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 reforms.
The latest turmoil in the trillion-dollar crypto sector, including FTXs sudden liquidity crisis and spectacular collapse, has updated the concept of bank run – made famous in movies like “It’s a Wonderful Life” and “Mary Poppins.” But this time the race has not been on a bank at all.
Instead, many crypto asset customers had accounts with non-bank crypto firms. When they ran (that is, when they simultaneously rushed to make large withdrawals), clients found their withdrawals slowed and then frozen by the firms in a desperate attempt to remain solvent. Customers were forced to watch helplessly as their accounts plummeted to zero. This is very similar to what happened to non-banks during the 2008 financial crash and would have happened when the 2020 pandemic hit had the Fed not acted so quickly.
The latest bankruptcies of crypto lenders Voyager and Celsius — and by the algorithmic stablecoin TerraUSD — makes the risks of non-banking 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 business operations around the globe, saw $6 billion in withdrawals in 72 hours and has completely collapsed amid the potential for law enforcement and congressional investigations.
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 connected to the banking system and the economy and can threaten financial stability. And they’re growing in importance: Non-bank financial intermediation (sometimes called “shadow banking”) accounts for nearly half of the $470 trillion in global financial assets, according to the Financial Stability Board’s latest report.
More recently, the growth of the trillion dollar crypto sector – with its many asset types, exchanges and wallets that intersect with mainstream finance in a number of ways – has created a whole new field of unregulated non-bank players.
Our organizations do not always agree on banking policy. But today, with warning lights flashing on the economic dashboard and facing both persistent inflation and the risk of a recession in the coming months, we both agree that crypto companies and other non-banks pose a significant and growing risk to our financial system which needs to be better understood and regulated.
The critical overarching principle for getting the shadow banking system on safer ground is this: Apply the same regulatory standards to the same products and services, regardless of origin or the technology involved.
Americans should know that when they engage in any financial activity, be it a checking account or a credit card or a car loan, or invest in a digital asset, they have the same basic consumer, investor and financial stability protections – 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 could go belt-free – instead, our auto regulators set uniform standards for vehicles regardless who manufactures them, how or where.
This means that the providers of these products – both banks and non-banks – should be subject to the same guarantee requirements, the same regulatory and risk management standards, the same cybersecurity and fraud protection and the same consumer protection standards. Despite our disagreements on some other banking issues, we share this common ground: the same activity should face the same regulation.
The “same risk, same rule” principle ensures a competitive, level-playing field where incentives for regulatory arbitrage are minimized, if not eliminated. If you wish to serve consumers through the payment system, through deposit products or loans, or through asset management and trade facilitation, you should 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 an economically damaging level of risk-taking to build up outside the regulated banking sector, as it seriously did in 2008. Like the legendary man searching for his glasses under the streetlight “because that’s where the light is,” evaluating 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 in order to offer financial products or services. It is a decision that involves business models, financing, governance and other strategic considerations. There are good reasons why financial intermediaries are banks, and there are legitimate reasons why some companies offer financial products or services outside the banking system.
However, although the type of institution may vary, the security measures must be adapted. Innovation in the financial sector is essential to maximize benefits for consumers, and fair, proper and consistently regulated competition can drive this process forward. But consumers also expect that the rules that govern providers – whether they are banks or non-banks – protect them and financial stability.
As the unseen risks of more unregulated non-banks materialize and the shadows of an economic recession lengthen around the world, exposing crypto and other shadow banks is more critical than ever.
