The U.S. financial system is built on a simple but critical principle: when entities engage in bank-like activities, they must be subject to the same level of regulation and supervision as banks.

This “regulatory perimeter” exists for a reason: when it is weakened or ignored, the consequences can be severe for consumers and the broader financial system.

What is the Regulatory Perimeter

The regulatory perimeter defines which institutions and activities fall within U.S. banking regulation and supervision. Entities operating within the regulatory perimeter receive important rights, including:

• Federal deposit insurance protecting consumer deposits 
• Access to core payment systems such as Fedwire and ACH 
• Access to central bank liquidity facilities 
• Public confidence due to strict regulation and supervision 

In exchange for these rights, these entities are subject to extensive federal oversight, along with stringent consumer protection and safety and soundness rules and requirements.

Conversely, non-bank financial firms, technology platforms, and commercial companies have not traditionally offered banking services, and thus while they did not have the rights that entities within the regulatory perimeter benefit from, they also were not subject to the corresponding same prudential rules or supervisory oversight as that faced by banks. This distinction reflects the longstanding separation between banking and commerce, a core feature of U.S. financial regulation that allows businesses to innovate and compete in their respective sectors.

Concerns arise when these commercial firms begin offering bank-like products or services without being subject to the same safeguards as banks. In other words, there is an increased risk of harm when entities outside of the regulatory perimeter begin engaging in the same activity as entities within the regulatory perimeter without taking on the same protective limitations.

Why the Regulatory Perimeter Exists 

U.S. law has historically separated banking from commercial activity and enforced this regulatory perimeter in order to:   

Protect Financial Stability: Banks are deeply interconnected with the financial system because they hold insured deposits and provide credit and payment services. Problems at a bank can spread quickly to other institutions. Regulation helps ensure banks maintain sufficient capital, liquidity, and risk management to withstand economic stress. 

Prevent Government Subsidies to Commercial Firms: Banks benefit from government-backed protections such as deposit insurance. If large commercial companies could access these benefits without the same regulatory obligations, it could effectively provide them with a government-supported competitive advantage. 

Preserve Fair Competition: Allowing commercial firms to operate banks could create competitive distortions. For example, a company that both sells products and controls a bank could favor its own business with credit, deny financial to competitors, or use financial data to gain a market advantage.

How the Regulatory Perimeter Mitigates Risk

Although there are many aspects within scope of the regulatory perimeter, several of the most frequently discussed risks are addressed through the following mechanisms:  

Risk	Mechanism of Addressing	Mechanism Description
Loss of depositor funds if an institution fails (and that the fear of losing funds causes depositors to proactively withdraw their deposits from the bank)	Deposit insurance coverage	Government-administered protection of depositor funds up to a certain level, funded by fees or assessments on institutions, so that depositors know they are protected in the event of collapse
Insolvency or inability to absorb financial shocks	Capital and liquidity standards	Regulatory requirements governing the level and composition of capital and liquidity an institution must maintain to remain resilient to financial shocks
Deterioration of financial health unnoticed until crisis	Prompt corrective action	A regulatory framework mandating graduated supervisory interventions as an institution’s capital declines, aimed at early intervention and preventing losses
Capital depletion due to shareholder payouts	Dividend restrictions	Limitations on payouts to shareholders, imposed to preserve capital and solvency, ensuring the institution can absorb potential losses
Risks involving commercial ventures outside the banking institution put the banking institution at risk	The separation of banking and commerce, and the Bank Holding Company Act	Oversight of companies that own or control an institution, setting requirements for capital, risk management, and permissible activities to prevent holding company risks from harming the institution
Undue risk or unfair transactions with related entities	Affiliate transaction limits	Restrictions on the size and terms of transactions between an institution and its affiliates to ensure fairness and protect the institution’s capital and depositors
Conflicts of interest or self-dealing by insiders	Insider transaction controls	Rules restricting financial dealings between the institution and its insiders (executives, directors, major shareholders) to prevent improper benefits at the expense of the institution, depositors, and shareholders

What Happens When the Lines of the Regulatory Perimeter Are Blurred

Challenges to the regulatory perimeter are not new. Questions about which entities may engage in the business of banking, and under what restrictions, have been tested since the nation’s founding, and when those boundaries were exceeded, harm often resulted.

Recent technological innovations have enabled new firms such as cryptocurrency exchanges, stablecoin issuers, non-bank payment platforms, and large technology companies to offer services that resemble traditional banking, often without comparable oversight. When these entities operate without the same regulatory safeguards as banks, they may be less equipped to manage financial stress, increasing the risk of significant consumer losses.

For example, if third parties could make payments of yield or interest available to holders of a stablecoin issued by a permitted payment stablecoin issuer without analogous prudential restrictions being imposed on such entities, this would be a traditional type of activity that usually occurs within the regulatory perimeter occurring outside of it. In other words, bank-like activities would be performed by an entity without the same restrictions banks face that are meant to protect consumers and the market, resulting in increased risk of harm to consumers and the market.  

The Bottom Line

The U.S. banking framework is built on a clear tradeoff: the privilege of engaging in banking, including taking deposits, facilitating payments, and extending credit, comes with the obligation to comply with robust oversight, supervision, and risk controls designed to protect consumers and the broader financial system. When companies offer bank-like services without accepting these responsibilities, they benefit from the upside of banking without the safeguards that prevent failure, increasing the likelihood that consumers and markets will bear the consequences when things go wrong. This is not about limiting who can provide financial services; it is about ensuring that anyone who does so plays by the same rules that make the system safe and stable.