#nonbanks

3 11, 2025

Karen Petrou: How a “Finality Account” Would Make Skinny Master Accounts Make More Sense

Shane Smith2025-11-03T09:19:50-05:00November 3rd, 2025|The Vault|

As I’ve recently noted, the barrier between banking and commerce is ever more evanescent. This isn’t, though, because the banking agencies are letting legacy banks into anything redolent of commerce. It’s because the FRB, OCC, and FDIC are letting nonbanks into banking with few of the regulatory and supervisory costs demanded of existing banks big and small, with one of the most consequential one-way tickets proffered by FRB Gov Waller in his recent proposal to give eligible special-purpose banks access to the Fed’s payment system. He describes these new master accounts as “skinny,” but they have yawning pitfalls and not just for banks.

Ever since the Herstatt failure in 1974, it has been clear that payment-system hiccups give the financial system acute gastric distress. This is why central banks dominate national payment systems, with the 1980 law authorizing the Fed to do so based in large part on the Fed’s arguments that only it could be trusted to keep the payment system’s lights on. And so the Fed said again when rationalizing the need for its own instant payment system rather than entrusting technological evolution to the private sector even though the private sector led the way to real-time payments long before the Fed bestirred itself.

If it is indeed essential for the central bank to control the payment system, then access to the payment system is a public good that should only be allowed for entities able to protect the public. This is of course one of the key …

20 10, 2025

Karen Petrou: Say Bye-Bye to the Banking/Commerce Barrier

Shane Smith2025-10-20T09:11:24-04:00October 20th, 2025|The Vault|

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 …

28 07, 2025

Karen Petrou: The High Cost to Competitiveness of the Bankers’ Quest for Certainty

Shane Smith2025-07-28T09:27:41-04:00July 28th, 2025|The Vault|

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 …

16 06, 2025

Karen Petrou: Why Republicans Want the Fed’s Money

Shane Smith2025-06-16T09:23:03-04:00June 16th, 2025|The Vault|

In the iconic movie “Goldfinger,” a murderous thug with a deadly bowler hat chases James Bond around Fort Knox as our hero stops a maniacal plutocrat from making the nation’s gold stock go radioactive. Compared to current gold conspiracies, that almost makes sense. Both President Trump and Elon Musk, among others, have doubted the security of the nation’s gold supply on nothing more than the fact that they haven’t actually seen it. To the rescue last week rode several super-conservative Members of Congress, who have introduced a bill to force an “independent” audit – read not the GAO or even Treasury – of all the gold held by or entrusted to the U.S. Gold conspiracies have come and gone since at least 1974, but the heights reached now speak to profound, widespread distrust of the government even by those who run it. This paranoia isn’t limited to inert stockpiles. It pervades two of the nation’s three branches of government and even occasionally touches the third. Thus, just because something doesn’t seem to make sense doesn’t mean it won’t happen.

I bring this up because several responses to my memo a couple of weeks back said Congress would never cotton to a sharp reduction in the payment of interest on reserve balances (IORB) or to balances held in the U.S. by foreign central banks. “Fringe thinking,” or so I was told by friends at the Fed, thinking they believed they could easily dismiss without a second thought by reminding critics …

12 05, 2025

Karen Petrou: Why Stablecoin Hegemony Could Cost Too Much

Shane Smith2025-05-12T09:49:18-04:00May 12th, 2025|The Vault|

In the battle over stablecoin regulation, defenders of the pending legislation make much of the need for the U.S. to become the dominant global leader. That’s fine, but what if the new stablecoin framework gives the U.S. crypto preeminence at the cost of U.S. bank resilience and macroeconomic growth? That would be a high price to pay, but it’s nonetheless the Faustian bargain lurking in the latest legislation.

As our analyses have made clear, the House and Senate bills address only payment stablecoins – i.e., digital assets used by consumers and companies to settle financial accounts or to purchase goods and services. The idea is to make regulated stablecoins as reliable a medium of exchange as dollars, with the bills’ reserve-asset requirements meant to ensure that one stablecoin dollar always equals one U.S. dollar. This is fine as far as it goes, but that’s not far enough to ensure payment-system finality, ubiquity, and equality. A more robust stablecoin also does little but make it still more likely that regulated banks will be disintermediated as deposits move from the current, fractional system into a new, “narrow bank” model that does little for anyone but stablecoin issuers, their affiliates, and parent companies such as giant tech platforms.

A dollar’s worth of stablecoins is little more than an abstraction until one knows how it moves across the payment system. If the payment rails are weak or the engineer is negligent, then armored boxcars just make an even bigger, harder bang when they derail.…

3 12, 2024

FedFin on: Nonbank-Payment Provider Regulation

Eliza Allen2024-12-03T16:48:27-05:00December 3rd, 2024|The Vault|

Continuing its efforts to advance controversial actions before the end of the Biden Administration, the CFPB has finalized proposed supervisory standards for large nonbank providers of general-use digital-payment-platform services. The new standard brings these companies under CFPB supervision as well as regulation and enforcement actions, better aligning their governance with rules applicable to bank payment providers and addressing the Bureau’s deep concerns about digital marketing. However, this new framework depends on voluntary compliance in anticipation of or as the result of rigorous CFPB supervision…

The full report is available to retainer clients. To find out how you can sign up for the service, click here and here.…

18 11, 2024

Karen Petrou: Why Banks Need More Than Just New Capital Rules

Shane Smith2024-11-18T09:27:52-05:00November 18th, 2024|The Vault|

Bankers complain with considerable fervor about a “tsunami of new rules.” There has certainly been a flood of standards indirectly implemented by supervisors, simply demanded by the CFPB, proposed, and finalized. It’s thus understandable that bankers think they’re drowning. But, as forest fires rage in Brooklyn and much of the nation is conserving water, it’s important to recall that too little rain is also dangerous. Which brings me to the strategic hazard banks run if deregulation, while alleviating a bit of bank burden, leaves untouched all the regulatory asymmetries that make it easy for shadow banks to dominate still more profitable activities once considered core banking services. If shadow banks offer better products, so be it. However, much of their market power derives only from adroit regulatory arbitrage. That’s not just bad for banks; it’s also dangerous to financial consumers, investors, and stability.

Regulators can go only so far in easing banks’ burden because the law requires many of the rules that bind them. Nonbanks are not governed by much federal law and there are scant state safety-and-soundness standards. Tech-platform companies are outside the law unless federal regulators use their inter-connection and antitrust powers to rein them in. That these nonbanks have their eyes on core intermediation and payment services is now indisputable. That banks will end up as little more than bedraggled “partners” or ancillary-service providers to nonbanks is inevitable unless necessary bank-regulatory reform comes with long-overdue nonbank safety-and-soundness and resolution standards.

Our forecasts of financial policy under President …

22 07, 2024

Karen Petrou: The Toxic Brew of Insurance Companies, Private Equity, and High-Risk Mortgages

Eliza Allen2024-07-22T11:13:54-04:00July 22nd, 2024|The Vault|

As financial regulators fret about risk migration to nonbank financial intermediaries, a new race to the sunny side of the regulatory street is already underway. As detailed in a comprehensive Bloomberg article, insurance companies are increasingly investing in high-risk whole residential-mortgage loans, doing so either with no capacity to service them unless they rely on parent-company private-equity firms to do so somehow. What could go wrong?

This transaction is redolent – indeed, it’s a repeat – of how nonbanks barged into mortgage finance before the great financial crisis without a clue about the real risks they ran. Well, I recall Bear Stearns’ big bet on mortgages placed without any concomitant servicing capacity because, as they said at the time, mortgages never go to foreclosure. Speculative house-price increases led them to this sanguine conclusion because there hadn’t been many foreclosures for a couple of years, but neither Bear Stearns’ mortgage portfolio nor the firm is here today to ruminate over hard lessons learned in the 1980s.

Bear Stearns’ failure quickly became a systemic threat, with wider damage delayed until the 2008 crash thanks only to the first of the Fed’s high-cost subsidized mergers that bred moral hazard that fired speculation up to a still more frenzied height until Lehman Brothers failed.

As before the great financial crisis, insurance companies are investing in high-risk mortgages because yield-chasing and capital arbitrage rewards them, at least for now. The whole mortgage loans insurance companies are buying carry wide spreads over RMBS is only …

2 07, 2024

FedFin: Taking Trump Still More Seriously

Arezou Rafikian2024-07-02T16:24:40-04:00July 2nd, 2024|The Vault|

In the wake of last week’s debate, clients have asked that we advise about what a second Trump term might mean for U.S. mortgage finance. We reviewed our forecast at the start of this year on exactly this point. Much of it remains as before, but there are several areas where an update is warranted due to recent Trump fiscal- and monetary-policy trial balloons. Our updated, complete forecast follows….

The full report is available to subscription clients. To find out how you can sign up for the service, click here.…

20 05, 2024

Karen Petrou on: How FSOC Enables Systemic Risk

Eliza Allen2024-05-20T11:37:05-04:00May 20th, 2024|The Vault|

One can and should debate the extent to which nonbank mortgage companies (NBMCs) are as systemically-risky as FSOC says they are. But it’s indisputable that, if FSOC believed what it said, then the paltry and politically-improbable recommendations it announced are proof of only one unhappy conclusion: all FSOC can meaningfully think to do when it sees a systemic risk is figure out how to bail it out. This is certainly what taxpayers have learned the hard way and investors have come to expect. Or, as humorist Dave Barry pointed out after the mid-March systemic deposit bailout, “Eventually the financial community calms down, soothed by the reassuring knowledge that American taxpayers will, as always, step up and cheerfully provide billions of dollars to whichever part of the financial community screwed up this time.”

As we noted in our detailed analysis of FSOC’s report, the Council lays out the rapid-fire growth of NBMCs, the role regulatory arbitrage played in pushing banks to the sidelines of the residential-mortgage business that once defined so many charters, and the direct taxpayer and resulting systemic risk of NBMC liquidity shortfalls. Asked about this at Wednesday’s HFSC hearing, Acting Comptroller Hsu said that NBMC stress could lead to “widespread contagion risk” that could prove “severe.”

Could NBMCs be pulled off the brink under current law? In a little-noticed aside, FSOC says no because NBMCs lack the assets that would make viable orderly liquidation by the FDIC under its systemic authority even if the FDIC finally figured out …