WASHINGTON — The Office of the Comptroller of the Currency’s fintech charter is fueling a debate over whether it might reduce systemic risk or could instead create a new generation of "too big to fail" institutions.

As they await the agency’s response to public feedback on its decision to create a special-purpose charter for fintech firms, critics and supporters alike have already started to imagine what it could mean for the broader financial system.

On the one side are state regulators and some bankers, who fear a large player that obtains a charter could quickly be seen as "too big to fail."

“The past could be prologue,” said John Ryan, the president and CEO of the Conference of State Bank Supervisors, pointing to the money market funds that were hastily bailed out in the last crisis.

John W. Ryan, president and CEO of the Conference of State Bank Supervisors.
If fintechs are “special enough to get a federal charter, there is a special interest in their existence, their success and their survival," said John Ryan, president and CEO of the Conference of State Bank Supervisors.

If fintechs are “special enough to get a federal charter,” he added, “there is a special interest in their existence, their success and their survival.”

Ryan warns that if a single federally chartered marketplace lender were to dominate the industry one day, its failure could cause whiplash in the U.S. economy.

If “thousands of businesses [are] relying on this entity to meet their next payroll,” Ryan said, "it could put the federal government, the OCC, in the position of trying to stabilize this funding source."

But supporters of the charter argue that it could help foster the growth of a new industry under the watchful eye of a federal regulator – while putting no taxpayer money at risk. The OCC’s charter broadly targets companies that do not hold deposits, and thus are not even backed by the Federal Deposit Insurance Corp., which is funded by industry assessments.

“The OCC fintech charter would reduce systemic risk,” said Nathaniel Hoopes, executive director of the Marketplace Lending Association. “It provides for the robust oversight of emerging fintech firms … and creates no new exposure for the FDIC’s Deposit Insurance Fund.”

The OCC has similarly dismissed concerns about the potential for the charter to create "too big to fail" institutions, noting that fintech companies hold far less market share than those financial institutions that could precipitate a crisis.

“No financial technology company reaches the scale and interconnectedness of being a systemically important institution,” said Bryan Hubbard, a spokesman for the OCC.

If the companies were to become systemically important, he added, they would then be monitored by the Financial Stability Oversight Council.

Moreover, the OCC would be able to spot any signs of trouble through the regular exam process, fintech champions say.

“Let's say that they do grow and let's say that somehow they become runnable,” said Brian Knight, a senior research fellow at the Mercatus Center. “There is ample time for the government to regulate as they grow.”

This debate highlights the tension underlying the OCC’s fintech charter initiative – whether the agency should treat fintech companies differently because they are not structured like banks, even though they would officially have some banking powers under the charter.

In a December white paper detailing how it plans to implement the charter, the OCC said it would require applicants to hand in a resolution plan – including a system for monitoring stress, a “wide range of credible” responses and specific “escalation and notification” procedures.

“Startups do have high failure rates, and that's a good thing,” said Jo Ann Barefoot, a consultant who advises both regulators and fintech companies. But “the ones that are going to get bank charters should be scrutinized and the regulator should be satisfied” that they are prepared for failure.

The agency also put out a rule that outlines its authority to place an uninsured national bank under receivership in the event of a failure.

But critics note that the rule does not provide sufficient information on the funding mechanism for the resolution process, leading bankers to worry they might have to foot the bill.

“Someone would have to pay for it and it's likely to be the rest of the banking industry,” said Christopher Cole, executive vice president and senior regulatory counsel for the Independent Community Bankers of America, “or it could be the taxpayers ultimately.”

It is also still unclear how risk-averse the OCC and fellow regulators will be in dealing with fintech companies as opposed to large banks.

“Given their history and culture, the OCC, the FDIC and the Fed don't want the institutions they're supervising to fold,” said Jeanne Hogarth, vice president at the Center for Financial Services Innovation. But “rescuing a fintech company might be different. Maybe they should be allowed to fail.”

Knight said that the OCC should be asking questions like, Does the firm have a credible plan for wrapping up operations in a way that protect customers? For instance, Knight suggested there should be provisions to ensure money does not get stranded if a payments company goes under, and loans still get serviced if an online lender goes bankrupt.

Under those conditions, the firm could be safely allowed to fail, Knight added. “What would make the firm 'too big to fail'?" he said. “It's size plus complexity plus a government backstop. Currently fintechs are not really big, they're not really complex and there's no government backstop.”

At the same time, critics of the charter argue that fintech companies that do not hold deposits – a cheap source of funding – could be more vulnerable to the whims of the market.

Marketplace lenders are "probably funding themselves with private equity, hedge funds, capital markets," Ryan said. "There are more people than me that should be thinking about the what-if."

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