Home Banking Preventing the Next Great Blurring

Preventing the Next Great Blurring

by internationalbanker

By Michael J. Hsu, Acting Comptroller of the Currency, Office of the Comptroller of the Currency (OCC)





The history of financial crises in the United States suggests that the blurring of the line between banking and commerce can lead to financial instability. Payments and private credit/equity are where I sense the greatest risk of blurring over the next decade.

The analytic framework recently adopted by the Financial Stability Oversight Council (FSOC) has great potential to identify and address financial-stability risks as they emerge. It provides space for identifying and assessing such risks before any action is taken.

Banking, commerce and financial stability

Banking can be defined in several ways. Banks are institutions that bundle deposit taking, credit intermediation, maturity transformation and payment facilitation into a single institution. Legally, banks are the only entities authorized to take deposits. Policy-wise, banks are “special” because by holding readily transferrable demand deposits, they can provide backup liquidity and function as a transmission belt for monetary policy. And from a regulatory perspective, banks are chartered, regulated and supervised by prudential authorities, such as the OCC (Office of the Comptroller of the Currency). “Commerce” is everything else, including nonbank finance and unbundled banking components, both of which can be prone to blurring and lead to instability.

The US economic and banking history includes numerous financial crises. Three stand out: (1) the Panic of 1907, during which the failure of nonbank trust companies prompted a broader banking panic; (2) the Great Crash of 1929, which was precipitated by banks going beyond their core functions and engaging in speculative and manipulative financial practices; and (3) the 2008 Global Financial Crisis (GFC), which was marked by the collapse of the shadow-banking system.

Each was preceded by a multi-decade period when the line between banking and commerce was blurred. This blurring occurred narrowly and slowly at first, then expanded and accelerated rapidly until each crash. How do we prevent the next great blurring from happening?

Payments and private credit/equity

Payments have been dominated by banks for most of the country’s history and by major credit card networks and payment processors since the 1970s. In the past 10 years, nonbanks—through innovation and technology use—now compete in the payment arena, leveraging and fueling the digital economy’s rapid growth.

For instance, peer-to-peer payments were nascent a decade ago but have grown steadily and significantly, though publicly available data are sparse. Similarly, point-of-sale (POS) terminals at retail businesses were rudimentary and difficult to set up. Today, most POS terminals are “smart”, compatible with tap-and-pay and integrated with business operating systems. Business-to-business payments were highly manual and relied on the automated clearing house (ACH) and SWIFT (Society for Worldwide Interbank Financial Telecommunication) services with limited real-time payment systems globally. Today, a range of nonbank fintechs (financial technology firms) offer automated ways of tying together businesses’ payments, accounting and finance needs.

Driving these trends has been the rise of the digital economy, especially e-commerce, which now comprises 15.6 percent, or $1.1 trillion, of US retail sales, up from 6 percent in 2014. Open banking and real-time payments are likely to further accelerate digitalization trends, with even more change expected going forward.

From a bank regulatory and microprudential perspective, our focus during this period must be to ensure that banking safety and soundness are maintained, consumers are protected, and the playing field is leveled.

From a macroprudential perspective, the prospect of banking being rebundled by nonbank entities outside of the bank regulatory perimeter bears careful monitoring because of the financial-stability implications. Arguably, some fintechs are already blurring the lines (and raising concerns about level playing fields). Companies that started off by facilitating payments now offer customers the ability to deposit paychecks, earn yields and access credit. The deposit-taking-like activity warrants the most scrutiny because of the vulnerability it creates to runs if customers have doubts about the safety of their money.

Many of these players started by focusing on facilitating payments and then moved over time into adjacent activities. This trajectory loosely mirrors the path of brokerage firms, which started by facilitating trading and then expanded to margin lending to meet client demand for leverage and to sweep deposits to handle their cash.

Like fintechs, broker-dealers are not banks. Trading today, which is subject to a mature regulatory framework, is “commerce”, not banking. As prior financial crises have shown, however, the blurring of that line warrants scrutiny and monitoring.

Private equity (PE) has historically been straightforward. PE firms raise money to fund and invest in the equity of privately held companies. The money is typically considered illiquid, given the time horizon. PE funds’ customary focus on equity, not debt, means they have traditionally been several steps removed from banking.

Things are changing, however. PE has grown significantly, from under $2 trillion in assets under management in 2012 to roughly $10 trillion in June 2023. Bank interactions with and exposures to PE firms have also increased—for instance, through capital call facilities. PE firms have expanded aggressively into private credit, which, as of 2022, exceeded $1.5 trillion globally, and many expect private credit to double or triple in the coming years. Nonbanks originating and holding loans at scale is a notable industry variation.

The closed-end fund structure of PE funds is also evolving. Rapid growth and competition have led to the search for more efficient investment structures that can reduce the idleness of money between capital calls, investments and distributions while providing investors with opportunities to exit early. These structures can introduce new risks, including redemption risks like those faced by open-ended bond funds, which have been cited as a financial-stability concern by the FSOC and the U.S. Securities and Exchange Commission (SEC).

PE firms have increased their holdings of insurance companies, which can provide a steady supply of premiums to invest. Some PE firms have also established offshore reinsurance companies to support their insurance activities and serve as holding companies for affiliates. The intermingling of funds and opacity of inter-affiliate risk transfers is reminiscent of practices at AIG (American International Group) before it collapsed in 2008. PE firms are not subject to consolidated supervision, which means that outsiders, including regulators, cannot assess how risky and interdependent their activities are.

With PE moving into private credit and insurance and adapting its funding vehicles to compete and accommodate further growth, one can see an evolution akin to the case of payments. Each pivot and change makes economic sense on its own, leading to a new opportunity or set of adjustments, which, in turn, lead to others.

Without clear guardrails, the line between commerce and banking tends to blur. The more incremental and rational the blurring, the harder it is to detect and address. Taking this as axiomatic can help guide financial-stability policymaking and monitoring.

Authorities and tools

Fortunately, regulatory agencies have a variety of tools to mitigate the micro- and macroprudential risks from blurring the line between banking and commerce.

Most roads eventually lead back to banks, giving bank regulators some visibility and influence over nonbank activities. For instance, nonbank technology firms generally cannot offer bank-like services without relying on so-called “sponsor banks”, which presents opportunities and risks for banks. The OCC expects banks to manage those risks prudently, including credit and liquidity risks. In this way, microprudential supervision and regulation have roles to play in mitigating some of the macroprudential risks from nonbanks.

Many nonbanks are subject to varying degrees of direct oversight by functional regulators. For example, the Consumer Financial Protection Bureau (CFPB) supervises nondepository institutions, and US federal banking agencies have examination and regulatory authority over certain third-party service providers.

There are gaps, however. The absence of federal money transmitter licensing standards and a comprehensive federal oversight regime means that nonbank payments-related regulation and supervision in the US comprises a patchwork of varying state-by-state standards and practices. In addition, PE firms are not subject to consolidated supervision, which contributes to knowledge gaps and opportunities for arbitrage. The law also limits deposit taking to only banks; however, it generally has not been used as a key tool in regulating innovative deposit-like products.

Lastly, bank regulators’ licensing decisions can play a role. Various fintechs have explored the possibility of obtaining a bank charter, seeking the benefits of a charter while also seeking to avoid its burdens. To accommodate novel activities, different banking regulators have considered creating new charters at different times.

If a fintech wants a national bank charter, the OCC will welcome that and review the application on its merits. Several have filed charter applications and received OCC approval. The OCC will not, however, lower our standards, create a special regime or take an overly expansive view of banking to entice new entrants or bring a particular activity into the bank regulatory perimeter.

Rather than contort bank charters and blur banking and commerce, a better solution would be for Congress to create a federal framework for payment regulation. Doing so would provide a clearer path for innovation and growth in payments with less risk.

Even if the microprudential tools noted previously are fully effective, financial-stability risks may still emerge. The FSOC has macroprudential tools that can address that risk—namely, the designation of nonbanks, payment, clearing and settlement activities, and financial-market utilities as systemically important or likely to become systemically important. The newly updated FSOC analytic framework has three distinct parts: the identificationof potential systemic risks, the assessment of such identified risks and the responses to the risks assessed to pose threats to financial stability.

More specifically, I believe a “tripwire approach” to identifying potential financial-stability risks could be effective. Under this approach, the FSOC would establish a set of metrics and thresholds, which would trigger the assessment of systemic risk if exceeded. These tripwires could complement other modes of analysis and would not have to be the exclusive means of prompting an assessment. The tripwire approach could be used in a host of areas.

The key benefit of a tripwire approach is that it combines transparency with awareness before a systemic risk becomes too big to mitigate, and the purpose and consequence of these tripwires would be to prompt an assessment. The FSOC would transparently publish the tripwires and seek public comment on their appropriateness and calibration before finalizing them. Notably, the only consequence of crossing a tripwire would be to move from the identification phase to the assessment phase of the analytic framework.

A tripwire approach would also be self-regulating. A parsimonious approach would be most effective. Too many tripwires set at too low a level would result in a battery of “false positives”, diffusing assessment resources and hurting the credibility of the identification process, ultimately rendering the tripwires ineffective and meaningless. With tripwires, less is more.


Innovation, growth and change are critical to solving problems and making the world a better place. When those forces spin out of control, however, people, communities and the broader economy can get hurt. The great financial crises of US history share common roots: a great blurring of the line between banking and commerce leading to rapid growth, then fragility and eventually collapse. When that occurs, it takes years to recover from the negative impacts on people and the loss of trust in banking and the government.

Today, the risk of a great blurring over the next decade is highest in payments and private credit/equity. Other areas, such as mortgage servicing and hedge funds, may warrant similar, or even more urgent, attention.

The FSOC’s recently adopted framework establishes a clear process for identifying, assessing and responding to risks to financial stability. Embedding a tripwire approach in the identification stage could help prevent a great blurring in the future in a transparent manner that allows for innovation and growth while addressing emerging financial-stability risks.



Michael J. Hsu is the Acting Comptroller of the Currency and serves as the Administrator of the federal banking system and Chief Executive Officer of the Office of the Comptroller of the Currency (OCC). The OCC ensures the US federal banking system operates safely and soundly, provides fair access to financial services, treats customers equitably and complies with applicable laws and regulations. Mr. Hsu holds a Bachelor of Arts from Brown University, Master of Science in Finance from George Washington University, and Juris Doctor Degree from New York University School of Law.


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