Many scholars have called for legal reform to end taxpayer-funded bailouts and crack down on anticompetitive practices by financial institutions. Failure to do so, in an era of fintech innovation, could not only greatly harm consumer welfare but also create a riskier financial system. Moreover, countries that enable domestic financial institutions to evade serious competition in the short term may make those same institutions more vulnerable in the long term. Virtual currencies or other technologies could drive such a result if they enable foreign competitors to bypass government barriers, thereby pitting domestic institutions made soft by domestically insulated markets against those honed by fiercer foreign competition.
In my recent article, I argue that even the best of substantive competition law reform efforts may disappoint without fixing an important organizational design flaw: in some countries, the same administrative agency advances both bank competition and bank safety and soundness. That conflicted dual mission submerges competition under the more salient task of preventing bank failures.
In the United States, the U.S. Treasury’s Office of the Comptroller of the Currency (OCC), for instance, extends new national bank licenses, and has led the development of a new special-purpose fintech charter. But the OCC’s main function is to keep banks ‘safe and sound’, which above all entails ensuring that banks’ balance sheets are strong. Although in the long run competition promotes stability, the OCC must on a day-to-day basis decide whether to empower competitors who could disrupt the very banks the OCC is tasked with stabilizing. This institutional orientation may help explain the special-purpose charter’s slow development and general unhelpfulness in enabling fintech startups to compete with the banks that the OCC must keep safe.
A similar tension can be perceived in the OCC’s and the Federal Reserve’s approaches to reviewing mergers and acquisitions—blocking an anticompetitive merger might weaken the profitability of a bank that the regulator cannot allow to fail. Nor has any U.S. financial regulator taken the lead in developing needed pro-competitive laws, such as that passed elsewhere to require banks to give consumers control over their financial data. Instead, in the U.S., banks have blocked fintech startups from accessing consumers’ accounts even when consumers granted such access, thus making digital intermediaries less able to challenge banks and more in need of their cooperation. Given these various competition hurdles, it is perhaps unsurprising that the U.S. fintech startup ethos has shifted from seeking to disrupt banks to hoping to be acquired by them. Dispersed financial competition authority among various agencies undermines the future of finance.
I propose a simple solution: give competition authority to an agency that is not charged with safety and soundness. The U.K. already has such a structure, as its Financial Conduct Authority has led the efforts to issue fintech licenses, not the country’s lead safety and soundness regulator. Organizational theory supports the common-sense notion that an unconflicted agency would make better decisions. After the subprime mortgage crisis, U.S. lawmakers followed this basic organizational tenet by removing most consumer protection authority from the OCC and the Federal Reserve, among others. Those banking regulators had previously deprioritized consumer protection to focus on their dominant mission, safety and soundness. It should not require another crisis for similarly sensible organizational changes to be made to financial competition.
Rory Van Loo is an Associate Professor of Law at the Boston University School of Law.