David Zaring on Skinny Charters and the Future of Banking

David Zaring is legal scholar and professor at the University of Pennsylvania. In David’s first appearance on the show, he discusses the role the Great Financial Crisis played in FinReg scholarship, how he came up with the term “skinny” in the new skinny Fed master accounts, the tumultuous road of Custodia vs. the Fed, a reimagined way to look at federal bank charters, whether commerce and banking are actually still separate, Fed independence and how it functions in a more corporatist model, and much more. 

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This episode was recorded on April 24th, 2026

Note: While transcripts are lightly edited, they are not rigorously proofed for accuracy. If you notice an error, please reach out to [email protected]. 

David Beckworth: Welcome to Macro Musings, where each week we pull back the curtain and take a closer look at the most important macroeconomic issues of the past, present, and future. I am your host, David Beckworth, a senior research fellow with the Mercatus Center at George Mason University. I’m glad you decided to join us. 

Our guest today is David Zaring. David is a legal scholar and professor at the University of Pennsylvania, where he works on, among other things, legal issues facing the Federal Reserve System. Today, he joins us to discuss two big legal issues facing the Federal Reserve. First, the issue of the skinny Fed master accounts and challenges to them, as well as challenges to who governs and how is the Fed accountable to Congress and other entities. David has written widely on both of these topics, and he joins us today to help shed light on them. David, welcome to the program.

David Zaring: It’s a pleasure to be here, David.

Beckworth: It’s great to have you on. Now, we recently crossed paths at a conference you helped organize at the University of Pennsylvania, the Wharton Financial Regulation Conference. It was a real treat for me, a macro guy, to be invited to hang out with the cool financial regulation scholars like yourself, Peter Conti-Brown, and others. Peter and I did a podcast there to kick the conference off. It was really fascinating, because what I learned from Peter in that podcast is that, pre-2008, a conference like that simply would not have existed.

You guys, the group of you—and I think of a number of podcast guests and friends that I have now made you, Peter Conti-Brown, Dan Awrey, Kate Judge, Lev Menand, Jeremy Kress, Graham, all these people do financial regulatory scholarship, some are former policymakers—but they’re all a product of the Great Financial Crisis. Tell us about that and how your story fits that narrative.

The Great Financial Crisis and FinReg Scholarship

Zaring: Yes, I think that’s exactly right. The financial crisis created a need that the legal scholarly community didn’t know it had for financial regulation scholars. Before the financial crisis, there weren’t many financial regulation scholars. They often taught at pretty fancy law schools, but they viewed banking regulation as something that was like corporate law and raising money through securities issuances. They were clearly on the business law side of the spectrum, so private law only with a regulatory overlay. Banks was about bank mergers and unit banking and then lending requirements and stuff like that.

After the financial crisis, we saw that in a crisis, there’s a lot of public interventions that happen in financial regulation that really mean that it can be pretty well looked at as a species of just regulation more generally. I came into the academy as an administrative law scholar, but I’d done some research for a law professor in law school. I was her research assistant. She was interested in the way that regulators collaborate with their foreign counterparts. I’d studied the way that financial regulators collaborate with their foreign counterparts. They do so in a pretty elaborate way.

After that, I hadn’t thought too much about banking until the financial crisis. Then I came back and thought to myself, “This is really an important subject and a subject that is really tractable by thinking about it as a form of regulation, just like other kinds of administrative law.” A lot of my research has been making that case or making the opposite of that case. Maybe we’ll talk about the opposite of that case later—the ways in which the Federal Reserve and other banking regulators don’t really conform to typical notions of administrative law.

I’ve also got a bunch of papers on the SEC and how it is and is not a typical administrative agency. That’s the value I try to bring to the scholarly debate about what banking regulation is, how it works, and why it’s important. The reason why so many of the people at that conference think it’s important is because they lived through the big financial crisis, which drove home for us just how critical all this stuff was.

Beckworth: Yes, it’s amazing the legacy of that experience, the great recession or Great Financial Crisis. Everything from how we think about monetary policy, fiscal policy, to the scholarship we do, legal field, economic field, the impact will go on for as long as there is this profession. It’s great to be a part of that. It was great to run into you there, as well as others. We learned about a number of other people who love the podcast, including you, Peter, and folks there. That was a great event, so I encourage listeners to go out and check out that conference if you can. The podcast too will have been out before this one does, so some of the folks will have heard that conversation.

David’s Experience with Fintech Charter Litigation

Now, as you mentioned, you’re writing in this area, and you have several great articles I want to talk to you about. The first one I want to talk to you about is a recent article of yours that deals with the question of skinny Fed master accounts. You had it in the Journal of Corporate Law, and the title was “Skinny Charters: Rebuilding the Banking Regulatory Perimeter.” Now, here’s the cool thing about that paper, other than it’s an important topic, is you came up with the word “skinny” before Governor Chris Waller, right? You were hip before others were using that term.

Zaring: I feel like an influencer at this point.

Beckworth: There you go. You had that article published prior to the use of Governor Waller’s term skinny Fed master account. You called it skinny charters, but that skinny part was there. We’re in the midst of this. There’s a lot happening here in this space. We just, in fact, recently learned that Kraken, who applied for a regular master account all the way back in 2020, finally gets one. It’s like a trial run. I guess it’s like a sandbox; let them go play and see how it works, work out some of the kinks. I know they recently took comments on the proposal.

Let’s step back because I know you’ve been a part of this story for some time, even before this article came out. Weren’t you a part of the litigation? Were you like an expert witness in some of the cases we’re going to talk about?

Zaring: Yes, I participated in litigation over the OCC’s fintech charter, which got up to the Second Circuit in, I think, 2019. I’ve also weighed in on Custodia, the Wyoming crypto brokerage. They asked for access to the Fed’s payment rails a while ago. The Fed arguably slow-walked it and ultimately denied their request. Then they sued in Wyoming and in the Tenth Circuit, arguing that they were entitled to a master account as a matter of right. I participated in that litigation just as an amicus. I weighed in on the side of the Kansas City Fed on that.

In that sense, it was a sort of interdepartment dispute in some ways because my colleague, Peter Conti-Brown—Peter, who you’ve done the podcast with—he weighed in on behalf of Custodia’s case, arguing that they were entitled to a master account as a right. We’re still good friends, but one department in Wharton speaking on both sides of this question of whether Custodia was entitled to a master account access or not.

Beckworth: Let no one say that there isn’t representation from both sides at Wharton. We have people speaking from both perspectives. Yes, but Custodia is probably the most interesting and probably best-known case, attracted a lot of attention. Just to go back and highlight this, this is a Wyoming specially purposed depository institution. It’s a state-chartered institution, a fintech company. They asked for an account back in 2020, the same time as Kraken. The irony, coming back to the Kraken point—Kraken, they got one. They’ve been silent. They’ve been a long time. Five of them in six years here.

Zaring: Really slow.

Beckworth: Yes, really slow, but Custodia’s been the one that keeps making all the noise, going to court. Kraken’s been quietly under the radar, and boom, it got it. This can’t be something that Custodia was excited to see happen, but nonetheless, it has happened. 

Again, just to go back and trace some of these steps out: You mentioned this already, but they apply in 2020. They’re a fintech company, they have a special state charter, and it takes forever for the Kansas City Fed to actually recognize. Eventually, as you mentioned, they go to court to get it disclosed. I believe the district court said no. The Tenth Circuit said no. Then they did some appeal, some process. The Tenth Circuit said no again. The next step would be the Supreme Court. Is that right, if they really wanted to push this?

Zaring: That’s right. They tried to take the adverse decision of the Tenth Circuit en banc, which is what lawyers say when they mean every judge on the Tenth Circuit, rather than just three of them—

Beckworth: Oh, okay, that’s what it means.

Zaring: —would consider Custodia’s appeal. This is inside baseball, but the Tenth Circuit rarely ever goes en banc. That was a tough ask, and indeed, they decided not to do so. It’s the Supreme Court or bust for Custodia, though they may be able to ask themselves, “Will we be eligible for a master account if Kraken eventually got one under the new Fed regime?” Maybe they can apply as a Tier 3 institution, like Kraken. They’re pretty similar businesses, both crypto-facing, Wyoming, special-purpose depository institutions. Custodia may think, “Let’s not spend all that money on a Supreme Court Hail Mary. Let’s see if we can go the Kraken route and get access to a master account under the new thinking at the Fed.”

Beckworth: Yes, it seems like that’d be the straightest path ahead. It’s just, “Take this new regime that’s being implemented.” Of course, there’s going to be challenges to this. I know the Bank Policy Institute’s not thrilled about these skinny Fed master accounts. We’ll come to that in a minute. One last question on the legal side, since you’re a legal scholar, I heard some people make a big deal about the fact that it was seven to three on the Tenth Circuit.

Like, “Oh, there’s three who were supportive.” That sends a loud signal if you were to pursue. Now, maybe they won’t because it’d be cheaper just to go straight with the path you outlined, but if they were to appeal it, does seven to three matter like I’ve heard some people say?

Zaring: It’s not nothing. One of the things that the Supreme Court is looking for is a circuit split. That’s the easiest way to get there, to say, “Look, they’re doing it differently in the Tenth Circuit than they are in the Ninth Circuit, than they are in the Second Circuit,” and that’s your fastest route to certiorari. So far, the Fed’s got a pretty good record of litigating and winning these master accounts cases, so Custodia doesn’t really have a circuit split it can point to.

This is one of the reasons why you get these sometimes dissents or dissentals, they’re sometimes called, on en banc things, in that it puts the Supreme Court on notice that, “Look, there’s a lot of judges in the lower courts that looked at this and think that there’s a problem here.” Sometimes for important cases, the Supreme Court won’t wait for that split to develop, but will say, “Look, this is an important case. We think the lower court got it wrong. We think so because the dissental, the three judges you would hear en banc are pretty persuasive.”

Judge Tymkovich, a well-respected judge, dissented on the three-panel decision, he thought that they should get access to a master account. All of that is stuff that is marginally helpful when it comes to getting the Supreme Court to hear a case, but isn’t the gold standard of the Ninth Circuit is doing this differently. We need to create a unit. We need to create a uniform national standard.

Beckworth: Okay. We’ll wait and see what Custodia does. It’ll be interesting to follow since this has been a long journey for them. The irony is it was the Kansas City Federal Reserve Bank that denied them, but then said yes to Kraken. I don’t know, that’s like rubbing salt in the wound, it seems like, at least from this perspective.

Zaring: I can imagine Custodia’s executives must be thinking, “What on earth?” This is something that actually has a rich and not that healthy tradition in financial regulation, is there’s always this concern that if you come after your supervisors, you try to vindicate your day in court, that they’ll take it out on you next time, that it’s not worth the candle because they can enact reprisals on you.

It’s not obvious that financial regulators could do that to a fintech like Custodia, but now they’re sitting there without one of these master accounts and seeing one of their competitors get one. They must be pretty worried about that, I would imagine, or asking themselves, “Wait a second, is this because we sued or what’s going on here?”

Beckworth: It could be that, or it could also be, to be charitable to the Kansas City Fed, maybe they got a new president and they’re like, “Look, it’s been a minefield. Let’s just start with a clean slate. Let’s say yes to this one firm that has applied, that has waited patiently. Let’s see what happens.” Maybe the Kansas City Fed is the sandbox for the rest of the Federal Reserve System. Other banks are looking on and, “Okay, let’s see what you guys do.” It’ll be fun to watch.

David, as you know, the plot thickens. Just to flesh this story out, because this sounds like a boring story on the surface, but actually it’s full of drama. We’ve already touched on some of it, but what made this interesting, I think really interesting, is the story of Reserve Trust Bank, which I believe in 2018 got a Fed master account. At least the allegations were that a former Fed governor had joined the board and then got the application past the finish line. 

Then Senator Pat Toomey, who’s been on the podcast, he noticed this, as well as Custodia. I think Custodia made a big deal about this as well. He pushed hard when this person, Sarah Bloom Raskin, she was going to be a governor, I believe under the Biden administration, he pushed her really hard on this. At some point, he pushed her hard on this. This led to a lot of commotion. One thing that came out of it that was a win for everybody was the Fed had to disclose—he got it passed into law, but I think all this commotion built the momentum to get into a spending bill. The Fed has to disclose the database of all the people who’ve applied or have a Fed master account.

Zaring: That’s right. Transparency is always welcome. Now there is some transparency, at least with regard to who has this and who doesn’t, so that is something. Yes, when I think about what led to all this, I think really what we’re talking about here is the rise of the fintech industry, financial technology firms, which want to offer banking-like services, but do so without necessarily all the rigor of bank regulations.

In some ways, that’s a reasonable goal if the fintechs end up holding customer money and taking care of it in a way similar to the way that a bank might. If a fintech is a customer acquisition service for a bank that will work with the fintech or partner with the fintech, then I think depositors and financial stability types don’t have much to worry about. But if fintechs are a whole separate business that basically offer banking services without complying with safety and soundness banking regulations, then you could imagine that introduces a lot of risk to the system, a lot of risks that consumers who patronize these fintechs might not be aware of. That’s the debate. “What are fintechs and how should we regulate them?”

The rise of the fintechs led Obama’s comptroller of the currency, Tom Curry, to come up with this idea for a fintech charter, which would be a way that fintechs could be regulated by OCC and get the benefits of nationwide regulation and maybe preemption of state consumer protection laws and the requirements of state money transmitter licenses. The Trump administration, their first comptroller of the currency, seemed to be totally fine with this, but no fintech has applied for a fintech charter. They’ve been scared about the legality of the program and maybe the expense.

A bunch of states sued OCC over the fintech charter. That’s the first litigation that I participated in in a federal appellate court in New York, the Second Circuit. The Second Circuit decided, “Wait, wait, wait, we don’t need to decide whether the OCC has the power to charter fintechs or doesn’t. Let’s wait until we have an actual charter application that’s being granted, and then we’ll decide does the OCC have the power to do this or not.”

They tossed that litigation aside and that’s where the fintech charter stands. The Biden OCC didn’t seem interested in approving a fintech charter from that office. We still have this program that’s been in existence since 2014 that no one has applied to take up. Instead, fintechs are often turning to trust charters.

Then, now, with Kraken, and with the skinny charter proposal of Governor Waller, they’re maybe going to wait and see if they can get access to the Fed’s payment rails, and maybe that’ll be enough for them, that they won’t need some full federal charter, but rather payments access that makes transacting cheap, fast for them, and avoids the costs of partnering with a correspondent bank that already is using the Fed’s payment rails.

Skinny Charters

Beckworth: That’s a nice transition into your paper. Where we are currently is these fintech companies or other firms like them, they’re doing two things. They’re reaching for an OCC trust charter, and then combining that or using that as a way to get into a skinny Fed master account, because you still have to be some kind of depository institution that’s recognized under the Federal Reserve Act. Those two things are working together, although they may be challenged. 

You have a paper that outlines a bold vision for what really needs to be done. I had Dan Awrey on the show, and he goes like, “Yes, they’re really doing legal gymnastics to get this thing through. The OCC trust charter and the Fed skinny master accounts, they really need something bolder, an actual change in law, which I believe you’ve also suggested too.” Again, your paper is titled “Skinny Charters: Rebuilding the Banking Regulatory Perimeter.” Tell us about the arguments you make in there and what you would like to see be the final solution to this tension we see in the industry.

Zaring: In that paper, I talk about something that people sometimes worry about quite a bit. I’m a little less worried than maybe some others are about the separation of banking and commerce. The idea here is we don’t want to let a bank run a factory. By the same token, we don’t want a factory to end up providing banking services to their clients. The concern is once you get a banking charter, you should only engage in the business of banking, which I guess the OCC has defined as three things: You take deposits, you make loans, and you handle payments.

The old conventional wisdom is if you’re doing those things, you’re a bank and you need a banking charter. If you’re doing something else, then you don’t need a banking charter, and you can go get a Delaware corporate charter and do whatever you want to do in business, but you don’t need to go to a federal banking regulator to do that. Just to make the bottom-line upfront point, I don’t see why you couldn’t offer a series of bespoke skinny charters, a full charter for banks, which require a lot of federal regulation.

The problem with banks is It’s a Wonderful Life problem of the loans can be the way the banks finance themselves through deposits, can leave at any moment, and yet they’re using the deposits to fund loans, which can’t be recalled at any moment, maybe for a home mortgage would last 30 years or for a loan to a business might last multiple years. This is all well known to banking scholars that the lending is done long and the borrowing is done short, and that’s a so-called maturity mismatch.

If you want to be in the business of banking, maybe you need to have somebody looking at both your lending decisions and somebody worrying about deposit insurance to ensure that your depositors are protected, and if they’re providing you with insurance, then they’re going to want to make sure you’re not taking big risks. That’s the regulatory scheme. That’s why we have a pretty heavily regulated banking system where you have the FDIC and other regulators, state regulators, federal regulators, if you’re looking at a national bank, coming in to make sure that these banks are safe and sound.

I think that the federal regulators could offer to split their charters as new businesses do some but not all in the business of banking. A firm like PayPal, not making loans, not really taking deposits, though sometimes people leave money in their PayPal accounts, but definitely trying to process payments instantaneously, they might love to have access to the Fed’s payment rails, and so maybe they should be able to get a payments charter.

Or you can think of a lending firm like a peer-to-peer lender, not taking deposits, or private credit maybe is an example of this, financing lending by going out and raising money from investors, maybe a lending charter would be a way to get them out of burdensome state-by-state regulation if they’re lending on a nationwide basis. Or maybe a deposit charter. That looks like a trust account. We might have something like that. There, the idea is a bank or maybe even a nonbank could take your money and not lend it out and just custody it. Maybe secure it against Treasuries and make a little bit of interest that way. Not being a lender, maybe there’s some room for a deposit account.

I think arguably, a trust charter is like a deposit account. A trust charter is the idea that we’re going to take your assets and we take on a fiduciary obligation to make sure that those assets are prudently maintained, but we’re not going to lend them out and have the maturity mismatch risk of a bank. That’s what a charter does. Arguably, that’s something like a deposits charter. It says, “We collect money. We promise we’ll give it back,” and it just sits on our balance sheet until you ask for it back.

That was a pretty lengthy bottom line up front. That’s the idea. It’s that right now we have one charter and it only goes to banks, but there’s all these new entrants. We like competition. We like new entrants and new business models. Maybe there’s room for bespoke charters for firms that want to do some but not all of the business of banking and get the benefits of a nationwide market with a nationwide regulator when they’re trying to do exactly that.

Beckworth: Would you like to see this done through changes in the law, as opposed to trying to wiggle in through existing charters and existing law?

Zaring: Yes, my view is that the fintech charter is something within OCC’s powers, that there’s nothing magical about the OCC’s definition, which doesn’t really come clearly through the National Banking Act, that a bank must take deposits, make loans, and process payments. In my view, Congress doesn’t need to act. The OCC can act to create that kind of skinny charter. If the OCC can act to create that kind of skinny charter, then why not other kinds of charters? Or the Fed’s proposal, which is not a charter, but master account access to the payment rails, which is as good as a payments charter, but it doesn’t come with the sustained oversight that you sometimes see in federal banking regulation.

Beckworth: You would be fine then with what they’re doing, the direction they’re going. Maybe some small refinements here and there, but you’d use the existing laws, existing institutions, and just push through?

Zaring: Yes. I should say that I’m not sure that our friends in the crypto industry and other financial technology interests would totally agree with me on that. We’ve got the Stablecoin Act, which I don’t think we need to talk about, but the CLARITY Act might create some sort of chartering or licensing provision which would allow crypto firms to do business. Maybe they think it’s going to take Congress and not the regulators to make room for certain kinds of new firms like crypto firms. I don’t take a strong position on that, but I think that the banking regulators have a lot of authority and probably have the authority to divide up the charters if they really want to.

Beckworth: Okay, fair enough. I bring that up because Dan Awrey wanted to see actual explicit legislation that would clearly define—but you’re saying, “Let’s work with what we got,” which may be a very pragmatic way to do this because it is hard to pass laws in the US, especially ones like this.

Zaring: No, I agree. You always worry about it. Boy, I’ve been keeping an eye on how hard it’s been to get the CLARITY Act through, a real priority of a bunch of legislators. It may not happen. Boy, it’s hard to pass legislation. That said, it’s always better if Congress endorses a practice rather than the regulators, especially these days with people really worried about runaway regulators. There are some advantages to congressional support for a new chartering program.

Legally, I think the Fed’s on pretty solid ground in its will to offer master account payments to nontraditional financial institutions. I think the OCC could have done that fintech charter. If it ever grants one, if it ever gets an application, I think it’ll be okay if they decide to grant it.

Beckworth: That is so interesting. I was not aware of these fintech charters at OCC. I was aware of the trust charters because those are popular. Fintechs are adopting the trust charters like they’re going out of style, but they’re ignoring the actual fintech charter themselves.

Zaring: Yes. They don’t want to go there, but they know the trust charters are legal and have been around for a century or so. That gives them some advantages when it comes to holding deposits, but it doesn’t necessarily get them master account access under the Fed’s framework. Trust charters might get you part of what you want, but it’s possible it won’t get them everything that you want.

For what it’s worth, some of these financial technology firms are out there going and buying banks, tiny little national banks which aren’t doing much. LendingTree did this with Radius Bank. Sometimes the CEO of the fintech firm will go out and buy a bank, a sleepy bank, and get a bank charter that way. That’s the other way they do it, a sort of entry in through M&A. 

Beckworth: Clever, very clever. Part of the pushback that you get from trying to pass a bill or even having these conversations is the established industry. Banks don’t like to see this competition. I gave a presentation to some people who were involved with bank regulation, and they had a hard time processing the possibility that anything other than the established banking model was the way for payments and credit creation, and all these different venues come together, as opposed to why not just have a firm that does just payments? Why can’t you unbundle these things? In their perspective, “It’s taken hundreds of years to reach this equilibrium.” In fact, one told me, “This is the optimal way to do things. We’ve learned this is the optimal way.” I was like, “Really?” Have you had that pushback as well, like, “What are you even talking about this? We have a model that works.”

Zaring: In my view, the reason for a full-fat banking charter is to deal with full-fat banks because what you’re worried about is the maturity mismatch problem. The problem that depositors can run on the bank, and in the case of the financial crisis, a housing crisis will affect a bunch of lenders in the same way, all at once. The quality of their assets will go down, and so their assets will go down in value, and those two problems seem quite related to me.

Finance through short-run deposits and lend long to borrowers. That’s a risky proposition, inherently risky, and financial regulation and the federal perfectedness—no, it’s not just federal—but I guess the perfectness of the banking charter, there’s a little tongue in cheek, but they do a great job. It’s about dealing with the risks posed by that thing. But processing payments safely doesn’t require that careful attention to loan quality and deposit runnability.

I don’t quite understand why a payments charter or access to the payments accounts needs the full-bore federal or state supervision that banks have to face, because I just don’t think that a payments company is doing something as risky as what a bank company is doing. That’s why for that payment charter alone, I just see the cost and benefits as different. By the same token, if what you want to do is take deposits and custody them, then there ought to be a charter for you, which doesn’t require a bunch of people to look at your loan portfolio because you don’t have one.

That’s my view is that different kinds of businesses pose different kind of risks and full-on banking regulation is appropriate for people engaged in that or firms engaged in that sort of maturity mismatch.

Beckworth: I’m guessing based on what you’ve just said, that you’d be comfortable with any entity that wants to go into the payment space, as long as they’re not doing intermediation and creating credit, as long as they’re strictly doing payments. We already have stablecoins, at least in the GENIUS Act, is supposed to be doing that. Then there’s issues to work out still with that legislation. What about other things?

You mentioned PayPal, but what about, let’s say, Starbucks? Supposedly, I’ve read these stories, they have more money on debit cards than many banks do. They’re a payment provider, effectively. Or how about even Walmart? Walmart applied, I believe, in the past for a bank charter. Would you feel comfortable with these types of retailers, as long as they were just doing payments and nothing else, no intermediation, would you be comfortable with them participating?

Zaring: I wouldn’t have a problem if Walmart set up its own payment system, and you could imagine there being a demand for that kind of thing. I would part ways with the community or the large banks, which I don’t think would welcome that kind of competition, but no, no, competition can be a good thing.

To me, what is surprising about Walmart is, and I talk about this a little bit, so in 2006, they want to get an industrial loan corporation charter. That’s an obscure kind of charter, which meant that you could be a nonbank holding company and own a bank subsidiary and not have to register with the Federal Reserve and be regulated by it. That’s what an ILC does. The idea was Walmart was going to own a bank, an industrial loan company that would have the powers of a bank, and that it would provide banking services for its clients.

To get that, you got to get the state of Utah to sign off on your ILC charter, and then you have to get deposit insurance from the FDIC. Walmart’s application for deposit insurance was ultimately rejected. The banking industry, I think, reacted to Walmart’s proposal to get a banking charter with real concern and a strong argument that this ends the separation of banking and commerce. We want banking and commerce to be separate. We don’t want banks to be doing commerce and commercial firms to be doing banking. I’ve never really understood the interest in that. There’s a political economy story that banks will get too big if they can do everything, including nonbanking activities. I’m not so sure about what would happen.

Anyway, Walmart, they gave up. Or did they? Right now, Walmart has money centers in half of its superstores. It’s got a ton of debit cards that it issues to its customers that have given them access to the financial system. Walmart, in some ways, has done a lot to address the problems of debanking by offering Walmart debit cards, Walmart money centers, which it advertises, one-stop shops. Direct deposit of your payroll, Walmart can help you out there.

It seems to me that if you walk into a Walmart or even a large grocery store in the suburbs, you’ll often see a bank right there or a money center. This separation of banking and commerce, which people have been worried about, I’m not sure that commercial firms have decided that they have got to stay out of the business of banking entirely, or if instead, in fact, commercial firms are getting into the business of banking in a bunch of surprising ways, very intentionally in the case of Walmart, and less intentionally in the case of Starbucks or airline frequent flyer miles.

The idea is that these guys are storing tons of value of individuals like you and me with gift cards and rewards miles. I don’t want to turn this into a dorm room conversation at 4:00 a.m. or whatever, but I do think it’s a good call. Are we sure that banking hasn’t been disintermediated by that kind of thing in addition to the risks of Walmart actually opening up a bank?

Beckworth: Those are great points. Again, the key is we don’t want Walmart or Starbucks to be making loans or taking on the risk, the credit risk that a bank would do. That is something distinct. If they’re just doing payments, it seems it would be something entirely different. That’s a great point, and I hadn’t thought of it, you brought up about grocery stores have effectively been doing banking for some time. You can cash a check there.

What is my ATM in my real world? It’s my grocery store. It’s Walmart. I rarely do take cash out, but when I do, I’m shopping, I need to maybe get some cash out to buy some Girl Scout cookies or something, I’ll do it there. I don’t go to a bank ATM. I can’t remember the last time I’ve actually stopped by a bank ATM. It’s been some time.

Zaring: I started my career at the Department of Justice. That was the first time I was earning somewhat real money. I’m a member of the Justice Federal Credit Union, which doesn’t even have an office in the state of Pennsylvania. I’ve been banking with them for a couple of decades. I can’t remember the last time I’ve set foot in a JFCU branch. It probably has been a couple of decades.

Beckworth: One last thing on this, David, as we move forward. There was a recent development, and this may not amount to much because it’s two House members. The House members are Representative Young Kim, a Republican from California, and Sam Liccardo, a Democrat from California. They’ve proposed something called the PACE Act. It’s a bipartisan bill. That’s the only reason I would bring this up because there’s many bills that are proposed that go nowhere.

This one’s called the PACE Act. If I understand it correctly, it would change the law. It would make it easier for firms to become payment providers. It would give them access to the payment rails of the Fed, give them access to FedNow, FedACH, Fedwire. It would set conditions and rules and regulations. It would supposedly complement the GENIUS Act. It would make it much easier to go on-ramp, off-ramp for, say, stablecoins and such. I know it’s just been proposed, but just to put it on people’s radar, what are your thoughts on it? Does it do anything more that’s not already being done?

Zaring: I’m interested in the PACE Act. Basically, it looks like it’s only eligible for payment providers who have at least 40 state money transmitter licenses. What we’re talking about are the big guys—PayPal, we’ve mentioned, Cash App, Apple Pay, Google Pay maybe. What they would get is not quite a charter from OCC, but some sort of license from OCC that would enable them to use the Fed’s payment rails. There’s real restrictions: They have to custody the money, they can’t lend out money that they’re holding for payments customers or whatever. They can’t act like a bank, they have to be a payments provider only.

They would preempt state regulation, they would get an OCC license, and they would get access to the Fed’s payment rails. I was interested to see that it’s bipartisan. It looks to me like this does something somewhat similar to the master account access proposal that the Fed’s doing, but would be congressionally blessed legislation. Less legal risk that you could do there, that OCC is acting in contravention of its chartering powers. It would get this explicit additional quasi-chartering power, and a congressional blessing that these payments processors ought to be able to use the Fed’s payment rails.

In that sense, it offers something to payments providers that the Waller proposal doesn’t. We’ll see. I did see it’s bipartisan with the Democrats and Republicans. It’s easy to introduce legislation in Congress, it’s hard to pass it, but that’s how I see it doing differently.

Beckworth: It’ll be interesting to follow this along, the payments development, Fed master accounts, stablecoins, all this good stuff. We’ll come back and revisit it sometime in the future. 

How to Govern the Fed

Now, I want to segue into another legal issue facing the Fed, and that is, how do we govern the Fed? How is the Fed accountable? Today, we are recording in April, the 24th, and we just learned that the Department of Justice is dropping its case, its criminal proceedings against Jerome Powell. They are going to send it to the inspector general at the Federal Reserve who’s not an independent IG. They report to the Fed chair.

It effectively looks like they’re killing us so that Senator Thom Tillis will approve Kevin Warsh and we’ll get a new Fed chair in. This has been a part of a story that we’ve been following for some time. President Trump has been going after governors. Lisa Cook is going after Jerome Powell. There’s been some concern about all of this. Although, I’ve always been a little less worried about this because the FOMC is a committee. It’s not a one-person show. It’s a little harder to get things done on a committee.

There have always been questions about, who oversees the Fed? How should we think about them? I’ve had guests on the show, David, who’ve said, “Hey, we need to pull banking regulation out of the Fed because, you know what, the OCC, the FDIC, they report more to Congress and there’s certain things they have to do that the Fed doesn’t have to do.” You’ve made the case actually that the Federal Reserve as well as some other financial agencies are different than regular agencies. You have this Iowa Law Review article from 2023, “The Corporatist Foundations of Financial Regulation.” This really helps us think about how the Fed is different. Walk us through that.

Zaring: I’d be happy to. I’ll give you the negative case, the way that banking regulation is not like other kinds of regulation. Then the positive case is, what is banking regulation? My answer is, it’s corporatist. That has a particularized meaning that maybe we can explore. Usually, a lot of people would say the way regulation works in the United States is through this—I’m using the formulation of Bob Kagan at Berkeley—adversarial legalism.

When a government regulator wants to do something, they make a proposal, they receive comment on the proposal, then they promulgate the proposal, and then they’re subject to suit in court under the Administrative Procedure Act. By the way, if the president doesn’t like what the regulator’s doing, then the president can remove some of the members of the regulator and put in people who he or she likes better. If Congress doesn’t like what the regulator’s doing, then Congress can limit appropriations, use the power of the purse to bring the regulator into line as well as passing other statutes.

That’s not the only thing. I think that the OMB, OIRA, is another way in which the White House reviews regulators ordinarily because any regulator that wants to pass a major rule has to get OMB, Office of Management and Budget, approval, to promulgate and then ultimately, to issue that rule, to propose and then ultimately issue that rule. Congressional supervision, presidential supervision through a couple of channels, removal and OIRA review, OMB review, and judicial supervision through the Administrative Procedure Act.

What I think is interesting about the Fed and the other banking regulators is essentially none of those rules apply. The agencies are self-funded, so they don’t need to get a congressional appropriation. The OCC and the FDIC are funded with fees on banks that they examine, and the Fed is funded through seigniorage mostly, but also their fees for being a member of the Federal Reserve System or a holding company or whatever.

Congress doesn’t really supervise these agencies, in theory, though that’s what the Cook litigation is all about. The president can’t remove independent regulators, or at least until the second Trump administration, presidents never removed regulators of independent agencies who had for-cause removal protections. Then banks, we talked a little earlier about how sometimes they’re worried about reprisals.

It’s not clear whether that’s the problem or if something else is the problem, but when I wrote that article, which was published in 2023, I was definitely right about this, banks never see their regulators. You’ve got this set of regulators out there who are not subject to any of the usual guardrails that apply to the Environmental Protection Agency, the Securities and Exchange Commission, tons of other regulators who live in this world of, “We got to fight for our appropriation, we got to worry about what the president thinks of how we’re doing in policymaking, we got to pass OIRA review, and we got to survive judicial review once our stuff is litigated.” Bank regulators don’t have to worry about any of that.

That is weird. That suggests to me that the usual rules of adversarial legalism apply in some places, but weirdly don’t apply in banking regulation. If that’s the case, what do we have? What I think we have is a more corporatist kind of regulation. Corporatist regulation doesn’t always get lots of praise by good governance types, though it’s not necessarily a terrible way to do things. Corporatist regulation is the idea that we bring all the stakeholders in a regulated industry to the table and we come up with an approach that works for everybody.

The classic example of corporatist regulation is German industrialization. In Germany, the government, the unions, and the firms all come to some common understanding of what it is they want to do and how they want to do it. That’s the way that regulatory policy gets made, through stakeholder negotiation rather than through adversarial legalism. My suggestion is that is not a terrible way of thinking about what’s going on with the Fed and the other banking regulators, that they are responsive to industry and work closely with industry. The supervisors are on top of banks, inside banks often. The consumer-facing or labor-facing side is a little less obvious.

This sort of relationship where it’s a stakeholder-negotiated relationship is not totally uncommon even in the United States. I think you could look at defense contractors and say, “That’s corporatist. They have one client and the government has one supplier and they have to work together.” Utility regulation, I know you’ve had on people who are interested in comparing banks and utilities, but that’s certainly something that’s out there in the legal scholarship. They also have a corporatist approach. You’re not going to kneecap a utility and put it out of business. They can’t throw all their repayers off. “No water for you. You failed to pay your water bill last month.” This, “We’re in it together,” stakeholder relationship, I think, exists in some parts of the American economy. I think that might be a good way of thinking about banking regulation as well.

Beckworth: That is so interesting. I remember a few years back, there was a term, I forget the name of the term, but Elizabeth Warren was promoting some version of stakeholder capitalism in the US. We needed to be more like the Germans. I know there was pushback against it, but what you’re telling me, some parts of the economy are already there. We’re very German in our banking sector already.

Zaring: Yes, for better or worse. I admit, I’m not sure exactly how to think about it, but it looks to me like banking regulation is quite collaborative, as is defense procurement. I know that Elizabeth Warren statute was going to create a federal charter for big firms, and everybody would have to go get a federal charter. I’m pretty opposed to that idea. She talks a lot about crony capitalism. I’m not going to say there’s no cronyism in any part of financial regulation. I think she’s onto something there.

Beckworth: I had a guest on some time ago, Sam Hammond. We talked about this proposal for this federal charter. He said the biggest challenge is that it’s a cultural thing. You can’t impose this from the top onto, say, a company like Apple. Silicon Valley, it’s very cutthroat capitalism. Steve Jobs comes in, he fires the entire board. That turnover, that cutthroat, ruthless efficiency would not work with the stakeholder capitalism model. Some industries like banking, which is very protected, slow-moving, lethargic, maybe it does work because there’s a different dynamism to it. It’s interesting to make that connection I hadn’t thought of before.

Zaring: No, I agree. There’s something interesting about that. I think you’re absolutely right. For most businesses, we don’t want safety-and-soundness-style oversight for a Silicon Valley startup. Cut a deal, try to get financing, try to build a product. If it works, it works. If it doesn’t, then go out of business. That’s a totally appropriate way to run large chunks of the economy. It promotes innovation. It keeps regulators off the case and has firms looking more to business judgment and business judgment protections rather than to the courts and the regulators for, “What can I do? What is permitted? What is not permitted?”

That’s just not the way banking regulation works. There’s lots of time where supervisors come in and tell the bank to knock it off. I’ve been interested in looking at these chartering activities. It makes sense, but one of the things that the federal charterers want to know is, “What’s your business plan? Who is on your board of directors?” In that sense, they’re acting as consultants when they’re assessing your initial application. They’re saying, “Is this bank going to make money? If the answer is yes, then we’ll charter it. If we’re not sure the answer is yes, then maybe we won’t.”

Trying to figure out an answer to that question, they’re often providing advice. “Have you diversified your loan portfolio enough? Are you going to be too exposed to agricultural banking if you set up in this part of the country?” It’s just a different kind of relationship than the relationship that you’d expect from somebody who’s trying to figure out if you’re polluting too much or not.

Beckworth: Let’s take this thinking as corporatist model or view of what’s happening in banking industry, and let’s apply it to the Supreme Court case, I believe, of last year. It was for the National Labor Relations Board and some other agency where Trump fired a bunch of head people, the regulators. Then in a footnote, they said, “The Federal Reserve is exempt from this because they’re special.” They cited the Second Bank of the United States. Now, all of you legal scholars are rolling your eyes, “This is terrible reasoning. It’s not the way to motivate it.”

It sounds like what you outlined, this corporatist model, might be a better way to motivate this. Look, they’re just a different model altogether than some of these other agencies that maybe regulate, like the Environmental Protection Agency, for example. Would that be one way to get better reasoning for the decision they made there?

Zaring: That might well be, and I’d love it if I could get the Supreme Court to read... 

Beckworth: They cited you, yes.

Zaring: Now we’re talking. I think that one of the questions with regard to these regulators who have been removed by President Trump, there’s been this weird aspect of independent agencies, which is that in some cases, and this is the case in financial regulation, you could have a situation if you can’t remove a regulator for any reason or no reason at all if the regulator has for-cause removal protection.

Then you get this weird situation, which we had briefly during the Biden administration, where the person running the Consumer Financial Protection Bureau is from the other party as the president, or the Vice Chair of Supervision. There was a possibility before Vice Chair Barr resigned his vice chairmanship and remained as a governor on the board, but left the Vice Chair for Supervision Office open for Michelle Bowman. The president wouldn’t have appointed the person carrying out his bank policy and supervision and examination priorities or his consumer protection priorities.

Kathy Kraninger is the head of the CFPB during the first year of the Biden administration, even though President Trump appointed her. She is the single head for a term of five years, and a five-year term hadn’t run out. Biden was stuck with her, or was stuck with her until the Supreme Court said, “You can’t have a single head who’s got for-cause removal protection.” Therefore, what the CFPB has done would be unconstitutional unless the president can remove the head of the CFPB for any reason. The day that decision came down, that was the day that Biden removed Kraninger from the CFPB.

I guess what I’m saying is you get this weird situation with removal protection in financial regulation in most of instances where the president is elected to carry out a bunch of policy responsibilities and then can’t do or can’t require his subordinates to carry out the policy priorities that he wants to. In a corporate system, maybe the need to have presidential control or supervision is less prominent. As long as all the stakeholders agree on what banking regulation ought to look like, maybe that’s a reason to preserve the independence of, say, the Fed.

I’m not too persuaded by the originalist argument, but I think that’s not the way. I think Lisa Cook is likely to win her case, and she’s likely to win her case because of the existence of the First and Second Bank of the United States. A couple of my colleagues, law professors at Cornell and Virginia, wrote an article making the case here. We’ve had independent banks chartered by Congress. We had it at the founding, and so therefore maybe the Federal Reserve is like that now. There’s a bunch of ways in which it’s not like the First or Second Reserve Bank of the United States, but I’m betting that the court will conclude close enough.

The Bank of France and the Bank of England, they weren’t privatized until the 20th century, so they were private banks just like the First and Second Bank of the United States. Nobody says, “Oh, well, they’re not central banks.” They are central banks. They’re the central Bank of England, the central bank of the United States. Maybe the Fed could have had some private banking antecedents before it was set up that suggest that it should be treated differently than the Environmental Protection Agency, which didn’t have any sort of private antecedent before Congress created it in 1970.

Beckworth: One last question on this corporatist model. You note it applies to all the federal bank regulators, not just the Fed, but the Fed is the one that gets singled out as the independent agency. It’s the one that gets the footnote in that Supreme Court decision. Should that same deferral be applied to the OCC and the FDIC that’s being applied to the Fed? If they are all corporatist models, should these agencies be more independent on the same level as the Fed?

Zaring: The corporatist account might suggest that they should get the similar kind of independence. Congress doesn’t have to go down this route. This isn’t required by the Constitution or anything. If Congress is happy with the corporatist model, financial regulation, maybe that’s a reason to keep financial regulators independent and with less of the ability of the president to remove them.

I confess that I’m actually more persuaded by your other guests who have said, “Maybe we ought to strip independence, supervision and regulation out of the Fed, and make the Fed, the OCC, and the FDIC, make those officials removable by the president for their supervisory stuff. When it comes to monetary policy—and the Bank of the United States did help with monetary policy—there you really do want decision-makers who aren’t politicians, who aren’t likely to inflate to chase growth in the short term at some cost to the long-term expectations of investors and managers and businesses.”

I think there’s maybe something to that, that when banks are being supervised and regulated, they’re subject to presidential policymaking and they should be subject to electoral oversight. For monetary policy, there’s a good reason not to do that. I will say that if there’s a good reason not to do it in monetary policy that’s not based on original, “What were the founders thinking about?” then there may be good reasons to have independent agencies in a bunch of different places. But there’s, at the very least, a good reason to consider the independence of the Fed.

Beckworth: Just to be clear, in your article, you’re more observing that there is this corporatist model, you’re not necessarily endorsing it in some of these applications?

Zaring: Yes. David, your earlier analogy was spot on. They don’t have a Silicon Valley in Germany. Indeed, there’s a lot of Germans in Silicon Valley. The reason they went there is because they think there can’t be a Silicon Valley in Germany. They want their risk-taking ethos and the network you get from doing stuff in the United States where there’s not heavy corporatist oversight.

I’m inclined to agree with that, but if what you think is that banking is super dangerous and yet we’ve arrived at a world where Congress, the president, and the courts aren’t really checking what the Fed’s doing, then maybe it’s good enough if industry buy-in is sufficient, along with the Fed’s own regulatory priorities and concern that it could be blamed for a financial crisis. So it has a reason for its own high standards. Maybe that’s a cold comfort, but a second best that we can all live with when it comes to legitimacy, accountability, and stuff like that.

Beckworth: On that note, our time is up. Our guest today has been David Zaring. David, thank you so much for coming on the podcast.

Zaring: It’s a pleasure. Thanks so much for having me.

Beckworth: Macro Musings is produced by the Mercatus Center at George Mason University. Dive deeper into our research at mercatus.org/monetarypolicy. You can subscribe to the show on Apple Podcasts, Spotify, or your favorite podcast app. If you like this podcast, please consider giving us a rating and leaving a review. This helps other thoughtful people like you find the show. Find me on Twitter @DavidBeckworth, and follow the show @Macro_Musings.