Towards a Google Bank

July 6, 2010
Adam Ozimek has a bright idea:

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Adam Ozimek has a bright idea:

Allow any company to become a bank with a very minimal regulatory barrier if they do 100% reserves on deposits. This means people will know their money is there whenever they want it, which will make the “bank” safe from runs, which will eliminate the need for FDIC insurance or heavy handed regulation.

In principle, I like the idea of non-banks like Google and Wal-Mart being able to conduct banking-style services. It works fine in other countries, like the UK and Mexico, and in principle anything which increases competition in the banking sector should be good for consumers.

On the other hand, I don’t see any reason why these new banks should be less regulated than existing institutions. Indeed, in the first instance — the first two or three years of operation, say, while the model is still untested — I’d want much more regulation, even unto a complete ban on lending. And I’d certainly want these institutions to voluntarily submit to the oversight of the Consumer Financial Protection Bureau, even while they were under $10 billion in size.

It’s also worth asking exactly what Ozimek means by “100% reserves on deposits.” What counts as “reserves”? Would uninsured deposits at banks count? How about money market funds? Would they all need to be available on demand at par? And would the reserves count as the cash reserves of the parent company for accounting purposes? If so, could these banks ramp up against their current cash reserves without having to make any extra reserving actions at all, happily lending out everything they take in as deposits?

Even with strict controls, there are some interesting things which Google might be able to do in the payments space, including building payments functionality right into its Chrome browser and Android OS. Indeed, Google’s already moving in that direction without a banking license.

The reason that Ozimek wants loose regulation when it comes to these new entrants, of course, is that it’s much harder to do any kind of payments innovation when you’re part of a regulated institution. Which is why companies like Visa and Mastercard, even when they were owned by banks, weren’t actually banks themselves. But the problem is that if you want to encourage innovation, you also have to encourage failure. So the question I have for Ozimek is this: do you want to see a payments system fail? And how do you build a system which can cope with such a failure, if you’re not keeping a close regulatory eye on it?


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