MODERNIZING THE BANK CHARTER.

• Author: Zaring, David

ABSTRACT

The banking charter--the license a bank needs to obtain before it can open--has become the centerpiece of an argument about what finance should do for the rest of the economy, both in academia and at the banking agencies. Some advocates have proposed using the charter to pursue industrial policy or to end shadow banking. Some regulators have proposed giving financial technology firms bank charters, potentially breaking down the traditionally high walls between banking and commerce. An empirical survey of chartering decisions by the Office of the Comptroller of the Currency suggests that chartering is best understood as an ultracautious licensing regime for "fit and proper" applicants. It would not and probably should not be easily adapted to realize the policies the advocates propose, or to mix banking with big business. The modern charter should be paired with more transparent administration by agencies and more standard review by courts. These policies could appropriately be paired with the careful and narrow fintech chartering program that regulators have created.

INTRODUCTION I. THE LAW OF CHARTERING II. MAKING SENSE OF THE CHARTER A. Charters as Throwback Regulation B. Banking Versus Commerce III. THE GREAT CHARTERING DEBATE A. Could Charters Make for a Better Financial System? B. The Chartering Debate Has Long Been with Us C. Bank Charters as an Overlicensing Case Study IV. FEDERAL CHARTERING IN PRACTICE A. The Practice of Chartering 1. Illustrating the Approval Process: The Online-Only Bank 2. Charter Denials B. All Applications Analysis C. What Should Be Done? V. THE FINTECH CHARTER A. The State of Fintech B. Revolutionaries in Waiting C. The Fight to Charter Fintechs 1. State Outreach to Fintechs 2. The Federal Fintech Lawsuits 3. Policy Implications of the Fintech Charter Fight D. The OCC's Cautious Expansion of the National Charter E. The Slow Adoption of the Fintech Charter F. Policy Implications CONCLUSION INTRODUCTION

One of the consequences of the 2007-2008 financial crisis was that it became all but impossible to start a new bank in the United States, although this policy was never publicly articulated by anyone. To found a bank, you must obtain deposit insurance and a bank charter, both of which require approval by the government. (1) However, stung by the number of relatively young banks that failed during the crisis, the Federal Deposit Insurance Corporation (FDIC) stopped giving out deposit insurance and the Office of the Comptroller of the Currency (OCC), the main federal regulator that charters banks, did not formally respond to any charter application for years. (2)

The prohibition against start-up banking could not last forever, and--again, without notice--recently, the FDIC has grudgingly started to do something about granting deposit insurance to newly chartered banks, or at least say something about the subject. (3) The OCC has cautiously moved towards granting new charters for banks, and even for some technology firms that are not banks. (4) The Chair of the FDIC said in a speech that a "priority of mine is encouraging de novo bank formation;" (5) in all, this led to fifteen approvals for new banks in 2018 and nine more in 2019. (6)

The apparent end of the no-charter era calls for a reassessment. How should the government use its charter-granting powers, now that it has apparently decided that new banks are permitted? Academics and regulators have come to entirely different views. A number of banking law scholars have argued that the charter should be given out parsimoniously and in exchange for a commitment by new banks (and old ones for that matter) to various public goals. (7)

The OCC has taken the opposite view. Rather than using the charter to narrow and direct the banking industry, it has announced that defining "that which we call a bank" (8) should be broadened to make room for financial technology (or "fintech") companies as well as regular, brick-and-mortar banks. (9) That means, as the Obama White House put it, companies making use of a "wide spectrum of technological innovations which impact a broad range of financial activities, including payments, investment management, capital raising, deposits and lending, insurance, regulatory compliance, and other activities in the financial services space," might also be able to obtain a banking license. (10)

Unlike other corporations, which are entitled to a corporate charter essentially on demand, bank charters have always been difficult to obtain. (11) While corporate charters today permit corporations to operate for "any lawful purpose," (12) bank charters are only available for companies engaged in the "business of banking" (13)--to the OCC that means taking deposits, making loans, or offering checking services--and only after considering the "convenience and needs of the community to be served." (14) Those are only the start of the requirements. To even apply for a charter, as Bob Hockett and Saule Omarova have explained, "[b]ank organizers are required to submit detailed financial information, business plans, and performance projections in order to convince chartering authorities of their ability to provide banking services in a safe and sound manner. (15)

This involved application process presents a challenge for anyone hoping to start up a "normal" bank. The OCC has occasionally experimented with the chartering of "special" banks--banks that perform some, but not all, of the functions of a normal bank. (16) These banks might hold money in trust, but not make loans or issue credit cards. (17)

On July 31, 2018, the OCC began accepting applications for its newest proposal for a special bank--the fintech charter. (18) Joseph Otting, the head of the Agency, said that "[t]he decision to consider applications for special purpose national bank charters from innovative companies helps provide more choices to consumers and businesses, and creates greater opportunity for companies that want to provide banking services in America." (19) The nascent national fintech charter has support from the Democrat and Republican Comptrollers of the Currency who preceded Otting. (20) The Treasury Department has also expressed support, predicting that peer-to-peer lenders and payments processors might be particularly well served by the charter. (21)

The fintech charter has opponents as well, especially those who are concerned that fintech charters could obliterate the traditional distinction between banking and commerce. Some of the largest fintech operations in the country include PayPal, Amazon's payment system, and Apple and Google's wallets. (22) Should these firms have bank charters? They could then compete against banks in every way, rather than only through payment processing, which would make them ultimate "shadow banks." (23) Senators Sherrod Brown (D-OH) and Jeff Merkley (D-OR) have argued that "[offering a new charter to nonbank companies seems at odds with the goals of financial stability, financial inclusion, consumer protection, and separation of banking and commerce." (24) State banking supervisors have posited that "[a]n OCC fintech charter is a regulatory train wreck in the making" and have sued, with some success, to stop it from happening. (25) Karen Petrou, a leading financial policy analyst, has concluded that people are likely to get "hurt" by the fintech charter. (26)

The banking charter has thus become the centerpiece of an argument about what chartered institutions should do for the rest of the economy. The chartering process also illustrates a remarkable divergence--worryingly common in banking regulation--between the law as written and the law as it is actually applied.

I argue that the best way to understand the OCC's chartering practice, at least as expressed through its written orders, is that it is engaged in "fit and proper" regulation, determining whether the promoters of a new bank are sufficiently experienced, adequately capitalized, and disinclined to break the law. (27) Chartering as practiced is not a philosophical debate about what banking is and should be, but a business viability analysis. When the OCC does grant a charter, it does so in a pro forma letter, without many conditions (though there are usually some) or even applications of the law to the facts of the submission. (28) It does not suggest that it is making decisions on policy grounds. (29)

But while writing an order approving or denying a chartering application looks easy, the actual application process is, it turns out, quite hard. Lawyers will tell you that behind the orders there is also a searching inquiry into the quality and viability of the business plan of the would-be bank and the track record of its managers. While the test is best characterized as a fit and proper test, (30) because it focuses on the management team and the business plan, it is certainly fit and proper with teeth.

This caution on chartering new banks also applies--it seems so far--to the OCC's approach to fintech. Rather than fully committing to the revolutionary promise of the fintech charter, the OCC has moved slowly in developing it. (31) Previous special charters have not exactly transformed the financial industry; they have largely gone to subsidiaries of already extant banks, offering established incumbents the chance to add services such as credit cards or trust deposits to their customers. (32) Nor has the OCC dispensed these charters easily or broadly. The OCC's approach to the fintech charter should be welcomed.

In documenting these practices, this Article provides the first comprehensive account of how chartering works on the ground since Kenneth Scott's government-funded analysis of the charter in 1975 appeared in the University of Chicago Law Review. (33)

It also offers four actionable prescriptions to policymakers. The first is directed to the OCC and FDIC, which should issue guidance reflecting their willingness to entertain...