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 Hi! Kiah here. The idea for today's essay came from my panel prep for Consumer Bankers Association’s Committee Summit on Sept. 23, which was moderated by Brian Fritzsche, CBA's associate general counsel, and also featured the inimitable Grovetta Gardineer. We talked about the "what, who and how" of banking, so you can see why I brushed up with this essay. HAPPENING TOMORROW!! Do you live in Nashville or have a cool coworker or friend in financial services who does? Do you/they work remotely or can stop by for a coworking day? Finity is hosting a Nashville coworking day and networking event on Oct. 7, and I would love to work alongside y’all! RSVP at that link. Spots to the coworking day are limited but still available. Was this email forwarded to you? Sponsored by Fifth Third Bank Adding new financial products shouldn’t mean adding a new banking partner and integration. What is a bank, and are they special?Banking is changing. So what makes a bank a bank? The Office of the Comptroller of the Currency has received 44 charter applications since January 2025 and approved 27. The Federal Deposit Insurance Corp. has approved deposit insurance applications for six companies over that same period of time. But this new breed of applicants often do not resemble the thousands of traditional commercial banks currently operating in the U.S. Many do not look like banks of yore or engage in the same business lines. Some of them focus on different payment instruments. Some have alleged that regulators have exceeded their authority to approve these applications. These charter types could increasingly indicate where financial services could go. They push at the boundaries of what it means to be a bank and what banks do. What’s so special about being a bank anyway? This is not the first time someone has written an essay asking and trying to answer that question. It's not even the first time I've written a piece in the same vein! Today, we’re diving into the annals of bank history to revisit the 1983 iconic essay, “Are Banks Special?” by Federal Reserve Bank of Minneapolis President E. Gerald Corrigan. A Time of ChangeAt the time of Corrigan’s essay, events of “an almost revolutionary character” brought rapid change for the financial services space through “market innovation and new sources of competition.” These challengers and competitors included the “growth of the commercial paper market, the thrift industry money market mutual funds (MMMFs), and the de facto trend toward ownership of banks by securities firms and commercial enterprises.” These changes in the industry and the available technology allowed firms to directly compete with banks by providing “‘bank-like’ services at a lower cost (or a higher rate of return) to the individual or corporate customer, thereby drawing business away from banking institutions.” This led to the perception “that banks' competitive position—and presumably their market share—has slipped” even as they carried “the extra burden of regulation on banks.” It's what led Corrigan to ask the central premise of the essay:
Corrigan determined that there are three functions banks perform that set them apart from all other institutions, financial or not. They are:
This is actually still true about commercial banks today! These functions interact with and complement each other; he wrote that “it is the relationship among them that best captures the essence of what makes banks special.” But it’s worth looking at Corrigan’s explanations of each function in light of how nonbanks, novel banks and de novos challenge the assumptions or encroach on the territory today. Banks offer transaction accounts.What makes a bank special is not that it makes loans. “Taken by itself, there is nothing unique or special about the asset side of a bank’s balance sheet,” he wrote. What makes a bank special is that they offer transaction accounts that are liquid, mobile and widely accepted to make payments in a way that greases the wheels of commerce.
Why don’t loans matter? Because, he wrote, the risk characteristics and nature of a bank’s assets are directly related and dependent on the bank's liabilities. The risk of maturity transformation isn’t that the assets have a long duration; it’s that the long-duration assets are funded by short-term deposits. The short-term, extremely liquid liabilities within a transaction account fund illiquid, longer-term assets. And those loans create more deposits. He wrote that a “contemporary definition” of a transaction account should focus on functional characteristics, rather than legal or regulatory distinctions. “If a financial asset satisfies the functional test of being payable on demand at par and readily transferable to a third party, it should—for those purposes—be a "transaction" balance.” What did this look like in 1983? Corrigan listed off “MMMFs, retail repurchase (RPs) agreements, customer credit balances with brokers, sweep accounts” that did not “at least in a technical sense, in fact possess the characteristics associated with the bank issued transaction account.” But “technology makes it possible to manage these financial assets in a way in which their ultimate dependence on a bank account is not apparent to the individual holder of the asset.” Money market mutual funds walked so Venmo could run — at least in this arena. Today, all sorts of nonbanks and novel banks offer accounts that, to customers, appear to satisfy this contemporary definition. Peer-to-peer payment services like PayPal, Venmo and Cash App all allow users to hold a balance in a wallet that is payable on demand and readily transferable. Stablecoins managed by national crypto trust banks and cryptocurrency also offer this functionality. It’s all thanks to the very technology that was taking root in the ‘80s, which even then was flattening the distinctions for end users between deposits in a bank account and funds in a nonbank wallet. If most customers interact with their bank online or on their phones, they will be less sensitive about sending, receiving and storing funds in nonbank firms that have apps and interfaces that look similar to a bank’s. It’s all an app on their smartphones at the end of the day. No wonder so many are confused about what is and isn’t a bank. It’s important that depositors believe their deposits in banks are readily available and accessible, so they conversely don’t pull them out all at once and cause a run. Deposit insurance and the discount window are uniquely available to banks to reinforce this capacity and bolster public confidence in banks broadly, he wrote. In good times, this doesn’t matter much. It matters a lot in bad times.
That takes us to the next reason why banks are special. Banks are the backup source of liquidity for all other institutionsIt is uncontroversial and boring to say banks are the primary source of liquidity for you, me, the companies we work for, the companies we buy things from, etc. That's true in good economics times as well bad ones. Corrigan observed that banks function as a backup — or a better word, a backstop — that greases the wheels of liquidity flowing throughout the economy. Even if a bank isn’t involved in providing liquidity, the existence of banks that provide financial services to these companies creates counterparty trust for them. Corrigan pointed out that it was “highly unlikely” that the broker-dealer and commercial paper markets, which Investopedia defines as “a financial marketplace where large, stable corporations and financial institutions issue and trade short-term, unsecured promissory notes to raise immediate cash,” “would function very well were it not for the presence of standby bank credit facilities obtained by those corporations that issue commercial paper.”
To that I say: Gerry, you would’ve marveled at the private credit space. While some have criticized its size, opacity or conversely argued its size is a net negative for banks that should’ve made those loans, it’s impossible to ignore the role that banks play as a senior lender to nonbank financial firms that then, down the line, make loans to customers. As Corrigan previously pointed out, making loans does not make banks special. But the ability to make loans during bad times does make them special. He wrote that banks can lend when liquidity is locking up because they can create deposits and access funds at the central bank to augment that liquidity. But this requires them to have exceptional judgment about credit quality, especially to borrowers in stressed periods. It’s not obvious how some of the new charter holders would perform in the role of backup providers of liquidity — if indeed, they would at all. My understanding of the national crypto trust banks that provide stablecoins is that it’s certainly a type of liquidity — it’s a payment instrument. But it’s not clear what happens in times of stress; we don’t have a lot of precedent here. How will holders of stablecoins behave: will they move funds into stablecoins, which should be backed by high-quality, short-term reserves, or out? How will the companies that issue them manage redemptions? If Circle became a backup provider of liquidity, who would they be providing the liquidity to? How would it keep liquidity going when it’s locking up? A Transmission Belt for Monetary PolicyOne thing that makes banks special is their direct relationship with the central bank and access to the discount window, which is facilitated through their master account. But Corrigan wrote that banks are, in some ways, forced to have a relationship with the central bank through regulatory reserve requirements. This connection means they’re positioned to be the “transmission belt” for the central bank and diffuse its actions and policies to the broader financial market and economy. Corrigan acknowledged it didn’t have to be this way: “neither monetary policy nor the payments mechanism are dependent on the relationship between reserves and the banking system.” There are other ways to conduct monetary policy and operate a payments system that didn’t “use bank reserves and the banking system in the way the U.S. system currently operates.” But if the U.S. wanted to opt for an alternate arrangement outside of this entangled relationship, it would require “major institutional changes and run the risk that they might not work as efficiently as the current framework or the possibility that they might not work at all,” he wrote.
What Is a Bank?Corrigan proposed that the three essential banking functions he listed should be segregated into “an identifiable class of institution,” which would be “functionally and intellectually” defined as a bank. Yes! That’s right. We are eight pages into an essay about whether banks are special, and Corrigan is just now defining what a bank is. But this framing is important: a bank is an entity that can do those three “special and unique functions.” He believed these entities should be treated differently — they should be treated as special — because these functions are “essential to the functioning of an efficient and safe financial and economic system.” The reason why banks needed to be defined, identified and segregated was underlined by the very financial innovation, competition and substitution happening in the 1980s. Even at that time, banks weren’t the only companies capable of providing these services; if banks didn’t provide them, another type of firm would. But refusing to segregate financial firms would mean that everyone got deposit insurance and access to the discount window, along with the supervisory and regulatory attaché, or no one would. In the past, tests like “a charter test to the functional test of issuing demand deposits and making commercial loans” had been used to define a bank, he wrote. But by the early 1980s, a satisfactory definition in existing statutes or regulations no longer seemed available. So he proposed a very simple definition of a bank:
He goes on to specify that the label of “bank” would apply to an entity that is eligible to issue transaction accounts, whether or not they choose to. Transaction accounts that he believed qualified included demand deposits, NOW accounts and share drafts; he was also open to money market demand accounts and money market mutual funds that allowed customers to write checks against the accounts. Institutions that meet this definition would qualify for deposit insurance, should have direct access to the discount window, be subject to reserve requirements, and have direct access to the Fed’s payment services. This definition in the 1980s would’ve made existing commercial banks, thrifts and credit unions all banks for his definition (my man wrote a footnote disclaiming the very broad and general use of the term “bank” for this essay), along with the nonbanks that were formed under the Bank Holding Company Act and industrial banks. (In another blow for trade groups, Corrigan wrote that industrial loan companies fall cleanly within his definition of a bank. But he does write about the separation or combination of banking and commerce as being an area of interest for policymakers!) Banking TodayCorrigan, of course, did not have the final say on what a bank was and what made them special. He wasn’t the president of the United States, or even the chairman of the Federal Reserve Board. He was a banker who ran two Federal Reserve Banks and was watching banking change: new entrants, new technology, new competitors. For being nearly 45 years old, his essay is surprisingly prescient. He was concerned about ownership, bank subsidiary powers and banking structure, which he goes on to write about in the essay and which I will leave to your further reading. In 1982, there were about 14,800 banks insured by the Federal Deposit Insurance Corp. (Side note: the graphic design of this summary of deposits report is amazing.) He may not have experienced truly nationwide banking, given that the Riegle-Neal Interstate Banking and Branching Efficiency Act was signed into law in 1994. He didn’t know that the 1999 repeal of Glass-Steagall by the Gramm-Leach-Bliley Act would allow investment and commercial banks to merge. He didn’t know that four decades from his essay, there would be a 71% decrease in FDIC-insured banks. He couldn’t have imagined P2P payment apps, banking as a service, cryptocurrency and stablecoins and all the innovations that came after his time. He couldn’t have imagined the fights and debates that would happen over what kind of company could receive a charter, how they might use that charter and what that says about the future of banking. But for all the ways he couldn’t have anticipated how deregulation and technology would change banking in 40 years, he wasn’t wrong to wonder what exactly made a bank “a bank.” FROM THE VAULT What’s on my mind and filling my time: 💬 Chatbot lingua franca: The Wall Street Journal wrote about how people are adopting the "prompt speak" words and phrases that the LLMs use: contrast framing, fawning feedback, punchy phrases. I obviously hate this. 💳 No more cheap flights?: An op-ed in The New York times by Mark Kahan, the vice chair and general counsel of Spirit Airlines from 1996 to 2006, argued recently airline credit cards "are messing up the whole industry" caught my eye. I'm not sure if I fully agree with him, but it's interesting how the credit card/miles partnerships between airlines and banks altered incentives and the options an airline would have. (Also there was a travel credit card ad when I opened this article to grab the link!) 🎙️ On Bank Nerd Corner: CBA President Lindsey Johnson joined me to talk about consumer sentiment versus the data, and what she's excited and worried about for 2027. 🛫 Catch me at: Money2020, Oct. 18-21, in Vegas baby! Ya girl will be moderating a couple of conversations, stay tuned for that. And make sure to sign up for Fintech Takes the Court on Oct. 18 and either play or spectate/commentate with me. AFC Policy Summit on Nov. 17 in Washington. Piper Sandler’s Balance Sheet Strategy Seminar on Dec. 7 in New York. 🎧 Bonus Podcast Rec: What happens when a risk-trained banker decides to automate his personal life? An agentic AI-powered family office. Episode 6 of Agent of Record, produced in partnership with Parlay Finance, features Patrick Slain, a banker and a builder who constructed a personal agentic system with more than 100 scheduled automations organized under a structured org chart. He explained to me and Alex how he designed these systems and leveraged his banker mentality, often seen as a source of institutional drag, to build in resiliency, redundancy, governance and security. Listen today!* *This rec is brought to you by one of our fantastic brand partners. Fun facts! In researching this piece, I learned that Corrigan, who stepped down as president of the New York Fed in 1993, married Cathy Minehan, who became the Boston Fed president in 1994 and served until 2007. I absolutely need the fictionalized retelling of this romance. Imagine the meet-cute. Was it over an FOMC meeting? (Catherine Leffert, my friend and cohost of the Closing Credits podcast, flatly texted me back “no.”) The break room at one of their respective Feds? Did they share a cab to the airport and both their flights were delayed? Who is writing this?! As always, thanks for reading. Let me know your thoughts on this and other ideas! - Kiah | ||||||||
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