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Pub Econ Working Paper Chartering Fintech Future
Pub Econ Working Paper Chartering Fintech Future
Charles W. Calomiris *
December 2020
* Chief Economist and Senior Deputy Comptroller for Economics, Office of the Comptroller of
the Currency (OCC). This paper was prepared for presentation at the Cato Institute’s 38th Annual
Monetary Economics Conference, November 19, 2020, and is forthcoming in the Cato Journal.
The opinions expressed are those of the author, and not necessarily those of the Office of the
Comptroller of the Currency or the U.S. Government. The author thanks the members of the
OCC Economics Working Group on FinTech and Financial Inclusion for assistance, including
Chau Do, Kristoffer Jackson, Sean Lewis-Faupel, Irina Paley, and Chris Reynolds, and thanks
Peter Stella, Stephen Karolyi, Chau Do, Murillo Campello, and Bryan Hubbard for helpful
comments on earlier drafts. The author retains all the responsibility for any errors or omissions.
1. Introduction
What we use as our medium of exchange is subject to dramatic change over time, and sometimes
bank regulation has accelerated such changes. The National Banking System, founded in 1863,
envisioned the creation of a uniform medium of exchange in the form of national bank notes,
which replaced the preexisting system of state bank note issuance. But the creation of the
national banking system soon resulted in the diminished importance of bank notes as a medium
of exchange. Under the new system, state banks faced a prohibitive tax of 10% per year on any
notes they issued, and national banks had to maintain collateral at the Treasury for their
outstanding national bank notes equal to 111% of their outstanding notes, and also had to
hand. That meant that if a bank wanted to make loans it had to find an alternative to bank notes
as a funding source for those loans. Deposits had been growing in importance leading up to the
National Banking Act of 1863, but the Act accelerated the growth of deposits markedly, and they
became the primary funding vehicle for loans. As Comptroller Eckels remarked in 1896: “And
thus it has come about that deposit taking is now the feature, and the issuing of circulating notes
but the incident, in national banking, instead of, as in the early history of the system, the note-
issuing function being the feature and deposit banking but the incident [emphasis added].”1
Furthermore, bank notes were not issued by all banks prior to the 19th century. Bank
notes were a 17th century innovation, and they were not the primary medium exchange or the
main liability for many important banks in the 18th and early 19th centuries. For many
transactions, bankers acceptances and bills of exchange were both the primary vehicle of credit
1
Eckels (1896), p. 565.
1
and the medium of exchange, and banks like Amsterdam’s famous Wisselbank functioned
Clearly, the history of successful bank chartering informs us that banking has always
been defined by the core functions that banks engage in – lending funds or clearing payments, or
both. In fact the word bank has been linked to both of those functions, and scholars debate
loans (a “mound,” or bank, of loans) has the greater claim to the origins of the word. The
particular means banks use to lend or transfer payments changes over time as a function of
technological and regulatory changes. In particular, transfers can be made via bills of exchange,
bank notes, deposits, credit cards, electronic balance transfers, or exchanges of crypto currency
tokens via block chain. History also teaches us that banks don’t always provide both lending and
payments services. Some banks specialize in one or the other. Indeed, I will show that it requires
some rather complicated and specialized economic modeling assumptions to explain why banks
sometimes choose to bundle lending and payments services within one intermediary. Those
assumptions do not always hold, which explains why bundling is not always a good idea.
Sometimes changes in banks’ structures and functions are predictable. The rise of deposit
banking in the mid-19th century United States was predictable as a matter of arithmetic if one
recognized that banks would continue to act as lenders (given that notes could no longer serve as
a funding source for loans after the passage of the National Banking Act). The rise of nationwide
universal banking in the U.S. after 1980 was also predictable, given the evident inefficiencies of
the preexisting U.S. banking system (Calomiris 2000, Calomiris and Haber 2014).
2
predictability based on clear trends that are driving change. In this essay, I consider why current
changes are occurring, and consider what the new structure of chartered banks likely will be in
the future. I don’t offer a single forecast of that future, but rather a conditional set of forecasts. If
special interests, many of which already are currently struggling hard to preserve the status quo,
fail to halt the path of progress, then I believe that technology will lead us down a path of
substantially increased efficiency and stability, and the expansion of chartering to encompass
novel banks. But the evolution of banking has never been entirely determined by technology or
economic logic. Politics is at least equally important in shaping the chartering of banks. If special
interests are successful in blocking progress (as our history shows they often have been), then a
very different path – one of persistent inefficiency and instability designed to preserve the status
and explains how and why technological changes now favor “unbundling” and the ascendance of
new FinTech banks2 capable of providing services that threaten that status quo. It also includes a
detailed analysis of how FinTech banks are improving financial inclusion, not just improving
efficiency for existing bank customers. Section 3 describes how I believe the chartered banking
system could and would evolve over the next decades if special interests fail in their attempt to
preserve the status quo. In the near term, this evolution could see substantial numbers of FinTech
shadow banks becoming chartered national banks, including many that do not rely on deposits as
a source of funding. As part of that analysis, I show that there may be substantial advantages
from the standpoint of efficiency, convenience, and stability to encouraging the creation of a
2
Throughout this paper, I use the term Fintech bank to mean a FinTech firm engaged in either lending, payment
services or both. I use the term FinTech bank to apply to both chartered and shadow banks, where I define shadow
banks are those that operate without a state or national bank charter.
3
chartered national bank network of stable value coin banks issuing non-depository liabilities.
Section 4 identifies the powerful special interests that either are attacking, or that may oppose the
In the 1980s and 1990s, the U.S. moved from a system in which banks were fragmented by
location, and in which financial services were provided by specialist firms (bank lenders,
universal banks. By 2000, a handful of large banks operating throughout the country provided an
unprecedentedly wide range of services. Based on the evident historical shortcomings of the
U.S.’s fragmented financial system (see Calomiris 2000, Calomiris and Haber 2014), the new
banking structure made sense as a means of achieving greater portfolio diversification through
geographic integration across bank locations, reusing customer relationship information, and
economizing on advertising and marketing economies of scale. After two centuries of regulation-
induced geographic and service fragmentation, by 2000 it seemed that we finally had arrived at
what some of us imagined would be a new nirvana of stable and efficient nationwide universal
banking.
But only 20 years (and one major financial crisis) later, the bloom of efficiency and
stability is off the rose of nationwide universal banking. We experienced one of the worst
financial crises in history in 2007-2009. Since then, the traditional chartered banking system
wallows in a state of unprofitability and inefficiency. For the first time in history, new entry into
chartered banking has been virtually nonexistent for over a decade. Banks’ services remain
4
expensive (and some have become more expensive since 2009), and more than 60 million
As has always been the case in banking history, the drivers of these facts are regulation
and technological change, which are themselves interdependent. With respect to regulation, the
merger wave of 1980 to 2005, which produced the integrated nationwide banking system,
occurred as part of a political bargain that drove merging banks to increase their real estate risk
exposures, thereby also increasing systemic risk (Calomiris and Haber 2014, Chapters 6-8). The
Card Act of 2009 and the Dodd-Frank Act of 2010 did little to remedy those incentives (banks’
exposures to real estate risk remain very high), but instead added to the already heavy
compliance burdens and other costs banks bear (Calomiris 2017, Calomiris and Campello 2018).
With respect to technological changes, new methods for providing loans and payment
services by “shadow banks,” especially by FinTech banks over the past several years, are
providing more attractive alternatives to customers (Jagtiani and John 2018, Thakor 2019).
According to Statista, the chartered banks’ share of personal loans granted fell from 40% in 2013
to 28% in 2018 while FinTech banks’ personal loans rose from a 5% market share in 2013 to
38% in 2018. Interestingly, these new competitors are structured very differently from traditional
banks. They tend to focus on one or two lines of business, and typically provide either loan
services or payments services, but not both. In sharp contrast to the pre-2000 trend toward
universal banking, FinTech providers are demonstrating a new model of financial intermediation
“unbundling.” The new wave of innovative, low-cost, unbundled FinTech providers that are
making behemoth universal banks look as necessary as buggy whips. They are gaining market
share in both the payments and lending side dramatically over the past several years, are out-
5
competing traditional banks for talent, and are attracting huge amounts of new investor capital
owing to their extremely high profit rates. What is driving the new unbundling trend?
First, it is worth noting that there have always been profitable examples of unbundled
banking. The famous Wisselbank of Amsterdam, chartered in 1609, revolutionized the clearing
of payments associated with international trade by clearing bills of exchange, but made almost
no loans during its first century of operation. In the U.S. in the late twentieth century, narrowly
focused credit card banks specialized in this type of loan and payments service, which replaced
deposits for executing many transactions, and some chartered banks still specialize in providing
credit card-based loans and payments. Initially, banks funded their credit card receivables with
deposits but subsequently many banks replaced deposits with securitization as the funding source
for credit card lending, finding it cheaper to fund their credit card receivables with securitized
debt offerings. Academic research explaining that change pointed to the cost-savings from
securitization, which among other advantages, provided a better and more disciplined means for
the timely processing of information about the evolving risks of credit card receivables, which
also permitted risk to be managed better. This was accomplished through a novel securitization
amortization triggers (that punish excessive surprises in defaulting receivables) and the spread of
new information technologies in the 1990s that made such tracking possible. Securitization also
segmented risk into various pieces to better align debt risks with debtholders’ differing risk
Second, there is no overarching economic theory that generally favors bundled banking.
Indeed, it requires some rather complicated and specialized assumptions to motivate bundled
banking. That is not to say that those assumptions rarely hold. On the contrary, until recently, I
6
would argue that the assumptions necessary to explain bundled banking have been more the rule
In any business, absent a strong advantage to bundling, there are good managerial reasons
to avoid it. Businesses that combine multiple lines of business suffer from a lack of strategic
managerial focus. And large, multi-line organizations can be too tolerant of poor performance;
under-performing business segments sometimes avoid making hard but necessary changes
because they ride on the coattails of successful business segments. Absent a strong advantage
from bundling, unbundled service providers generally will be more efficient and profitable.
informational advantages from combining both within the same intermediary. Tracking a
borrower’s payments history may provide timely information to a lender about how their
business is doing (Mester and Nakamura 2005). Or a bank engaged in opaque lending may find it
advantageous to fund itself with demand deposits because of the discipline that comes from
exposing itself to sudden withdrawal risk. Such discipline may ensure that the bank behaves
honestly and manages credit risk more efficiently (Calomiris and Kahn 1991, Calomiris, Heider
and Hoerova 2018). In both of these theories, the informational challenges of screening and
monitoring bank borrowers underlie the advantages of bundling deposit taking and lending.
Such bundling advantages become less relevant as new screening and monitoring
lending. Banks have new data resources they can use to screen and monitor borrowers, making
the need to bundle a borrower’s deposits and loans less necessary. And those same informational
improvements may allow banks to convey information about their own lending practices, thus
reducing the need to use the discipline of deposit withdrawal risk to reduce their funding costs.
7
Consider, for example, the information services provided by OakNorth, which collects
information about small and medium-sized businesses, which it packages for lenders. OakNorth
developed its system in the U.K., where it also used the system as a lender. In the U.S.,
OakNorth provides informational services to other lenders. It draws real time information about
borrowers from thousands of databases and makes that information conveniently accessible to
lenders. Not only do these data assist lenders in screening borrowers, they flag potential
problems in loans early, often before there are any delays in payments or other traditional
indicators of potential loan losses. These sophisticated monitoring procedures have made many
of the traditional screening and monitoring procedures used in the past less important, including
Furthermore, the efficiency improvements from unbundling credit from payments often
includes the ability – demonstrated decades ago in credit card securitization – to match specific
sources of funding to their preferred portfolio risks. For example, at least one innovative FinTech
mortgage provider allows competing mortgage purchasers to express their portfolio preferences
Some of the gains from universal banking had resulted from other cost savings from the
reusability of information across banking services. For example, a lender that has served a firm
for many years may more easily be able to underwrite securities for the same firm (Calomiris and
Pornrojnangkool 2009). Or a consumer lender may be in a better position to offer insurance to its
borrower. But now big data systems permit all would-be lenders or insurance providers to access
information that allows them to compete to provide a service without a prior history of providing
8
Another advantage that drove nationwide banking was the portfolio diversification that
came from a larger geographic footprint (i.e., bundling across different geographies). Being able
to branch across state lines meant that banks could pool risks related to different industries or
crops to the extent that those industries or crops had locational specificity (as they often do). And
nationwide banks also could expand their branch networks to gather lower-cost deposits from
new locations. But FinTech providers are able to make loans and raise funds on the internet
without having to maintain costly physical branches or loan offices. Furthermore, a local
geographical presence is not nearly as important as it used to be for lenders who need to gather
Unbundled FinTech enterprises that can customize loan portfolios to meet the specific
preferences of loan funders, that can take advantage of state-of-the-art information processing
when screening and monitoring borrowers, and that can avoid the physical costs of maintaining
branch networks, will increasingly win the competitive struggle to serve customers.
Given the regulatory and technological changes in recent years, it is no wonder that
unbundled FinTech providers are increasing their market shares in payments and lending
dramatically. Of course, some customers still find bundled relationships more convenient, or
they are less comfortable with internet-based banking. But others may dislike or distrust
traditional banks and feel more comfortable transacting with FinTech banks on the internet.
Indeed, some FinTech banks have modeled their business precisely to attract such customers.
Not only are new unbundled FinTech providers more profitable and efficient than
traditional banks, their technologies are proving to be very promising for improving access to
9
financial services for many people who have not been served well by traditional banks,
especially lower-income people. The U.S. banking system serves about 80% of American
families’ needs to make payments, save, and borrow. But what about the other 20%, the so-
called “un-banked” and “under-banked”? What barriers explain why the normally reliable
pressure of market competition has not led banks to compete for the business of such a large
fraction of the population? How are FinTech banks breaking down some of those barriers?
Historically, the barriers that have kept the un- or under-banked from becoming fully
integrated into the formal financial sector consist of several supply-side and demand-side factors.
On the supply side, these include challenges lenders face in differentiating borrowers’ risks, the
high transaction costs of serving small-dollar customers, and the costs of regulatory uncertainty
(which are often defined on a per-customer basis, and therefore, disproportionately disadvantage
small-dollar customers). On the demand-side, factors such as the limited financial resources of
low-income customers, their limited experience with financial service providers, and their
With respect to demand-side factors, how have FinTech banks improved financial access
for the un- or under-banked? According to an FDIC survey, 13 percent of unbanked households
state that banks do not offer products or services that they need. For example, a majority of un-
or under-banked households live paycheck to paycheck, cannot afford the high standard
minimum balances or account fees banks require, and do not live near branches.3 To meet some
of these demands, FinTech banks have developed different products that may be particularly
3
Indeed, about nine percent of unbanked household cite inconvenient location or inconvenient hours as the reason for
not having a bank account.
10
products with low-cost fees or and smaller minimum small dollar amount loans. For example,
some offer free overdraft protection (typically limited to up to $100)4 or 0% APR cash advance
that requires no credit check and no monthly fee (limited to $250).5 Many now offer bank
accounts with no monthly fees, no overdraft fees for limited overdraft protection, and no
minimum balance fees, as well as no ATM fee access for in-network ATMs.6 The common
denominator of these products is that physical cost savings from operating as a FinTech provider
Other FinTech banks have designed products to smooth spending in the face of high-
frequency fluctuations in customers’ incomes. Because there is a lag between the days wages are
earned and the day that employees are paid, some FinTech banks have attracted un- and under-
banked customers by offering “paycheck deposits.”7 Instead of depositing paycheck funds into a
customer’s account with the traditional delay (waiting for the funds to cleared from the
employer’s bank), these FinTech banks deposit the funds as soon as the transfer instructions are
received, taking on the minimal risk that the employer’s bank is unable to fund the transaction.
This decreases the customer’s waiting time by two days. Other FinTech banks offer customers
access to their wages in advance of the pay day on terms that are generally far superior to payday
FinTech banks also cater to un- and under-banked customers’ demands by designing
innovative and convenient means for customers to access services through mobile phones,
4
Chime.com, Varomoney.com, Dave.com
5
Moneylion.com
6
Chime.com, varomoney.com, Dave.com, moneylion.com
7
https://www.chime.com/, https://www.varomoney.com/, https://dave.com/, https://www.moneylion.com/
8
Even.com and Payactiv.com
11
therefore obviating the need to be near a branch. Because the majority of un- and under-banked
households have mobile phones, FinTech banks have been able to attract many low-income
Consumers with limited financial experience sometimes make financial decisions that
damage their credit record and leave high-cost lenders as their only option. Financial education
and counseling services can reduce these costly mistakes. While academic evidence regarding
the impact of financial education and counseling has been mixed, there is evidence that certain
targeted to a particular borrower’s needs and is delivered at the time the knowledge can be used.9
For example, research has shown that mortgage counseling conducted at the time a mortgage is
Many FinTech banks provide precisely this form of financial counseling as part of the
loan products they offer. They use a wide range of educational services to build relationships
with customers that have limited experience with financial transactions. One online lender offers
lower rates for completing their online courses on managing debt,11 while another online lender
prominently advertises “community support” whereby borrowers are connected with free and
trusted financial counselors.12 Other FinTech banks produce free content for customers or
potential customers to help explain when and how their products fit into a well-managed
financial plan or to instruct customers on managing finances and debt more generally.13 Finally,
many comparison shopping FinTech banks provide free tools for consumers to evaluate
9
Fernandes, Lynch, and Netemeyer (2014).
10
Agarwal, Amromin, Ben-David, Chomsisengphet, and Evanoff (2020).
11
https://www.lendup.com/
12
https://oportun.com/
13
https://www.personifyfinancial.com/, https://www.saverlife.org/
12
alternative debt scenarios, such as debt consolidation, or to create a plan to reach a savings
goal.14 To reduce confusion or misunderstandings that can undermine trust, some FinTech
providers have developed products that alert customers when they are at risk of being charged a
fee, thus helping to reduce fees and improve their decision making.15
With respect to supply-side factors, many innovative FinTech business models are
reducing the costs of serving customers. These costs consist of physical costs and information
costs. Physical costs are lower for FinTechs because they avoid the high overhead costs of
With respect to information costs, many un- and under-banked customers are “credit
invisibles” – people without formal credit scores. That lack of information makes it challenging
to lend to them. For an estimated 26 million Americans,16 traditional credit products remain out
of reach because they lack a credit score. These “credit invisibles” often turn to payday lenders,
pawn shops, or auto-title lenders, or end up paying high overdraft fees at traditional banks. Such
borrowing is expensive, with APRs as high as 300 percent.17 What’s more, repayment of these
loans often doesn’t establish a credit score so experience in these markets brings borrowers no
closer to cheaper credit. Instead, they end up in cycles of accumulating debt. Such borrowing
amounts to over 280 million transactions per year and roughly $78 billion in revenue.18
An important aspect of FinTech banks’ ability to provide improved access to credit for
consumers comes from their use of new sources of information (Jagtiani and Lemieux 2017). By
using information not traditionally found in a credit report, lenders are able to safely and
14
https://www.nerdwallet.com/, https://www.lendingtree.com/
15
Opportunities for mobile financial services to engage underserved consumers, FDIC, 2016
16
https://files.consumerfinance.gov/f/201505_cfpb_data-point-credit-invisibles.pdf
17
https://www.urban.org/sites/default/files/publication/57871/410935-analysis-of-alternative-financial-service-
providers.pdf
18
https://www.urban.org/sites/default/files/publication/57871/410935-analysis-of-alternative-financial-service-
providers.pdf
13
affordably lend to customers with little or no credit history. FinTech banks such as Oportun and
Upstart have advertised that using alternative data has allowed them to successfully provide
credit to households who lack the formal credit scores required by most financial institutions.
Some FinTech lenders have started to use consumers’ cash flow history—how much income
flows into the person’s bank accounts and how much spending draws out of them—to underwrite
credit, while other FinTech lenders use utility- and telecom-payment data to inform their risk-
scoring. One study finds that roughly half of credit invisibles interested in obtaining credit have
stayed current on all of their bills in the past twelve months.19 By using such alternative credit
data to approve loans, FinTech lenders can offer lower prices than their traditional counterparts.
A LexisNexus study finds that of the 24% of consumers in their sample without a credit bureau
score,20 86% became scorable using RiskView, a credit score that uses alternative data.
However, the proportion of un- and under-banked consumers who would benefit from such a
We are seeing only the beginning of what FinTech banks can do to improve the
efficiency of the financial system and promote financial inclusion. The industry continues to
evolve as new and better approaches enter the market. As with traditional lending, FinTech
lending entails safety, soundness, and fairness risks. But the financial services industry and its
regulators are well equipped to handle these risks. And agencies like the OCC are encouraging
19
https://www.fdic.gov/householdsurvey/2017/2017report.pdf
20
Consumers who did not have enough credit history to be scorable because it either did not have recent activity on
their credit, only non-tradeline data, or no credit obligations open for a long enough duration.
14
FinTech banks to reach their full potential by coming out of the shadows and joining the
In particular, some Fintech banks may be able to deepen their resource base and broaden
their customer reach by becoming national banks. Additionally, an OCC charter carries with it a
thorough and strict examination process that can create value for member banks. Examination
creates value by providing critical analysis of business strategies and operations, which can
enhance a member bank’s credibility in the market (Calomiris 2020). The OCC has made it clear
that it welcomes innovative financial service providers to apply for national bank charters. Given
the evolving banking landscape, it makes no sense to restrict bank charters to bundled providers,
or to banks offering one kind of payment product, such as deposits. Unbundled banks that
execute payments through means other than deposits, or those that confine themselves to lending
rather than payment services, should be free to become chartered banks, if they so choose.21
I emphasize that I am not arguing in favor of requiring all FinTech shadow banks to
become chartered banks. For some firms, the benefits of the charter outweigh the costs of the
charter, while for others the benefits may not outweigh the costs. For that reason, forcing all
FinTechs to become chartered banks could reduce the supply of banking services.
At the OCC, we know that new technologies and consumer preferences, not regulators,
will decide the future of banking, and will determine what combination of novel and traditional
banking businesses will evolve over time. Government or court decisions on chartering,
however, can decide how much of that future occurs within the chartered banking system.
Allowing FinTech shadow banks to bring their novel approaches to applying technological
21
For some, but not all, FinTech business strategies access to Fedwire is also a potential source of value creation
related to becoming a chartered national bank. That is especially true for FinTech shadow banks that currently rely
on partnering with chartered banks to gain access to that system.
15
changes to the needs of customers’ preferences into the chartered banking system will help those
Some have questioned how the OCC can apply prudential standards to novel banks
whose cash flows may not arise from traditional intermediation practices, and whose balance
sheets may contain only small amounts of tangible assets. In fact, the OCC has been setting
prudential regulatory standards for many years for lines of business within traditional banks for
which substantial cash flows arise without a connection to tangible assets on the balance sheet.
Such prudential standards take into account the volatility of the bank’s cash flows, and the ability
of the bank to meet its expenses, including operating costs and debt service. There is no
legitimate cause for concern about the ability to establish effective prudential standards for banks
with small amounts of tangible assets. Capital ratios on novel banks with only intangible assets
(present values of future cash flows) can be determined to achieve the same safety and soundness
Recently, the OCC has clarified the regulation of national banks with respect to
transactions involving some crypto assets. The OCC clarified that national banks may act as
custodians of crypto assets, and also may hold the reserve balances of certain stable value crypto
currency providers. These actions reduce regulatory uncertainty and simply recognize the fact
that crypto assets are a significant and growing part of the global financial system.
What about chartering crypto currency providers? The state of Wyoming has been among
the most progressive authorities in establishing state chartering of banks involved in producing
crypto currencies. The UK and the EU also seem willing to pursue similar initiatives. Whether
16
and how other U.S. states or the OCC might follow suit remains unclear. The question of how to
properly charter stable value coin providers as banks is an open one. Which business models
should be considered within the scope of chartering for the OCC? How should algorithms set by
crypto coins be regulated and examined? What prudential capital and cash asset standards should
be applied? In my discussion here I do not mean to suggest that the OCC has decided the
answers to these questions. I do, however, believe that there are several identifiable advantages
from doing chartering stable value crypto currency providers with safe and sound business
models as national banks. In what remains of this section I consider the prospective advantages
of chartering stable value crypto currency providers as national banks. I first identify several
advantages from permitting stable value crypto coin providers (whether as shadow banks or
chartered banks) to eventually develop a new non-depository payments network separate from
the existing central bank-based network. At the end of that analysis I also consider some reasons
stable value crypto coin issuing bank. But my conclusions about the potential advantages of this
arrangement apply more broadly than to just this model, although it would not apply to all
potential business models for stable value coins. The point of this example is to show that a non-
depository stable value crypto coin can be issued in a safe and sound manner, and that it could
have substantial efficiency, convenience and stability advantages, if it were designed properly.
Imagine a bank that sells a total number of S coins, selling each coin it issues for $1. The
coins can be used to transact in goods and services through block chain clearing (i.e., through
gross real time settlement at nearly the speed of light). The bank maintains a secondary market in
its coins. Specifically, it commits contractually to buying coins whenever their value falls to
17
$0.99 at that price and selling coins whenever their value rises to $1.01 at that price. It does so
automatically as long as it possesses sufficient cash on hand to buy or sell coins at those prices.
If it is unable to purchase coins at $0.99 (due to a lack of cash), then its financial claims are
revised, as described below. The secondary market purchase and sale policy is contractually
credible and executed automatically by an algorithm. There is no redemption option for the coins
and they never mature. The coins are effectively a kind of perpetual preferred stock in the bank.
The only claims on the bank are coins and common shares. If the bank is unable to
purchase coins in the secondary market due to a lack of cash, its financial claims are revised as
follows: Coins enjoy a strict prior claim on the assets, and this is implemented by setting the
value of preexisting common shares owned by the bank stockholders to zero in this state of the
world. In that eventuality, the quantity of preexisting coins is reduced (written down) in amount
by 5%. This avoids any need for a liquidation of assets or other bankruptcy proceedings. Coin
holders then receive pro rata amounts of new common shares that give them the remaining
residual interest in the bank. If, after this initial write down, the bank is still unable to meet its
secondary market purchase obligation, then a second 5% write down occurs, and so on, until the
bank has deleveraged sufficiently so that the value of its assets exceeds the value of its coins.22
I reiterate that this is only one model for how a non-depository stable value coin provider
might operate in a safe and sound manner. I do not mean to suggest that it is the best model, but I
find this example simple to analyze, and it allows one to see some advantages that arise from a
22
Notice that, although in the model presented here, stable value coins always maintain their $1 value in
equilibrium, the stable coin algorithm provides for a case where the stable value coins decline in value below $1.
Why might this happen? Fraud, processing errors, or other operational errors are practical considerations that apply
in reality even though they are not modeled here explicitly. The bank’s design permits those risks borne by equity
holders to a certain extent, but if equity proves inadequate for that purpose, the coins will be written down
automatically, which avoids the inconvenience and delay associated with a receivership, as would occur under
traditional depository banking.
18
liability structure different from typical depository banking. I now proceed to consider the
Because the bank operates in a competitive environment (and has near zero physical
costs) I assume that the bank contractually commits to paying interest on the coins equal to the
U.S. Treasury bill rate. I initially assume that the bank’s tangible assets consist of cash assets
($C) in the form of U.S. Treasury bills. I later consider deviations from that assumption. I also
assume that the bank possesses an intangible asset equal to the present value of fees it expects to
earn from executing payments ($F). To simplify our discussion, but without loss of generality,
the amount of transaction fees expected to be earned in each period is not expected to grow over
time. $F is the discounted value of that constant expected stream of earnings. But $F is
stochastic; the arrival of news about changing transactions demand can affect $F. The lower
support (lowest dollar value) of $F is $F’. The value of the bank’s equity ($E) at any moment in
If the bank sets S < $C, what will be the value of each of its coins, and in that case (where
S < $C) will it ever fail to be able to honor its promised secondary market purchase policy?
So long as the bank is known to operate credibly under the above set of rules (i.e., its
holdings of cash assets are deposited in a safe place and are observable to its coin holders, and its
commitment to purchase and sell at the specified prices in the secondary market are contractually
binding on it), then in equilibrium, each coin will trade at a value of $1 and the bank will never
have to write down its coins. The bank can arrange a line of credit from another chartered bank
collateralized by its Treasury bills that will allow the stable value coin bank to draw an amount
19
No depositor has an incentive to sell coins in the secondary market because it is not
possible to profit from selling them at $0.99. The coins are riskless and useful for transacting in
the market for goods and services, and the bank is always able to pay the contractual interest rate
(the market interest rate on riskless cash assets). Therefore, the bank will never need to actually
draw upon its line of credit. In equilibrium, the coins will be valued $1 each.
Can the bank reduce the amount of tangible assets it holds (by paying a dividend to its
stockholders) without creating the possibility of a failure to maintain this riskless stable coin
equilibrium?23 Yes, if there is a known lower bound to $F equal to $F’, then the bank can pay out
some of its cash assets as a dividend. To maintain a riskless commitment that keeps stable coins
at the value of $1 the bank just has to maintain cash assets $C such that $C + $F’ = S. The bank
will maintain a line of credit equal to $C + $F’, and as before, it will never have to draw on that
line of credit because coin holders never have an incentive to sell coins below the price of $1 in
the secondary market. Note that this implies a form of riskless fractional reserve banking. The
bank can also pay all of the transaction fees it earns per period out as dividends without running
Note that because the bank does not rely on deposit funding and does not offer a first-
come first-served rule for redeeming its coins, it cannot experience a run. Coin holders see no
advantage to being first in line to sell their coins in the secondary market.
Is it realistic to imagine that coin holders would demand these stable value coins rather
than deposits in a conventional bank? Yes, for several reasons. First, this bank has zero overhead
costs (more realistically, its overhead costs are much lower than for a conventional bank) so it is
able to offer a higher interest rate on coins than depository banks can offer on deposits, which are
23
In this model, the bank can also pay all of the transaction fees it earns per period out as dividends without running
the risk of failing to maintain the $1 value of its stable coins.
20
similarly riskless. Second, the coins are more useful than deposits. A payment can be made with
instant finality and can be accompanied by a message that assists in executing the transaction,
which is the service that account for the fees charged for payments. Stable value coin producers
already are creating novel services that facilitate transactions, which will further increase
demand for their coins as media of exchange. For example, if the purchaser wishes to convey
selective information about himself during a transaction that can be done credibly by using
verification procedure through the block chain. A purchaser may wish to convey that he is older
than 18 years so that he can engage in gambling on line, or may want to convey his state of
Furthermore, the coin holders gain from the fact that a block chain payments network is
much less vulnerable to cyber attack or hacking than the existing centralized payments network
operated by the Fed. That advantage also has positive systemic risk consequences. Eisenbach,
Kovner and Lee (2020) argue that a cyber attack on a member of the existing centralized network
will disrupt payments throughout the network, with large spillover effects on other banks and
their customers. But because block chain clearing through a decentralized network it offers an
environment that is much more secure from hacking, coin holders throughout the block chain-
How should governments react to this type of stable value coin issuing bank? Its
existence adds to systemic stability for several reasons. First, coin holders bear no risk of default
and there is no possibility of a run. Second, the systemic risk from cyber attack would be lower.
Third, an additional systemic risk advantage comes from the absence of insured deposits, and the
unbundling of lending and clearing. The current bundling of lending with insured deposits has
been shown to be a substantial source of systemic risk. Insuring the deposits of banks that engage
21
in risky lending encourages banks to increase their lending risk,24 as evidence across many
countries’ and more than a century of experience has demonstrated (Demirguc-Kunt and
Detragiache 2002, Demirguc-Kunt and Huizinga 2004, Kane 2010. Calomiris and Jaremski
2016, Calomiris and Chen 2020). For example, Brewer (1995) shows that insurance of the
deposits of savings and loans in the U.S. substantially increased the risk taking of those
institutions during the 1980s. Gorton and Pennacchi (1992) propose a solution to the problem of
deposit insurance funding of loans: banks that provide transactions accounts backed by riskless
assets can give consumers the ability to hold riskless balances for payments without creating the
systemic risks associated with insuring the deposits of lenders. The stable value coin bank
Fourth, because transactions are executed via block chain, which permanently records
every transaction, regulation can credibly require the bank’s transacting algorithm to contain
protocols that minimize the possibilities of money laundering and tax avoidance (which could be
required by law and enforced by examination ex post). That could substantially reduce such
criminal activities.
So far I have only considered bank policies that result in a riskless stable-value coin
issuing bank. Could a risky version of this bank arise in equilibrium (where the stable value coin
bank would convert a significant fraction of its cash assets into risky assets)? This seems
unlikely. It is hard to see why that would appeal to coin holders. The stable value coin issuing
bank has no obvious comparative advantage in lending or stock picking, so it is not clear why it
would seek to substitute stock holdings for Treasury bills. If the bank were to buy a diversified
24
An alternative policy of providing conditional lender of last resort assistance in lieu of unconditional deposit
insurance would permit the government to deal with the risks attendant to financial crises without contributing so
much to systemic risk (Acharya and Thakor 2016).
22
portfolio of stocks with some of its cash assets, that would make coin balances riskier with no
obvious gain to consumers given that the coin holders can purchase shares on the same terms if
they so desire. Most importantly, people generally like to keep low-risk transaction balances
separate from their long-term risky asset holdings (this is a defining characteristic of payments-
related balances held by firms and consumers throughout the ages).25 Furthermore, setting up a
risky stable value coin bank likely would not appeal to the bank’s organizers either; note that my
model assumes that if the bank is unable to meet its contractual commitment in the secondary
market, the preexisting shareholders of the bank would forfeit all of their common stock.
Even if I am missing some reason why a risky version of a stable value coin bank might
appeal to coin holders and bank organizers, such a bank would not create any new risks for the
rest of the economy from losses it incurs. In contrast, traditional depository banks do magnify
risk in the economy when they suffer losses on their portfolios, especially through withdrawal
pressures as a consequence of those losses (Calomiris and Wilson 2004), which can lead them to
curtail the supply of lending, liquidate risky assets, and reduce the prices of the risky assets being
liquidated. Recall that the stable value coin bank modeled here operates under a coin write down
protocol that automatically converts preexisting coins into new coins (of lower value) and creates
new common shares to replace old ones. Thus, even if a risky stable value coin bank were
created for some reason I cannot fathom, given that it does not rely on redeemable deposits, it
would not contribute to systemic risk in the way that standard depository banks do.
If transactions balances are withdrawn from traditional banks and converted into stable
value coins, will that undermine the ability of banks to lend? For example, Calomiris and Kahn
(1991) show that lenders might need to establish traditional banking structures funded with the
25
Gorton and Pennacchi (1990) explain why this is true, in theory. Calomiris and Wilson (2004), among others,
show empirically that even when banks are uninsured, market discipline forces them to offer very low-risk deposits.
23
discipline of redeemable or short-term debt. First, as discussed in Section 2, improvements in
information technology may have mitigated the theoretical motivations that drive this contracting
structure of intermediation. Second, if lenders still need the discipline from borrowing short-term
funds in the market, then that is best provided by risky debt, not insured deposits. Lenders can
rely on commercial paper or repo, as many finance companies and hedge funds have done since
the 1960s. Here again, efficiency is served by unbundling lending from payments, and stable
value coins offer a means of improving transacting. I see no gain to be had from preventing that.
In summary, a payments system founded on sound business models for stable value
coins, operating via a decentralized block chain network, would reduce transaction costs,
increase payment speed, reduce hacking risks, raise interest paid on accounts, and allow new
services (such as the communication of information about the payer) to be provided efficiently.
That decentralized network would also lower systemic risk and reduce criminal activity.
Should the OCC and state banking authorities charter stable value coin banks like those
that are modeled here? Although the details of the OCC’s chartering policy remain a subject for
study and ongoing debate as we gather all the facts about appropriate business models and ways
of regulating and supervising these banks, my analysis contributes to the argument in favor of the
view that it would be desirable to allow such banks to obtain national bank charters. By
chartering them, we allow banks’ customers to gain from credible examination of their
algorithms and accounting and managerial skills. By encouraging shadow banks of all kinds
(including stable coin banks) into the chartered system, examination can ensure that consumers
are not taken advantage of by unscrupulous, dishonest, or misleading practices. The government
would also gain because examination would ensure that the bank’s algorithms comply with laws
against money laundering and tax evasion, and that its accounting is honest.
24
Will some stable value banks be willing to join the ranks of chartered banks? I think so.
First, they would reap the advantages from having examinations help them build market
credibility for their algorithms and managerial practices. And a national bank charter, in
particular, helps banks to expand their market reach across state lines. Finally, stable value coin
banks, like other novel banks whose business models do not require that they borrow deposits,
will be able to reap those advantages while avoiding some of the regulatory apparatus that makes
traditional banking more costly. For example, a national bank that avoids issuing deposits does
not have to be regulated by the FDIC or obtain deposit insurance (which is superfluous to it). A
non-deposit bank also can be owned by a holding company without having to face the regulatory
burdens of Fed oversight (which in many cases also would be superfluous, given the simple
business models of stable value coin banks). It would be regulated by the OCC, but some of the
costs of OCC regulation would be reduced for non-depository banks. For example, non-
depository banks are not subject to the Community Reinvestment Act. The gains from avoiding
those various regulatory burdens largely would accrue to consumers (recall that regulatory costs
are one of the barriers that prevent traditional banks from serving small-dollar bank customers
affordably). I conclude that stable value coin bankers, their customers, and the government all
stand to gain from chartering stable value banks. The same logic that favors the chartering of
unbundled FinTech banks today likely also applies to stable value coin banks in the future.
Not everyone welcomes a future in which unbundled FinTech banks become an important part of
the chartered national and state banking systems. The idea that today’s unbundled FinTech
banks, and possibly tomorrow’s stable value coin banks, should become chartered banks is
25
anathema to the special interests that profit from keeping progressive financial intermediaries in
the shadows. And some powerful entities may be especially threatened by the idea that a banking
system could arise to accomplish payments transfers without needing to maintain liabilities in the
form of deposits. After all, powerful special interests possess huge economic rents that are
conferred on them as a consequence of preserving the status quo. Who are those special interests
and how likely are they to be successful in preventing a chartered FinTech future?
State authorities that license shadow banks are one special interest group that has already
identified itself as hostile to the chartering of FinTech banks. The State of New York is suing to
prevent the OCC from chartering non-depository FinTech banks (Lacewell v. OCC). In 2019
alone, New York State earned over $100 million in licensing fees. Not only would chartering
FinTechs move fees out of the state coffers for the banks that migrate to the national system, the
state licensing authorities would likely lose from the consequent decline in the fortunes of other
financial service firms that they license because those firms may find themselves in a less
competitive position. For example, payday lenders are entirely state-licensed and regulated.
Chartering FinTech banks as national banks (including those with financial inclusion strategies
discussed above) could substantially reduce the market share of payday lenders. That would
benefit consumers throughout the country by reducing the cost of small-dollar loans, but state
Traditional banks, especially the least efficient among them, should and do see chartered
FinTechs as a threat that would likely accelerate their declining market shares and profits.
Traditional banks are struggling. With few exceptions their business models are antiquated. Net
interest margins for traditional banks today are at historic lows, and branch networks have
become highly unprofitable owing to the low-interest rate environment that has prevailed since
26
2009. With the wholesale interest rate near zero, the interest savings from attracting core deposits
(the primary purpose of bank branches) are also near zero, which means that noninterest
expenses associated with operating branches are a source of value destruction for the banking
enterprise. This effect is visible in the declining values of core deposits to banks’ enterprise
The bundled, universal, too-big-to-fail banks already are waging a battle to discredit
progressive FinTech banks. They wage this battle mainly through their policy advocacy arm,
known as the Bank Policy Institute (BPI). Articles published by BPI economists either stoke fear
that new technologies will be destabilizing, or argue that it is unfair to allow unbundled banks to
provide services to consumers with lower regulatory costs than the too-big-to-fail banks are
forced to bear.26 It is somewhat astounding to see these large banks asking regulators to preserve
their businesses from more efficient competitors. It never seems to occur to them that they might
change their business models instead, by taking to heart the trend toward unbundling, by
becoming more focused in their strategies, and by making more efficient use of resources.
Sometimes traditional bank advocates even join the state licensing authorities in making the self-
serving and contra-historical argument (as the introduction to this article showed), that the very
This is no surprise given that the too-big-to-fail banks have reason to be concerned about
their future. Their business models are not doing well, and their size and complexity make it
especially challenging for them to conceive of ways to adapt to the new competitive
environment. Not only are they displaying low profitability, two of the largest four bank holding
companies in the United States have total common shares worth less in market value than the
26
See Rosenthal and Court (2020) and the references therein to other BPI policy papers.
27
value of their tangible common equity, which implies that the present value of their non-tangible
assets is negative.27 In other words, their business models destroy value rather than create value.
It is likely that traditional banks – especially the large banks and their advocates – will
continue to lose market share to FinTechs, whether or not FinTechs become chartered national
banks. Inefficient banks would do more for their shareholders by improving their business
models than complaining as the future of financial services unfolds before them.
There are other potential losers from the chartering of FinTech banks who may also join
the buggy whip coalition. The Federal Reserve is a very powerful organization that stands to lose
its monopoly over the payment system as block chain-based networks develop. The Fed’s
political power is closely linked to the centralized payment system that it controls, and it has
always been mindful of expanding and preserving its power (Calomiris 2019). Furthermore,
some FinTech firms are choosing to structure their chartered banks in ways that will not require
Federal Reserve Board oversight of their holding companies, implying another potential decline
in Fed power. Finally, Fed digital currency is a possibility being discussed by many economists.
Advocates of a Fed cyber dollar see its creation (alongside the abolition or restriction of the use
of paper dollars) as a means of empowering the Fed. A cyber dollar could pay negative interest,
thereby removing the zero lower bound on interest rates as an obstacle to the Fed’s ability to
pursue expansionary policy. FinTech banks, especially stable value crypto coin producers of the
future operating via block chain, are an important prospective source of competition that could
limit the Fed’s ability to impose negative interest rates on consumers and firms.28
27
Note that bank accounting treatment sets tangible asset books values at market value, which is why market-to-
book measures are so informative of value creation or value destruction (Calomiris and Nissim 2014).
28
It would be possible for the Fed to set the yield on Treasury bills at a negative nominal value through open market
purchases. It could at the same time also pay a negative interest rate on cyber dollar reserves to its member banks.
Banks would be forced by competitive pressure to pass on the negative interest rate to their depositors. If a stable
coin bank pegged its currency to the cyber dollar, and held Treasury bills as reserves, it too, would be forced to pass
on a negative interest rate to its coin holders. In that case, however, consumers and firms could decide to shift
28
Given that the Fed could lose substantial power as the result of the chartering of non-
depository FinTech banks, it may oppose them. One can hope that the Fed will be guided more
by public interest than a desire to preserve its own power. As far as I know, the Fed has not taken
What about community organizations, such as the members of the National Community
Reinvestment Coalition (NCRC)? One would hope that these organizations, too, which have
given themselves the mission of helping to advance the lives of America’s poor and
underprivileged, would see the advantages for financial inclusion of chartering FinTech banks, as
described in detail above. On the other hand, the heads of these organizations make large salaries
and have gained substantial power by serving as poverty intermediaries. As agents of the poor,
they (like all agents) can be conflicted. In particular, NCRC members have gained a great deal
personally (in salaries and power) from the regulation of traditional depository banks under the
Community Reinvestment Act, which entailed transfers of trillions of dollars (either in the form
of grants or targeted lending) to their organizations (see Calomiris and Haber 2014, Chapter 7).
As with the Fed, it is too early to know how these organizations will greet the chartered FinTech
future. Will they prioritize improving the lives of the poor, even if doing so weakens their own
I conclude that, although the chartering of FinTech banks as national banks would
promote efficiency and inclusion, there are powerful vested interests that either have already
holdings to stable value coin providers that peg to something other than the cyber dollar. For example, some stable
value coins already are backed by foreign currency assets. Another possibility would be to adopt a commodity
standard (which could be done relative to gold, or to a broader basket of commodities). If gold were used as the unit
of account, then gold holdings would serve as reserves. If a broader commodity standard were chosen as the unit of
account, then a basket of futures contracts could serve as reserves. Stable value coin chartered national banks
conceivably could participate in non-cyber dollar denominated coin issuance too. There is precedent for national
banks to avoid using the legal tender dollar as their unit of account. National gold banks issued notes redeemable in
gold rather than legal tender dollars in the late 19 th century. These banks were created under the Currency Act of
July 12, 1870. Ten national gold banks were chartered, nine in California and one in Boston.
29
expressed hostility to the idea (the too-big-to-fail banks and state licensing authorities) or that
may do so in the near future (the Fed and NCRC members). These are all powerful players in
what Stephen Haber and I call the political Game of Bank Bargains, and it would be naïve to
think that the chartering of FinTech banks is a foregone conclusion as the result of its compelling
economic logic. Politics has its own logic, and it isn’t always pretty.
4. Conclusion
I have shown that the chartering of FinTech shadow banks as national banks is a desirable
development. In the near term, this will occur in the form of unbundled, novel providers of
payments or lending services. Some of their business models entail borrowing deposits, but some
do not. All of them are banks. They and their consumers stand to benefit greatly from coming out
of the shadows and becoming chartered banks. For many shadow banks, the advantages of
greater geographic reach and enhanced market credibility from OCC examination will outweigh
the new costs of regulations they will bear. That is especially so if they are able to avoid
I emphasize that I am not arguing in favor of requiring FinTech banks to obtain national
charters. This would impose regulatory burdens on all banks, some of which would be less able
to meet customer needs as a consequence. I also emphasize that the externality argument often
used to justify forcing traditional intermediaries that issue deposits to be chartered does not apply
to unbundled non-depository FinTechs. Traditional banks that use deposits to fund loans can
magnify recessions as the result of the combination of deposit taking and lending. Losses on
loans create credit crunches when banks facing loan losses cut lending to maintain a low risk of
default on deposits, and such banks can face a risk of runs if they are unable to keep deposit risk
30
low (Calomiris and Wilson 2004). Unbundled banking does not create these sorts of
externalities, and therefore, there are no obvious arguments for forcing FinTech shadow banks to
The point of chartering FinTech banks should be to allow them to reap the net gains of a
charter, if those gains are positive for them. This approach ensures chartering only occurs when
the charter creates value. Furthermore, by permitting, but not requiring, FinTech banks to obtain
charters, society reaps a further benefit: technology serves as a check on excessive regulation. If
chartering authorities know that excessive regulatory burdens will discourage FinTech banks
from coming out of the shadows, then regulators will be more mindful of the costs of
regulation.29
Consumers stand to gain dramatically from allowing FinTechs to obtain national bank
charters. Chartered FinTechs, in many cases, could offer lower costs, better service, and greater
access to financial services, especially for the un- and under-banked. Consumers will also gain
from improved supervision of these banks, which will help to ensure that their customers are
treated fairly, and that the banks are run on a safe and sound basis. For all these reasons, the
OCC is welcoming novel FinTech banks to apply for national bank charters.
Does it make sense to extend the national bank charter to encompass stable value crypto
coin providers? I show that doing so could have some important advantages. The OCC is
currently considering this possibility, although the policy framework that would guide national
bank chartering of stable value coin providers remains a topic of study and ongoing debate.
29
Some might argue that FinTech banks should be forced to obtain charters because of the reduced systemic risk
externalities that come from the regulation of chartered banks. I don’t find this argument convincing when applied to
FinTech shadow banks. As I pointed out in my discussion of stable value crypto banks, because they avoid issuing
deposits, and because they do not combine deposits with lending, then do not generate the sorts of negative
externalities related to systemic risk (credit crunches or stock market value declines) that traditional banks can
create.
31
When considering whether FinTech shadow banks, including stable coin providers, will
eventually become an important part of the chartered banking system, it is crucial to take into
account the political power of the special interests who stand to lose from doing so. Whether
consumers are able to realize the gains of a chartered FinTech future ultimately will depend as
32
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