- Key insight: Bank regulators have shrugged off a zero-failure mentality and are allowing some risk back into the system.
- What's at stake: A restrictive chartering environment and focus on preventing bank failures limits competition, reduces consumer choice, and freezes innovation.
- Forward look: Innovation may bring failures, but a system designed to resolve them allows responsible innovation — rather than excessive caution or fear of failure — to define a new era of banking.
A wave of
Regulators are fostering innovation through a revitalized chartering function; a supervisory framework that adapts to innovative business plans; and a philosophical acceptance that the goal is no longer to prevent every bank failure, but to ensure frameworks are in place for the system to absorb them (something made possible through recent congressional action). This paradigm shift marks the transition from the
Following the global financial crisis, bank innovation fell into a deep freeze due to an unwritten rule that the role of the regulator was to prevent bank failure. This "zero failure" philosophy characterized the supervisory approach with a focus on higher capital, stricter risk management and skepticism of novel business models. That defensive regulatory posture effectively shut new entrants out of the banking system with
The restrictive chartering environment and focus on preventing bank failures limited competition, reduced consumer choice, and froze innovation within the banking system, even as blockchain and digital assets transformed finance. A decade past the crisis, regulators struggled to expand the "banking perimeter" as regulatory frameworks and underlying statutes lagged innovation; financial innovation firms lacked regulatory maturity; incumbents resisted competition; and investors remained wary.
The freeze on new bank charters and novel activities began thawing as the misalignment between industry innovation and supervision became more pronounced, catalyzing the need for supervisory recalibration and congressional action. The rapid advances in banking technology diminished the effectiveness of traditional monitoring and early warning mechanisms. Meanwhile, the expansion of off-balance-sheet banking models weakened the effectiveness of conventional risk-mitigation tools.
In response, bank regulators have begun scaling back their more subjective risk monitoring initiatives — such as reviews of reputation risk and management composition — returning to the statutory requirements with a focus on financial indicators. Rather than signaling weaker supervision, these changes reflect a recalibration of supervisory tools in response to structural changes in the industry. Further prompting regulators to adopt a system balancing innovation, supervision, and orderly failure was the long-awaited congressional action in passing the Guiding and Establishing National Innovation for U.S. Stablecoins, or GENIUS, Act in July 2025, providing a regulatory framework and issuer standard for stablecoins.
The most consequential regulatory shift is the move away from a "zero failure" mindset. Innovation inevitably means some banks — and business models — will fail. As new banks enter the system and older models face pressure, resolution becomes a central policy question. Though often overlooked during periods of rapid growth and technological change, the ability to manage failure is essential to sustaining innovation. The challenge for regulators is to ensure failure occurs within credible frameworks for orderly resolution that prevent broader market disruption.
The payments firm wants to issue a stablecoin called PAYO-USD, joining a wave of digital asset companies seeking federal bank charters.
Such frameworks for orderly resolution for novel, uninsured charters have largely been aspirational. The resolution framework for insured banks is well established — the FDIC has resolved insured banks since its inception in 1933. The same framework, though, is not mandated for banks that do not accept insured deposits. Those uninsured banks are also not eligible to use the Bankruptcy Code. As a result, there was no uniform playbook for resolving uninsured banks.
Historically, the OCC addressed the risk of uninsured charters failing by adopting a belt and suspenders approach, with operating agreements containing conditions. The operating agreements imposed capital and liquidity support from parent companies to prevent failure while also including "sell, merge or liquidate" provisions if certain conditions were met. The approach was costly, burdensome and largely outdated for most business plans and models. With the wave of digital asset trust charters, the OCC has largely abandoned the approach.
While the OCC could revive its receivership authority to resolve uninsured trust charters, exercising that authority would be like starting a Model T after nearly a century in the garage.
Although the OCC published a rule in 2016 outlining its authority to resolve uninsured national banks, its powers are limited to National Bank Act provisions pre-dating the creation of the FDIC in 1933, and not designed for the modern financial system.
The GENIUS Act partially addresses the responsible exit for uninsured banks involving digital assets. The law allows an uninsured national bank to operate as a federally qualified payment stablecoin issuer, or FQPSI, and provides that banks serving as permitted payment stablecoin issuers — including FQPSIs — will be resolved by the FDIC. Accordingly, a national trust bank issuing payment stablecoins falls within the FDIC's resolution regime.
The GENIUS Act partially addresses a long-standing gap in the regulatory framework: the absence of a clear resolution regime for uninsured banks engaged in novel activities. By providing pathways for resolving certain institutions, the GENIUS Act reduces the need for regulators to anticipate every potential failure at the chartering stage. This shift benefits new entrants. Most banks do not fail, and regulatory frameworks designed primarily to guard against low-probability failures can unnecessarily constrain institutions that would otherwise operate safely and profitably.
Innovation may bring failures, but a system designed to resolve them allows responsible innovation — rather than excessive caution or fear of failure — to define a new era of banking.
