Consumer Shadow Banks

Abstract

There is no risk-free way to engage in bank-like activities. Entities that take deposits, transmit money, or otherwise provide custody of funds all generally engage in maturity transformation, a process that turns short-term debts into longer-term investments. Maturity transformation is inherently dangerous. Firms that engage in these activities also face moral hazard, whereby they may act contrary to their customers' interests. Without government intervention and a backstop, institutions that engage in these activities are liable to run, harming their customers. For that reason, the government heavily regulates bank, serves as their lender of last resort, and provides their depositors with insurance. Scholars have long been wary of "shadow banks:" nonbanks that perform bank-like activities without the guardrails that protect bank depositors. 
Shadow banks are not just limited to the largest financial institutions, like those that helped exacerbate the great financial crisis. Retail consumers send and receive payments with P2P platforms, purchase and hold stablecoins, and make deposits in crypto and imitation banks-all of which require maturity transformation-without understanding these institutions' inherent instability and the risks of loss that they pose. Although consumers have seen runs, deposit insurance means they have likely never been harmed by one, and they do not understand the differences between their banks and the "consumer shadow banks" that perform the same or similar functions. 
In this paper, we argue that consumer shadow banks can be "abusive" and should be regulated by the Consumer Financial Protection Bureau (CFPB). Accordingly, we urge the CFPB to enact regulations providing minimum standards for their provision, including capital, liquidity, lending limits and limits on extending credit to insiders, safety and soundness standards, and stress testing where appropriate, and subject these firms to supervision.

Keywords: Shadow bank, Crypto, CFPB, stablecoin, money transmitters, imitation banks