23. Februar 2021, von Pedro Magalhães Batista
Foto: Erol Ahmed
In "Unbundling Banking, Money, and Payments," Professor Dan Awrey diagnoses the origins and problems of banks' central position in our modern economy. According to Awrey, banks' bundling of banking, money, and payments is a product of historical accidents, political machinations, rent-seeking, and technological limitations that are still found in the current legal architecture and serve as barriers to entry, limiting financial innovation and inclusion, and turning us, and even banks' competitors, into their dependents. The working paper is also motivated by the Office of the Comptroller of the Currency proposal to create fintech charters, which in Awrey's view would further solidify the bank's centrality (Check our short review of Charles Calomiris's proposal here), lacking the courage to imagine a world in which banking, money, and payments are "unbundled" and open to entrepreneurial exploration.
The first part of Awrey's piece describes the history and politics that led banks to combine their lending activities with money and payments and how needed interventions to ameliorate society's dependence on these institutions, systemic risk, turned into privileges protecting them from the competition. Then, in the second part, he presents three ways the law further solidifies such bundling and dependence: (i) the financial safety net granted to banks (access to the Fed's emergency lending facilities, federal deposit insurance, and special bankruptcy regime); (ii) restrictions on infrastructure access to the US payment system (§ 13.1 of the Federal Reserve Act); and (iii) brokered deposit rules that "further entrench banks as the gatekeepers of the US payment system." According to the author, "bank regulation is constantly changing in response to new technological, financial, and other developments that threaten the dominant position of banks at the apex of our intertwined systems of money and payments."
The distortions created by the law are explored in the third part: (i) the provision of a robust financial safety net to banks and the exclusive access to the Federal Reserve's master accounts alter the legal level playing field, harming competition and thereby leading to lower financial innovation and inclusion; (ii) the costly financial regulation incentivizes new competitors to explore regulatory arbitrage in through a destabilizing dynamic; (iii) and by preventing such competitors from offering alternative for the conventional banking system, the law exacerbates banking dependence fueling the "too-big-to-fail" problem. In its fourth and last part, Awrey analyses the technocratic limitations regulators face when trying to address these distortions, but how new technologies managed to do so. In this view, Awrey's paper could also be read as a celebration of how certain innovations finally started to free us from banking dependence.
Moreover, to further the unbundling of banking, money, and payments that certain innovations have started to promote, Awrey proposes three legal changes. Firstly, to amend the Federal Reserve Act allowing financial institutions other than banks to open and maintain master accounts. Secondly, non-banks holding a master account must hold 100 percent of customer deposits in these accounts, limiting platforms operating money and payments to engage in banking activity. And, thirdly, to alter the definition of banking itself: to move away from the circular definition of banks to a functional one in which bank is "any financial institution that combines lending with the creation of monetary liabilities." Awrey's paper is mandatory reading for all of us thinking about the law's role in creating an open environment for entrepreneurial discovery.