KT Fintech Blog

The KT Fintech Blog provides insights into how the emergence of fintech is fundamentally changing virtually every aspect of the financial services landscape and how traditional businesses navigate this rapidly evolving industry.

Category: Office of the Comptroller of the Currency

Posted on Wednesday, November 8 2017 at 9:00 am by
Acting Comptroller Explores the Separation of Banking and Commerce

Written By Eamonn Moran

On November 8, Acting Comptroller of the Currency Keith A. Noreika explored how the separation of banking and commerce evolved in the United States and called for a broader discussion of whether the separation continues to serve the best interest of the nation’s banking system and economy today. He provided these remarks at The Clearing House Annual Conference in New York City.

In response to the Great Depression, Noreika observed how Congress enacted the Glass-Steagall Act and the Banking Act of 1933, which further separated commercial and investment banking. While he noted that “popular history tells us Glass-Steagall was enacted to eliminate a persistent problem in banking that contributed to the Great Depression,” some more recent research shows, however, that banks that combined deposit and investment banking performed better under stress during the depression than deposit banks without affiliates, and they issued higher quality securities than independent investment banks. Noting that rules and laws “are enacted by people and affected by their personal interests at the time,” Noreika stated that “we must question whether the reasons for decisions made decades ago continue to support the public interest today.”

Noreika also briefly reviewed more recent limits imposed to separate banking from commerce and investing. Though structured differently, Noreika highlighted how the Bank Holding Company Act and the Gramm-Leach-Bliley Act have both allowed certain grandfathered companies to mix banking and commerce by permitting the affiliation of banks and commercial enterprises through a holding company structure. As a result, he observed, “these laws continue to give grandfathered companies advantages not allowed to others.” Furthermore, he pointed to other provisions of federal law, such as section 4(o) of the Bank Holding Company Act, which provide similar exceptions for some firms to mix banking and commerce more freely. “In practice, then, a general prohibition on the mixing of banking and commerce has resulted in the very sort of things the prohibition was set up to prevent: advantaging and aggrandizing a few at the expense of the many,” he stated.

Noreika suggested that a thoughtful response to these special exceptions is to look to the grandfathered companies that continued to commingle banking and commerce, and the companies that have accumulated exceptions, as a means to assess whether these companies perform better or worse than their separated kin. Such an assessment “would provide for a more informed decision on whether continuing to separate banking and commerce still makes sense,” he stated. Noreika pointed to a study of the savings and loan crisis of the 1980s and 1990s that “found no evidence suggesting that limited commingling of banking and commerce poses undue risks to the federal financial safety net.,” and also argued that the recent financial crisis demonstrated that “there is nothing inherently safer about separating banking and commerce or traditional banking and investment banking,” since both banks and commercial investment firms not regulated as banks (Bear Stearns and Lehman Brothers) faltered and contributed to the economic downturn. In his view, “[r]einstating Glass-Steagall or continuing to look for ways to separate banking and commerce even more will not make the system any safer because mixing the two did not weaken the system in the first place.”

Along with providing an historical perspective and overview of why the separation exists in the first place, Noreika focused on whether the separation has any usefulness for today’s economy.

He argued that, in smaller communities, fewer restrictions against mixing banking and commerce “could allow for greater use of local capital, and support growth and business activity locally,” while also helping smaller community banks “grow and take advantage of benefits previously only available to grandfathered companies and banks that are big and sophisticated enough to convince the Federal Reserve to grant them an exception.” Furthermore, he commented that meaningful competition could have a number of other positive effects, such as making more U.S. banks globally competitive and promoting economic opportunity and growth domestically. For banking customers, particularly those underserved by traditional banks, Noreika highlighted how increased competition could result in better banking services, greater availability, and better pricing. “If a commercial company can deliver banking services better than existing banks, we hurt consumers by making it hard for them to do so,” he stated.

While suggesting that the main takeaway from some recent studies is that mixing banking and commerce “can generate efficiencies that deliver more value to customers and can improve bank and commercial company performance with little additional risk,” Noreika cautioned that regulators need to closely watch markets to avoid too much concentration and not enough competition, and also “match any increased complexity in the institutions they oversee with added sophistication and capabilities.” He called for fresh research that looks at banking and commerce in a post-Dodd-Frank world.

We expect that these questions will spark some interesting and informative discussion, with potential ramifications for fintech companies interested in exploring bank charter opportunities or other bank partnership possibilities.

Posted on Tuesday, October 24 2017 at 9:00 am by
3 Key Takeaways: Fintech & Banking 2017: Further Exploration of Bank Charters for Fintech Companies

Written By Eamonn Moran

During recent months, Kilpatrick Townsend Partner Christina Gattuso and Counsel Eamonn Moran have provided regular updates regarding the Office of the Comptroller of the Currency’s (OCC) decision to move forward with considering applications from fintech companies to become special purpose national banks. Please click here to learn about key developments that have taken place within the past few weeks.


Posted on Friday, October 20 2017 at 9:00 am by
Acting Comptroller Discusses Innovation and Financial Technology

Written By Eamonn Moran

Acting Comptroller of the Currency Keith A. Noreika recently discussed innovation and financial technology during a speech at Georgetown University Law Center’s Institute of International Economic Law’s Fintech Week. His remarks highlighted his optimism for innovation enhancing products and services for consumers and provided an update on activities related to the Office of the Comptroller of the Currency’s Office of Innovation, including the latest on the agency’s thinking regarding a charter for fintech companies that offer banking products and services.

According to Noreika, “we are at the beginning of a period in this country that is more open to rethinking our approach to regulation, so that we can promote economic opportunity while ensuring the financial system operates in a safe and sound manner and protects consumers from abuse.” He perceives bankers, industry members, regulators, and legislators to “appear ready and willing to have discussions today that would have been impossible six months or a year ago.” He views this change in tone as “very encouraging,” which “suggests that we are finally able to have a constructive, bipartisan conversation about how to approach our regulatory framework.” He stressed that in any steps we take, “we must carefully weigh the cumulative effects of our actions. That includes the impacts on markets, consumers, and banks, and on other companies, such as fintechs, that are innovating the way financial products and services are delivered based on the evolving needs of consumers, businesses, and communities nationwide.”

Noreika noted that his optimism is also based in part on how he views change, including the transformations occurring in the financial services marketplace today, as a part of the “natural evolution” of the banking industry toward “increasing convenience, speed, and control.” Pointing to some of the transformations in the banking sector, such as mobile banking, he stressed the importance of being “careful to avoid defining banking too narrowly or in a stagnant way that prevents the system from taking advantage of responsible advances in technology and commerce.”

In describing the work of the OCC’s Office of Innovation, Noreika noted that the office’s “primary purpose is to make certain that institutions with federal charters have a regulatory framework that is receptive to responsible innovation and the supervision needed to support it,” and that the office “serves as a clearinghouse for innovation-related matters and a central point of contact for OCC staff, banks, nonbank companies, and other industry stakeholders.” He noted that the OCC also is in the early phases of developing a framework for OCC participation in bank-run pilots that allow banks to develop and test products in a controlled environment. In his view, pilots “can accomplish the same goals as what others call ‘sandboxes,” and allow [the agency] to gain insight into a product and to become comfortable with a proposed product’s controls and risks early in the process.”

Building upon remarks he made in July, Noreika reiterated his views that companies that offer banking products and services “should be regulated in the same way that banks are and subject to the same type of ongoing supervision and examinations that banks face.” Consistent with his predecessor, Noreika also is of the mindset that companies that offer banking products and services should be allowed to apply for national bank charters in order to pursue their businesses on a national scale if they choose, so long as they meet the criteria and standards for doing so. He again emphasized that national charters should be just one choice for companies interested in banking, and should exist alongside other options that include becoming a state bank or state industrial loan company (ILC), or operating as a state-licensed financial service provider. Noreika highlighted how certain states, like Georgia, already offer limited purpose charters that even allow commercial companies to be the parent company of the state institution (merchant acquirer limited purpose banks). Furthermore, fintech companies could also pursue partnerships or business combinations with existing banks, or even consider purchasing a bank.

“If, and it is still an if, a fintech company has ambitions to engage in business on a national scale and meets the criteria for doing so, it should be free to seek a national bank charter,” Noreika stated. That includes pursuing a charter under the OCC’s authority to charter special purpose national banks or the OCC’s long-existing authority to charter full-service national banks and federal saving associations, as well as other long-established limited-purpose banks, such as trust banks, bankers’ banks, and other so-called CEBA credit card banks. According to Noreika, “[m]any fintech and online lending business models fit well into these categories of national bank charters, and there has been some interest in fintechs becoming full-service banks, trust banks, and credit card banks. Chartering innovative de novo institutions through these existing authorities enhances the federal banking system, increases choice, promotes economic opportunity, and can improve services to consumers, businesses, and communities.” He cautioned, however, that a national bank charter “is a special thing, and the OCC will not undermine its value by granting charters to companies that are not ready to meet [the agency’s] admittedly high expectations.”

Noreika also took the opportunity to correct some misperceptions that he has seen and heard about – especially the concerns about fintech charters leading toward the inappropriate mixing of banking and commerce. He pointed to the many examples where commercial companies are already allowed to own banks at the state and federal levels, including national credit card banks, state merchant processing banks, state-chartered ILCs. “The law allows commercial companies today to own these types of banks for good reason – they support legitimate business goals and deliver valued products and services to their customers,” he observed. He recognized that the Bank Holding Company Act defines what it means to be a bank for the purposes of that law, but if a particular chartered bank does not satisfy that definition, its parent company would not become a bank holding company solely by virtue of owning the bank. Accordingly, nonbank holding companies, commercial entities, or other banks could own such banks under the law. He did want to be crystal clear about one thing, however: “[t]he chartered entity, regulated by the OCC, would be a bank, engaged in at least one of the core activities of banking – taking deposits, paying checks, or making loans.”