According to Acting Comptroller of the Currency Ken Noreika, the time is right to reconsider the U.S. policy of limiting the ability of banking and commercial businesses to mix together.
Noreika’s comments have come in the context of the heated controversy over the OCC’s potential launching of a “fintech national bank” charter that could facilitate such a blending of banking and commerce. See "Acting Comptroller Explores the Separation of Banking and Commerce."
State bank regulators and community bank groups have opposed the OCC’s fintech charter initiative and have filed legal challenges in court to stop it.
In advocating a review of the policy of separating banking and commerce, Noreika has pointed to existing scenarios in which commercial or industrial firms own certain existing types of U.S. banks, such as state-chartered, FDIC-insured “industrial loan” banks (e.g., banks owned by BMW, Pitney Bowes and Toyota). Other examples cited by Noreika include certain credit card banks (e.g. the bank formerly owned by Target) and “unitary thrifts,” which are federal savings banks that are owned by commercial or industrial firms due to a “grandfathering” provision in federal banking law (e.g., savings banks owned by Nordstrom and Hy-Vee Foods). Aside from these and a few other limited exceptions, federal banking law generally prohibits commercial or industrial companies from owning banks.
Noreika has advocated a constructive discussion about whether these prohibitions are the best public policy.
Noreika’s call for this discussion, however, is not new. In fact, the topic of whether the separation of banking and commerce is good policy has been debated for many years and is the subject of a variety of scholarly articles and position papers over those years, including documents issued or published by federal bank regulatory agencies – even Noreika’s own OCC. For example:
- “The Separation of Banking and Commerce in the United States: An Examination of Principal Issues,” Office of the Comptroller of the Currency, OCC Economics Working Paper 1999-1, April 1999
- “The Separation of Banking and Commerce,” Federal Reserve Bank of San Francisco, FRBSF Economic Review, 2000
- “The Mixing of Banking and Commerce: A Conference Summary,” Federal Reserve Bank of Chicago, Chicago Fed Letter No. 244a, November 2007
- “The Future of Banking in America - The Mixing of Banking and Commerce: Current Policy Issues,” Federal Deposit Insurance Corporation, Banking Review, 2004
- “Should Banking Be Kept Separate from Commerce,” United States Department of Justice, EAG 08-9, August 2008
Most of these papers reach mixed conclusions, recognizing both positive and negative impacts of the separation policy and potential positive and negative impacts of terminating it.
Noreika’s angle, though, appears to be aimed at the issue of directing the discussion toward major emerging business trends in our economy – for example, whether fintech companies and Internet-based monoliths like Google and Amazon should be able to acquire a bank of any type and, if so, what types of restrictions should be attached.
Noreika’s approach is a departure from the approach of his predecessor, Comptroller Tom Curry, who provided assurances in preliminary fintech bank charter guidance that the OCC would not approve any fintech national bank application that would “inappropriately commingle banking and commerce,” citing potential “anti-competitive effects and undesirable concentrations of economic power.” (See Thompson Coburn Bank Check blog posting "OCC won’t allow fintech national bank charters for commercial firms, addressing potential Walmart fintech bank concerns," March 17, 2017.)
Looming in the background of this potential discussion of co-mingling banking and commerce would be fears of creating a new class of “too big to fail” banking organizations with far reaching connections into many facets of the U.S. economy.
In addition to these concerns, community banks also fear that opening any door for commercial firms to acquire banks will inevitably lead to the potential for Walmart to acquire a bank, as the retail giant has attempted to do in the past. Community bankers have tremendous concern that a Walmart bank would have the same impact on community banking that Walmart’s retail operations have had on locally owned retail competitors – i.e., the potential to drive many of them out of the market.
One policy position that is generally agreed to on both sides of the political spectrum is that community banks are already straining under an inordinately heavy compliance burden due to the ever-increasing load of federal banking rules. These already-strained community banks are also regarded by many on both sides of the political aisle as being crucial to U.S. economic development.
Whether out of apprehension over a Walmart bank or a Google or Amazon bank, many community banks share a strong concern that commercial firms owning banks would be able to compete for community bank business on unfair terms – whether by economic leverage or due to exemptions from certain banking law requirements that would apply to traditional bank holding companies that own community banks.
Nonetheless, the Acting Comptroller has raised the question of the separation policy, as it has been raised many times before. For example, the Gramm-Leach-Bliley Financial Modernization Act of 1999 was implemented in part as a change to the doctrine on the separation of banking and commerce.
The real challenge for the parties who participate in any renewed discussion on the doctrine will be whether they can facilitate fintech innovations without jeopardizing the community bank system that provides financial services that have played such a vital role in the health and development of our economy, particularly on main street.
Greg Omer advises banking and financial services organizations on regulatory and corporate issues. He is a former bank and financial services regulator and speaks regularly to financial industry groups on regulatory issues.