystem undermine the speed and cost of payments without an affiliated depository institution without the qualms other banks will have about ultimate settlement finality.
The OCC under Acting Comptroller Hood is open to these innovative charters, but the Fed may object to them not only out of payment-system worries, but also because it fears that Circle, Ripple, and whomever comes next is not a suitable bank holding company. Stablecoin parent companies might well conform to the activity restrictions imposed on BHCs, but their ability to serve as sources of strength for insured depositories is far from clear.
Could the new Fed cotton to the idea of stablecoin parent companies given the fact that at least some are principally financial enterprises? If it doesn’t, will Treasury order it to charter them under the authority now claimed over Federal Reserve supervisory and regulatory decisions? Either outcome is possible. Even if it isn’t, there’s always the FDIC, which might agree to charter ILCs with enough of the benefits of a national-bank charter to matter.
Once upon a time, the competitive balance between banks and nonbanks was reasonably fair because insured depository institutions were the sole beneficiaries of powerful, costly taxpayer backstops for which banks paid through the cost of all the rules to which they were subject. Now, these taxpayer benefits are shared even though the rules are still more binding and asymmetric. In three of the last four systemic crises, the FDIC and Fed bailed everyone out, not just banks and, in 2020, only pretty much the rest of the financial system, not banks. As a result, depositors, counterparties, and investors bask in moral hazard, taking above-market gains when times are good secure in the knowledge that there won’t be losses when times are bad.
Banks are holding their competitive own, but in smaller and smaller corners of the retail and wholesale marketplaces. The very largest banks can muster the economies of scope and scale to compete, sometimes very effectively and, so far, always sufficiently. What of the rest of the banking system on which smaller companies and many households also depend? Aye, there’s the rub.