Nondeposit Deposits and the Future of Bank Regulation

We argue in this paper that the nation has already entered with a vengeance into the era of nondeposit deposit banking. The traditional bank deposit against which reserves must be held and deposit insurance paid is suffering encroachment from a wide variety of competitive instruments and arrangements, all of which, to one degree or another – often to a substantial degree – serve a function economically similar to that of the checking account at a depository institution.

The legal system may respond to these developments by attempting to bring nondeposit deposits under regulation, as it has done with other banking oxymorons such as the nonbank bank and the nonthrift thrift. However, the wide variety of nondeposit deposit instruments already available in the marketplace, coupled with the extraordinary ingenuity of bank lawyers at devising new ways of doing business while avoiding regulations, suggest that any attempt to close the nondeposit deposit loophole will ultimately prove unsuccessful. Nondeposit deposits are here to stay. The results of this development for the future of banking regulation are likely to be profound and longlasting.