Rob Nichols is president and CEO of the American Bankers Association and Dennis Kelleher is president and CEO of Better Markets, a Washington-based nonprofit that promotes financial market reform.
The recent turmoil in the trillion-dollar crypto sector, including the sudden liquidity crunch and the spectacular collapse of FTX, brought to light the concept of a bank run – made famous in movies like “ It’s a Wonderful Life” and “Mary Poppins”. But this time the race was not on a bank at all.
Instead, many crypto-asset customers had accounts at non-bank crypto firms. When they ran (meaning when they simultaneously rushed to make massive withdrawals), customers saw their withdrawals slowed down and then frozen by companies in a desperate attempt to stay solvent. Customers were forced to watch helplessly as their accounts fell to zero. This is very similar to what happened in non-bank financial companies during the 2008 financial crash and would have happened when the 2020 pandemic hit if the Fed hadn’t acted so quickly.
The recent bankruptcies of crypto lenders Voyager and Celsius – and algorithmic stablecoin TerraUSD – make the non-bank risks painfully clear to consumers who have lost billions in uninsured crypto accounts and investors who have lost trillions of dollars. And now the largely unregulated non-bank FTX, which had multiple crypto trading operations across the globe, has seen $6 billion in withdrawals in 72 hours and has completely collapsed amid potential forensic investigations. of the order and of Congress.
The financial crash of 2008 and the pandemic-induced crisis of 2020 have already proven that non-banks are not just fringe players in our global financial system; they are critically important and deeply interconnected to the banking system and the economy and can threaten financial stability. And they’re growing in importance: non-banking financial intermediation (sometimes called “shadow banking”) accounts for almost half of the $470 trillion in global financial assets, according to the latest report from the Financial Stability Board.
More recently, the growth of the trillion-dollar crypto sector – with its many asset types, exchanges and wallets, intersecting with traditional finance in many ways – has created a whole new field of non-bank players. unregulated.
Our organizations do not always agree on banking policy. But today, as the warning lights flash on the economic dashboard and we face both persistent inflation and the risk of a recession in the months ahead, we both agree that crypto companies and other non-banks pose a significant and growing risk to our financial system that needs to be better understood and regulated.
The overarching principle essential to putting shadow banking on safer ground is this: apply the same regulatory standards to the same products and services, regardless of their origin or the technology involved.
Americans should be aware that when engaging in any financial activity, whether it is a checking account, credit card or car loan, or investing in a digital asset , they benefit from the same fundamental protections for consumers, investors and financial stability – regardless of who offers the product or service. It wouldn’t make sense to say that cars built in a union factory must have seat belts, while cars built in a non-union shop might not wear seat belts – instead our car regulators set uniform standards for vehicles, regardless of who makes them, how, or where.
This means that the providers of these products – banks and non-banks – should be subject to the same underwriting requirements, the same regulatory and risk management standards, the same cybersecurity and anti-fraud protections and the same standards. of consumer protection. Despite our disagreements on certain other banking issues, we share this common point: the same activity must face the same regulations.
The “same risk, same rule” principle guarantees a competitive market with a level playing field where incentives for regulatory arbitrage are minimized or even eliminated. If you want to serve consumers through the payment system, through deposit products or loans, or through asset management and trade facilitation, you must be subject to the same requirements as all other participants.
This principle also gives policymakers a better window into systemic risk, ensuring that we do not allow a devastating level of risk-taking for the economy to build up outside the regulated banking sector, as has seriously produced in 2008. Like the proverbial man looking for his glasses under the streetlamp “because that’s where the light is”, assessing financial stability should not mean that policymakers should only look for systemic risks. in the entities they directly regulate.
Finally, this principle does not mean that a company must be a bank to offer financial products or services. It’s a decision that involves business models, funding, governance and other strategic considerations. Financial intermediaries have good reasons for being banks, and some companies have legitimate reasons for offering financial products or services outside the banking system.
But if the type of institution may vary, the guarantees must be aligned. Innovation in the financial sector is key to maximizing benefits for consumers, and fair, properly and consistently regulated competition can advance this process. But consumers also expect the rules that govern providers, whether bank or non-bank, to protect them and financial stability.
As the invisible risks of more unregulated non-banks materialize and the shadows of an economic recession grow longer around the world, it is more critical than ever to shine a light on crypto and other shadow banks.