WASHINGTON — A federal regulatory plan detailing how to unwind a failing uninsured national bank provides some tantalizing clues for how the Office of the Comptroller of the Currency may craft a charter for fintech companies.
As it currently stands, the proposal would affect only 52 banks — nationally chartered financial institutions that don't have deposit insurance — and deals with how the agency should handle their failure, an issue that hasn't been a problem since the Great Depression.
But the plan also signals how the OCC would enact a charter for fintech firms anxious to be supervised by a single federal regulator rather than a patchwork of states.
"The OCC is not doing it because it is losing sleep over the lack of a resolution framework for trust banks," said Julie Williams, a managing director at Promontory Financial Group and the former No. 2 at the OCC. "The elephant in the room here is, what does this mean for special-purpose fintech banks in the near or long term?"
Comptroller Thomas Curry acknowledged as much in a speech this week in which he said the plan "is relevant to any potential future fintech charter that could or may be issued by the OCC."
Following are summaries of what industry experts think the plan means.
Fintech charter may not include CRA
The OCC's proposal may signal that some laws and regulations that apply to traditional banks, such as the Community Reinvestment Act, would not apply to fintech firms.
The proposal would only cover financial institutions that are not insured by the Federal Deposit Insurance Corp., and thus are not allowed to hold customer deposits. But that also exempts them CRA and a host of other regulations.
Whether fintech firms should have to comply with CRA is a controversial subject, with some regulators saying it's necessary while others have yet to weigh in. The law requires banks to make loans near areas where they locate branches.
But fintech companies have raised concerns about how the law would apply to them and suggested they could stay away from a national charter that includes such requirements.
"Bankers and community groups alike discussed the impact and value of the [CRA] in the context of fintech and marketplace lenders," Curry said. "But, the CRA applies only to insured depository institutions."
Living wills for fintech companies
Fintech firms considering applying for a possible charter may want to begin planning for their potential demise.
The OCC proposal details how the agency would handle a failing nondepository financial institution, including whether it would place it into receivership — a role the agency typically doesn't play and may want to avoid.
According to the proposal, certain trust banks have previously created a preapproved "safeguard agreement," a plan for a simplified resolution that would not require the establishment of a receivership. Such plans were hashed out early on during the licensing process, the OCC suggested.
The measure was a not-so-subtle hint for fintech companies, observers said.
Such firms may want to create a similar framework, which might allow them to bypass the OCC's receivership rule.
"An applicant could come in with, in effect, a self-liquidation plan," Williams said.
Is bitcoin being snubbed?
In its resolution plan, the OCC explicitly referred to the emerging fintech industry. And yet the agency's definition of what constitutes the industry may leave some types of businesses out in the cold.
"The OCC's rules provide that a special purpose bank must conduct at least one of the three core banking functions, namely receiving deposits, paying checks, or lending money," the proposal said.
This would appear to encompass online lenders but leave out firms dealing with entirely new technologies, like virtual currency. Unless the agency issues another proposal to update the definition, this could mean that bitcoin exchanges will be left out of the charter.
"What the OCC doesn't say here is that it's considering broadening those activities," Williams said. "It might be that they are going to consider another rulemaking, but they don't hint at that here."
Premiums for fintech firms?
The FDIC uses its Deposit Insurance Fund or, in a worst-case scenario, a line of credit from the Treasury Department, to pay for any receiverships. But the OCC does not have similar reserves from which to pool. That leaves a big question mark when talking about the failure of a fintech firm which has a charter through it.
"The OCC would not have all the powers [given to the FDIC in] the Dodd-Frank Act, the access to the Treasury," said Ronald Glancz, who chairs the financial services group at Venable. "What happens if there's not enough money even to wind it down?"
But the OCC faces an easier — and cheaper — task than the FDIC. If an uninsured institution were to fail, the OCC would have no depositors to pay back. The receiver's primary function would instead be to liquidate the company's funds in the order of priority it has laid out.
The OCC would have to pay for administrative, legal costs and other costs related to its responsibilities as a receiver.
In its proposal, the agency indicated that it might fund the process by raising assessments on chartered, uninsured institutions. Changing the assessment structure would require the OCC to file a separate proposal, an agency spokesman said.
This is not likely to play well with the trust banks that are currently charted by the OCC, as it would effectively require them to bear the costs of insuring much riskier market players.
"That might be a bit controversial," said Pratin Vallabhaneni, an associate at Arnold & Porter. "Trust banks rarely fail," he added, whereas "if fintech companies enter this space … there will probably be" a higher number of failures.