Report: ‘Imitation banks’ should be regulated like banks

Regulators should use their authorities to shut down “imitation banks” or subject them to the same regulation as traditional banks, given the threat such institutions pose to consumers and the financial system, according to a new paper published by the Roosevelt Institute, a New York City-based think tank. According to the report, multiple nonbank financial technology firms have used misleading marketing to create online-only presences and act like banks while evading the banking laws that protect customers and the financial system, institute fellow Todd Phillips writes.

“Like other shadow banks, imitation banks are at risk of running, yet are not subject to capital, liquidity, disclosure and other regulatory requirements, nor to prudential or consumer protection supervision; do not have access to the Federal Reserve’s discount window; and have depositors that do not receive federal deposit insurance,” Phillips writes. “But unlike other shadow banks, imitation banks use the misleading language of banking, not investment, to appeal to depositors.”

Regulators should either shut down imitation banks or ensure they are subject to the same regulation as banks, Phillips writes. “And because unregulated deposit-taking is dangerous to depositors and the financial system, Congress should consider legislation that would permit only prudentially regulated institutions to take deposits.”

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