The US bank chartering system is hopelessly behind the times

Graeme Sloan/Bloomberg

The U.S. financial system is at an inflection point. Technology is reshaping how people move, save and manage money. It is further allowing innovators to specialize in particular areas of financial services, effectively unbundling inefficient or monopolistic models. 

Yet our regulatory architecture is stuck in the past. By forcing providers to choose between a binary approach — meaning nonbank or bank, with the insured depository institution being preferred — policymakers risk stifling innovation, concentrating risk and creating an unnecessary dichotomy in our financial system. Meanwhile, global peers are racing ahead with more adaptable licensing models, threatening U.S. leadership.

It doesn’t have to be this way — a point recently underscored by Federal Reserve Board Governor Chris Waller, who called for exploration of a new Fed “payment account” for innovative payments firms. Put simply, what we need is a coherent framework to manage the evolving landscape: a ladder of licenses and charters tailored to specific activities and risks. Each rung on that ladder would come with tailored regulatory expectations and requirements, benefits and privileges.

In a dynamic market, firms can assess the model that best fits their business needs. Regulators would gain clearer oversight, while consumers would benefit from more competition. Such a system fosters innovation and trust, leveling the playing field and ensuring that no firm gains an unfair advantage. 

In order to craft this framework, policymakers must recognize three fundamental truths. 

First, the business of banking is not static and new approaches not predicated on taking insured deposits will be a core feature. From safe deposit boxes to ATMs to mobile wallets, financial services continually evolve. Defining “bank” too narrowly — forcing everything into the traditional insured depository institution model — creates key dangers. It limits innovation, competition and access to financial services by blocking new approaches. It over-concentrates risk by forcing diverse activities into a single depository model, making the whole system more fragile. And it forces institutions that don’t want to take insured deposits outside of the bank regulatory perimeter.

Second, tailored charters and specialized banks are not deregulatory. They are a strategic choice based on the activities the entity pursues. Firms that seek specialized charters are willing to accept higher compliance costs and regulatory requirements in return for specific privileges, such as access to payment rails. That ensures activities are supervised under fit-for-purpose rules, rather than being shoehorned into a structure designed for different risks. The result…