The U.S.
Despite the demonstrated success of the dual banking system, there are periodic calls — often in times of stress or challenge — for the federal government to take over more and more of the financial system. These proposals would inject a federal, one-size-fits-all approach to regulation and supervision over an even greater share of the financial services market, eliminating or greatly constraining the vital role that states play in their local economies. Do not let the siren song of federal uniformity lure you to the death of financial innovation.
State supervisors charter and are the primary regulator for 79% of the nation's banks. The states also license, regulate and supervise many consumer-facing nonbank institutions, like mortgage lenders, money services businesses and consumer finance companies. The nonbank component of our financial services sector is indeed growing. Last year alone, state-licensed mortgage companies originated $925 billion and serviced $6.6 trillion in loans, while money services businesses handled $5.5 trillion in payments for U.S. consumers. Anticipating this market growth, states increased their coordination of nonbank supervision and enforcement, including the development of model laws to set prudential standards for mortgage servicing and money transmission.
New and innovative financial products and services are being developed every day in the dual banking system. Technology is allowing financial services to reach new customers, including consumers that have been overlooked historically by traditional finance. Banks and nonbanks are also partnering to increase access and choice for consumers. Many of these innovations are possible because individual states have allowed financial firms to take measured risks — while insisting on consumer protection and safety and soundness. Policy variations among the states often allow technologies and financial products to mature. The regulatory and supervisory framework provided by the states enabled many of the innovations consumers rely on daily — such as checking accounts, ATMs and peer-to-peer payment services.
Sen. Richard Blumethal, D-Conn., chair of the Senate Permanent Subcommittee on Investigation, asked bankers whether the Electronic Funds Transfer Act should be updated to include scams that involve authorized fund transfers.
The growth of technology and the expansion of financial services beyond traditional institutions has created a more competitive and inclusive system, but it also comes with added complexity. Acting Comptroller of the Currency
Federal regulators already have significant authority to regulate and supervise in this environment — including deposit insurance misrepresentation rules and enforcement powers held by the FDIC, federal supervision of banks and third-party service providers and CFPB efforts related to a growing list of activities and institutions. Federal guidance and enforcement actions have not resolved risks associated with this growing complexity or provided our nation's banks and their partners with a meaningful, operational path to innovate.
Federal preemption of state financial and consumer protection laws should be the exception, not the rule. Instead of overreaching for more exclusive authority, I encourage our federal agency partners to work together with the states to cooperatively manage risk in the sector. This partnership could start with better information sharing and coordination on third-party supervision, but it need not stop there. Additional engagement and coordination on safety and soundness risks, consumer protection and Bank Secrecy Act/Anti-Money Laundering could strengthen the resilience of the system and improve the allocation of limited federal and state supervisory resources, while providing additional regulatory clarity to the industry.
The U.S. financial services sector must continue to innovate. Finger-pointing and federal regulatory overreach will not resolve the complex challenges facing this ecosystem. Working together, the states and our federal partners can steer clear of the siren song and manage the risk of this forward progress — protecting consumers and promoting competition in the process.
