Picture this: Amazon, Apple and Google, global leaders with access to fresh capital and technology, are poised to revitalize the banking sector yet are unable to do so.
Meanwhile, regional banks like PacWest Bancorp are under pressure
The solution? A new approach that unites the capital of tech firms, private equity and experienced venture-backed operators to breathe life into the banking sector. But first, we must overcome antiquated regulations that hold us back.
The problem lies in certain outdated regulations within the Bank Holding Company Act of 1956, which prohibit the commingling of banking and commerce. This barrier is partly why Walmart failed to acquire a bank in the 2000s, as incumbents pushed back. It's also why companies like Amazon have conquered nearly every industry — except banking. Private equity firms face limitations, unable to own more than 24.9% of a bank or take control via board seats. Consequently, tech firms, venture capital and entrepreneurs can't come to the rescue when smaller banks need help.
Interestingly, international bank laws generally do not have a prohibition on the commingling of commerce and banking. In fact, JPMorgan Chase, one of the most prominent financial institutions in the world, began its journey as a water company. Wells Fargo started as an express delivery service. This context underscores the need for the United States to reevaluate its regulatory framework.
Our financial system is at a crossroads, with regional and community banks under pressure as deposits flow to global systemically important banks and money market funds. Other banks hesitate to step in and save their competitors, opting instead to cherry-pick assets or poach top talent. The result? A weaker financial sector and declining confidence among consumers.
As the Federal Reserve grapples with the dual challenges of managing monetary policy and bank supervision, it's time to consider a bold new approach. By modifying specific regulations within the Bank Holding Company Act and allowing nonbank entities to invest in and control banks — subject to the same safety-and-soundness standards — we can inject much-needed capital and engineering talent into aging financial institutions.
At the same time, we must recognize the risk of powerful big tech companies becoming too dominant and difficult to regulate effectively in the U.S. banking sector. Their vast resources and influence could lead to an imbalance in the financial landscape, stifling competition and making it harder for smaller players to thrive. To remedy this issue, we should encourage de novo charters and joint ventures. Technology firms and private equity firms could serve as a source of strength, providing capital and innovation, while seasoned bank operators focus on running the bank. This collaborative approach would level the playing field and maintain competitive markets.
The benefits of such a partnership are immense. An influx of engineering talent would help banks innovate faster and more effectively, leading to better financial products, improved risk management and enhanced customer experiences. Access to outside capital would provide struggling banks with a much-needed lifeline, enabling them to weather economic downturns and better serve their communities.
As the Federal Reserve continues to raise interest rates to combat inflation, it's essential that we find new ways to bolster our banking system. We need to change the outdated approach of limiting bank ownership to other banks. The future of banking is bright, but only if we embrace change and adapt to the new reality of digital finance.
