FedFin reports since at least 2011 have identified the comparative advantage nonbanks enjoy thanks to lots of costly bank-only standards. However, we missed one big nonbank advantage sure to prove even more decisive in the stablecoin wars: bankers crave regulatory certainty even as their competitors aggressively exploit the battlefield advantage that uncertainty gives to those who dare.
Bankers aren’t dare-devils because they’re not supposed to be. Indeed, anyone who takes someone else’s money should be very, very careful. Decades of accepting deposits under strict rules without meaningful competition meant that most bankers rightly asked a lot of questions before doing anything even a little bit novel. To be sure, high-flying bankers abused taxpayer benefits thanks to negligent or even captive supervisors and rules weren’t always right. Still, rules and the supervisors who enforced them generally kept bankers in their lane since there wasn’t any faster traffic.
This comfy balance between caution and competitiveness was fiercely challenged for the first time when money-market funds dawned in the late 1970s, luring bank deposits at a time when anachronistic rules barred banks from offering competitive interest rates. High-flying bankers then sought to evade these constraints by making high-risk loans, thus bringing about the 1980s S&L crisis and the banking debacle that followed in the early 1990s. Both of these were systemic in terms of taxpayer cost, but neither had macroeconomic or financial-stability impact.
Newer, better rules succeeded these crises, but they were outflanked as “nonbank banks” became the first commercial firms to exploit chartering loopholes in the mid-1980s, building novel charters Congress largely ignored or grandfathered. More and more “shadow banks” have lurked ever since, and bankers took more and more risks to compete followed by more and more rules governing only banks in hopes of curtailing high-risk activities. Banks thus fell farther and farther behind in a negative feedback loop that makes banks ever more cautious and nonbanks ever better at finding loopholes and turning them into chasms.
Despite ever-smaller bank market share, the embedded quest for certainty continues unabated no matter its awesome strategic cost. That bankers love a regulatory blankie was most recently clear at last week’s capital conference at the Federal Reserve. A persistent refrain was a request that the new capital regime rely on hard thresholds, not supervisory judgment. Bankers fear supervisory ambiguity, but bankers willing to count on their own judgment who know their own markets might quickly and safely do far better if they strictly complied with hard-wired capital standards and deployed stress-testing as a guardrail, not concrete wall. These banks could get billion-dollar edges without additional risk thanks to supervisors with confidence in their judgment and courage to act under the expansive powers Congress provided for prompt, corrective action.
However, the quest for capital certainty fades in comparison to the sure and certain strategic cost of the search for regulatory certainty in head-to-head competition with entities distinguished most by their imagination and innovation, not internal controls. The imbalance between bankers and tech entrepreneurs will be immediately evident as bankers plead with regulators to set new rules and stablecoin issuers exploit every bit of ambiguity they can find in the new law to offer coins the way they want to whom they want when they want.
And nonbanks have a lot of room to roam as bankers plead for clerk fencing. A new FedFin report lays out the many drafting ambiguities left in the “GENIUS Act.” Many uncertainties are key to competitiveness such as whether issuers can offer enticements and who may own an issuer. Nonbanks will take every inch they can find and the yards by which they outdistance bankers will grow ever longer as bankers seek certainty.
That this will be slow to come should it come at all will eventually force banks into yet another rear-guard action unlikely to be any more successful than those over the last four years. Bankers have long tried to beat back nonbank competitors by pleading for like-kind rules on like-kind activities, but I haven’t seen a single one. So, what to do?
First, learn to live outside the certainty cocoon. Where rules are open to change – e.g., the capital standards – leave room for what Alan Greenspan in a different context called “constructive ambiguity” instead of getting the lawyers to nail down so many details that the rule is anachronistic the day it’s finalized. Where rules are imminent, ensure parity wherever possible. If supervisors are too cautious, then go to their bosses – bankers are so afraid of regulatory vengeance that they demur, but nonbanks have zero problem mounting a political offensive and they usually prevail.
Bankers also need to get a lot more combative with their competitors. If a nonbank issuer offers rewards to its customers, mount an immediate appeal, if necessary – as seems likely – in the courts and on the Hill. Where a practice can reasonably be deemed anti-competitive, go also to DOJ, the FTC, and the White House. Some of these challenges are hard, but they will give banks time to come up with ways to make tokenized deposits and their own stablecoins a meaningful marketplace challenge to their emboldened competitors.
And a warning: bankers seeking regulatory certainty for new products such as tokenized deposits will waste a lot of time that is better spent building a business. If rules are really in the way, fix them fast. If law or rule is unclear and the bank believes its innovation is safe and sound, go for it. John Milton wrote centuries ago that, “They also serve who only stand and wait.” Theologically, that is sound; as a business strategy, not so much.