«1995 1995 Wild Card Statutes, Parity, and National Banks - The Renascence of State Banking Powers Christian A. Johnson Assist.Prof., Loyola ...»
Loyola University Chicago Law Journal
Issue 3 Spring 1995
Wild Card Statutes, Parity, and National Banks -
The Renascence of State Banking Powers
Christian A. Johnson
Assist.Prof., Loyola University Chicago, School of Law
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Christian A. Johnson, Wild Card Statutes, Parity, and National Banks - The Renascence of State Banking Powers, 26 Loy. U. Chi. L. J. 351 (1995).
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Wild Card Statutes, Parity, and National Banks- The Renascence of State Banking Powers ChristianA. Johnson*
TABLE OF CONTENTS352 I.INTRODUCTION
II.THE DUAL BANKING SYSTEM AND354 BANKING POWERS
B. National Banking Powers
C. State Banking Powers
D. Other FederalRegulators
1. The Federal Reserve Board
2. The FDIC
III.PRESSURES TO EXPAND STATE BANKINGPOW ERS
A. The Role of State Banks
B. Expanding National Banking Powers............ 363 C. PoliticalPressures
D. Legislative Inertia
E. Interstate Banking
IV.WILD CARD STATUTES
C. Regulatory Interpretationof the Wild Card Statute.... 372
1. Investm ents
* Assistant Professor of Law, Loyola University Chicago School of Law; B.A., 1984, M.Pr.A., 1985, Utah; J.D., 1990, Columbia. The author gratefully acknowledges the thoughtful comments of Steven Huefner, Franklin Johnson, and Nancy Sanborn.
The author was an associate with Mayer, Brown & Platt during the preparation of this Article and wishes to thank the firm for its generous assistance. The author also thanks Richard Brennan, Richard Cummings, Edward Dobbins, Kevin Hallagan, Elizabeth Raymond, and Richard Rosenberg for comments made during earlier discussions regarding wild card statutes. The views expressed herein are solely those of the author.
352 Loyola University Chicago Law Journal [Vol. 26
I. INTRODUCTION Over the last 100 years, the United States has developed what is commonly referred to as a "dual banking system."' Under this system, a bank is chartered, examined, and regulated as either a national bank, under the National Bank Act,2 or as a state chartered bank under any one of fifty different state banking laws. 3
1. See generally Edward L. Symons, Jr., The United States Banking System, 19 BROOK. J. INT'L L. 1 (1993) (detailing the history of the United States banking industry). For a general history of commercial banking, see BENJAMIN J. KLEBANER, COMMERCIAL BANKING IN THE UNITED STATES: A HISTORY (1974); JAMES J. WHITE, 1-34 (1976); see also Melanie L. Fein, The
TEACHING MATERIALS ON BANKING LAWFragmentedDepository Institutions System: A Case for Unification, 29 AM. U. L. REV.
633 (1980) (discussing regulation of depository institutions).
2. National Bank Act of 1864, ch. 106, 13 Stat. 99 (codified as amended in scattered sections of 12 U.S.C. (1988 & Supp. V. 1993)) (repealing the National Bank Act of 1863, ch. 58, 12 Stat. 665).
3. See Symons, supra note 1, at 9. Depository institutions can also be regulated The Renascence of State Banking Powers 19951 State chartered banks ("State Banks") have traditionally been an important part of the dual banking system, often leading the way in banking innovations.4 State banking regulators have also developed new approaches for regulating and examining financial institutions.5 Finally, State Banks provide state legislatures with a degree of control over their banking systems that the state legislatures do not have over national banking associations chartered by the federal government ("National Banks").6 During the last decade, however, State Banks have experienced difficulty in remaining competitive with National Banks. The primary impetus for this lack of competitiveness is the increasingly broad powers granted to National Banks by the Office of the Comptroller of the Currency (the "OCC"), which has allowed National Banks to engage in non-traditional banking activities such as financial derivatives and insurance brokerage.
An obvious solution for State Banks would be to increase their powers to correspond to those enjoyed by National Banks. State legislatures have attempted to speed up that process by passing "wild card" or "parity" statutes. A "wild card" or "parity" statute enables a state banking regulator to grant a State Bank the same banking powers enjoyed by a National Bank. These statutes provide an efficient, fast, and flexible tool for state banking regulators to expand state banking powers to match those granted to National Banks.7 A number of obstacles, however, have prevented state legislatures and banking
regulators from taking full advantage of wild card statutes, including:
(1) safety and soundness considerations; (2) bureaucratic inertia; and (3) limitations potentially imposed by state laws.
This Article proposes that judicious use of "wild card" statutes would provide state banking regulators with the powers necessary to enable their State Banks to compete on an equal footing with National Banks without endangering the institutions' safety and soundness.
under other federal regulations. See generally Fein, supra note I (discussing the regulation of banks, savings and loans, credit unions, and other depository institutions).
4. See infra part III.A.
5. See infra part III.A.
6. See infra part III.A.
7. State laws utilizing federal laws as a standard for state action are not unknown in other areas. The most prominent example is a state's "long arm" statute. See, e.g., CAL.
CIV. PROC. CODE § 410.10 (West 1973) (providing that a court "may exercise jurisdiction on any basis not inconsistent with the Constitution... of the United States"). Other examples include state securities "Blue Sky" laws and state income tax codes.
354 Loyola University Chicago Law Journal [Vol. 26 This Article initially discusses the dual banking system in the United States and the pressures to expand state banking powers.8 This Article then describes wild card statutes and their current use by state banking regulators, focusing on the more fruitful areas of wild card application. 9 It then scrutinizes some potential difficulties in their application, and proposes a model wild card statute.' ° Finally, this Article concludes that State Banks can remain competitive with National Banks."
To ensure this outcome, however, State Banks must urge their banking regulators to utilize the powers provided by their respective wild card statutes. Additionally, State Banks must encourage state legislatures to clarify the activities authorized thereunder.
H. THE DUAL BANKING SYSTEM AND BANKING POWERS
A. Generally The dual banking system in the United States is a complex historical outgrowth of state and federal regulations governing commercial banks.' 2 The result is a system in which two commercial banks can service the same customers, be the same size and be located in the same city, and yet be authorized to exercise different banking powers.
As of the end of 1993, approximately 11,300 commercial banks held approximately $3.9 trillion in assets and $3.0 trillion in deposits.' 3 Roughly 8,000 of these commercial banks were State Banks, holding $1.8 trillion of the assets and $1.4 trillion of the deposits. 4 The remaining 3,300 commercial banks were National Banks holding $2.1 trillion in assets and $1.6 trillion in deposits.' 5 The end result of the dual banking system is a non-uniform system in which commercial banks may enjoy different banking powers
8. See infra parts II and III.
9. See infra parts IV and V.
10. See infra parts VI and VII.
11. See infra part VIII.
12. Unless otherwise indicated, "commercial bank(s)" includes both commercial banks and savings banks, but excludes savings and loan institutions, investment banks, and other depository or nondepository institutions. A discussion of the effect of wild card statutes on these other non-bank financial institutions is beyond the scope of this Article.
13. See CONFERENCE OF STATE BANK SUPERVISORS, THE STATE OF THE STATE BANKINGSYSTEM 7-8 & figs. 1-3 (1994).
14. See id.
15. See id.
The Renascence of State Banking Powers 19951 6 depending upon whether they are state or federally chartered.' Compounding this complexity is the fact that both federal and state commercial banks are subject to a patchwork of laws and regulations.
B. NationalBanking Powers National Banks have existed in one form or another since the founding of the United States.' 8 National Banks did not become a fixture of the American banking system, however, until Congress provided for the chartering of National Banks under the National Bank Act of 1864.'9 Although subject to significant revision and amendment since that time, the National Bank Act continues to govern National Banks.20
16. See ROBERT E. LITAN, WHAT SHOULD BANKS Do? (1987); see also Kenneth E.
Scott, The Dual Banking System: A Model of Competition in Regulation, 30 STAN. L.
REV. 1, 20 (1977) ("[Ilt should be evident that the existence of 51 lawmaking bodies in addition to the federal government has created great diversity among the powers conferred on banks and the restrictions imposed on them.").
17. Commentators continue to lament the state of the United States' regulation of
Nevertheless, we continue the vestigial debates about such parochial matters as the dual banking system, branching, interstate banking, and section 4(c)(8) bank holding company powers and restrictions. These and other topics still dominate the financial and depository scene here in the United States, bearing little or no relationship to the realities of the financial world at large.
Paul Nelson, Banking Regulation in the Nineties: Fighting Tomorrow's Battles with Yesterday's Tools, 9 ANN. REV. BANKING L. 369, 370 (1990) (footnote omitted).
18. See BRAY HAMMOND, BANKS AND POLITICS INAMERICA: FROM THE REVOLUTION TOTHE CIVIL WAR 720-25 (1957). The federal government chartered two National Banks between 1791 and 1816, although both charters were eventually repealed. See Symons, supra note 1, at 6-7. For a discussion of the history of the First and Second Bank of the United States, see HAMMOND, supra, and Symons, supra note 1, at 6-7. The nation's first bank was actually the Bank of North America, chartered by the Confederation Congress in 1781. See HAMMOND, supra, at 48-51. The Bank of North America subsequently obtained a state charter from Pennsylvania in 1782. Id.
19. National Bank Act of 1864, ch. 106, 13 Stat. 99 (codified as amended in scattered sections of 12 U.S.C. (1988 & Supp. V 1993)) (repealing the National Bank Act of 1863, ch. 58, 12 Stat. 665). Congress appears to have modeled the National Bank Act on various state bank chartering laws, particularly the New York Free Banking Act of
1838. See Edward L. Symons, Jr., The "Business of Banking" in Historical Perspective, 51 GEO. WASH. L. REV. 676, 689-90 (1983).
20. In certain matters, however, Congress and the courts have defaulted to state law.
See, e.g., 12 U.S.C. §§ 92a(f), (i) (1988) (mandating that trust department operations must not contravene state law); id. § 36(c) (branching); First Nat'l Bank v. Missouri, 263 U.S. 640, 656 (1924) (explaining that state law governs National Banks to the extent that it does not conflict with federal statutes, discriminate against National Banks, or unduly burden their operation).
Loyola University Chicago Law Journal 356 [Vol. 26 National Banks are regulated by the OCC, an office within the United States Treasury Department. 2' The OCC is specifically empowered to charter National Banks, 22 examine them, 23 and promulgate regulations governing them. 2 Courts have been reluctant to disturb 4 OCC decisions because of the broad delegation of authority granted to the OCC by Congress in the National Bank Act. 2 Section 24 of the National Bank Act enumerates the powers granted to National Banks to conduct a banking business, including the power to engage in activities incidental to the business of banking.26 A National Bank must obtain the express consent of the OCC before it may engage in activities not expressly provided for in either statute or regulation. Most of the growth in the powers of National Banks has been based upon the incidental banking power provided by the National Bank Act.28 Congress, in contrast, has expressly granted few
21. 12 U.S.C. §§ 21, 24 (Seventh) (1988 & Supp. V 1993), as amended by Riegle Community Development and Regulatory Improvement Act of 1994, Pub. L. No. 103Stat. 2160, 2226-27, 2241.
22. Id. § 27 (1988), as amended by Riegle Community Development and Regulatory Improvement Act of 1994, Pub. L. No. 103-325, 108 Stat. 2160, 2227.
23. Id. §§ 26, 481 (1988 & Supp. V 1993). The OCC is expressly precluded from examining state member banks, regardless of any affiliation with a National Bank. See id. § 481.
24. Id. § 93a (1988).
25. See Michael P. Malloy, Balancing Public Confidence and Confidentiality:
Adjudication Practices and Procedures of the Federal Bank Regulatory Agencies, 61 TEMP. L. REV. 723, 733-36, 771-77 (1988); see also First Nat'l Bank v. Smith, 610 F.2d 1258, 1264 (5th Cir. 1980) (recognizing the Comptroller's wide discretion);
Investment Co. Inst. v. Conover, 790 F.2d 925, 935 (D.C. Cir.) (recognizing that the OCC has primary responsibility for interpreting the statute), cert. denied, 479 U.S. 939 (1986).
26. Section 24 provides as follows: