Introduction: American Banking Law
Banking Law suffers from complexity. The field is subject to a fast pace of change and development. In the
past twenty years alone, for example, federal statutes governing this area have been broadly amended at least
eight times. The changes come from the government (federal statutes) and sometimes the highest court
(Supreme Court) steps in to give its opinion on how things should work. So, it's like rearranging furniture in a
room – the layout keeps changing, and it can be a bit confusing due to the frequent adjustments.
Complexity, diversity and the dynamic nature of Banking Law in the United States set also in the context of
intense globalization of banking.
The multiplicity of sources, fragmenting bank regulation is an undeniable factor of complexity. Banks (and
other bank–like entities) are limited and controlled in their corporate and business activities by (relatively)
specific statutory provisions.
In the US, banking is regulated at both the federal and state level.
Federal laws about banking go way beyond just telling companies to disclose information, like the Securities
Exchange Act of 1934 does for publicly traded companies. These laws also cover big things like how a company
can be created under federal law, and they regulate a bunch of activities, like entering the banking industry,
expanding into new areas, merging with other companies, or even reorganizing.
Basically, every move a bank makes is watched and needs approval from one or more regulators. And all these
rules are influenced by a long history of discussions and debates about the usefulness of banks and the right
balance between state and federal control over them.
The rules we have for banks today are still influenced by historical debates that go back two centuries. Back
then, there was a constant tug-of-war between the federal government and individual states on who gets to
control banks. The first and second Banks of the United States marked periods where the federal government
had more say.
The whole idea of having different state and federal regulations for banks came from all these debates. After
some controversial events, there was a time when states had more control, but then the federal government
took charge again, especially after the stock market crash in 1929.
Since the 1930s, the basic structure of bank regulations hasn't changed much, but the actual rules have
become more complicated. Nowadays, the environment in which banks operate is heavily regulated. Different
government agencies control various aspects of what banks can and cannot do. This regulation involves giving
permission for banks to operate (chartering), keeping an eye on them (supervision), and checking their
activities (examination). It's a bit like a complex set of rules that banks need to follow, with both state and
federal governments playing a role.
The way banks operate in the United States has changed a lot over the years. Initially, they were limited to
specific areas, but now they compete on a national level. The rules governing banks, known as banking
regulations, have also gone through significant changes, especially from the 1980s onwards.
Between 1980 and 1994, there were more changes to banking laws than any other period since the 1930s.
Congress passed five major laws between 1980 and 1991, and there were more changes in 2008, 2009, and
2010 in response to the credit crisis. The Dodd-Frank Wall Street Reform and Consumer Protection Act, passed
in 2010, introduced over 1500 provisions, creating new agencies and authorities to regulate banks and
interpret these changes.
Despite these efforts, the global financial industry, including banks, faced and continues to face significant
challenges. Implementing these new rules is not easy, and the field of bank regulation is particularly volatile
and complex. This complexity makes it a challenging area for research and analysis, especially given the ever-
changing nature of the financial landscape.
Preliminary chapter: Regulated Environment of Banking
The world in which banks operate is filled with rules and regulations. Different government agencies, called
regulators, create and enforce these rules. These regulators not only allow banks to exist (chartering) but also
keep a close watch on them (supervision), check what they're doing (examination), and sometimes give the
green light or say no to certain activities. So, it's like banks must follow a set of complex guidelines, and these
regulators are there to make sure they play by the rules.
-----> Regulatory Functions (1)
-----> Regulated Entities (2)
-----> Regulators (3)
1) Regulatory Functions:
We need to remind the regulatory functions performed by the state and federal regulators may be divided
into three broad categories:
Chartering: Supervision: Examination:
The Office of the Comptroller of Regulators, like the OCC, Federal Banks, regardless of any issues,
the Currency (OCC) and state Reserve (FED), and Federal undergo periodic examinations by
regulators oversee granting Deposit Insurance Corporation regulatory staff. Different
charters to banks. The OCC (FDIC), not only create rules for regulators may be involved,
oversees national banks, federal banks but also issue guidelines on depending on the bank's charter
thrifts, and branches of foreign how banks should operate. They and memberships. For instance, a
banks. use various methods, such as state-chartered bank with FDIC
circulars and memoranda, to insurance and Federal Reserve
guide banks and may investigate membership is overseen by the
possible violations. state authority, FDIC, and the FED.
This regulatory landscape is intricate. Some regulations apply not only to banks but also to various participants
in commercial and financial activities, like antitrust and securities regulations. The primary federal regulators
of banks have specific responsibilities in these areas, although other agencies like the Department of Justice
(DOJ) and the Securities Exchange Commission (SEC) also play roles. The structure of this regulatory
environment is complex and involves multiple layers of oversight.
To simplify this complexity, the focus will be on identifying different types of banks allowed by federal and
state laws and the corresponding federal regulators.
2) Regulated Entities:
Since the 1960s, there's been a variety of financial players like banks, savings associations, credit unions,
insurance companies, and securities firms. The term "depository institution" became significant in regulatory
policies, defined by the Depository Institutions Deregulation and Monetary Control Act of 1980 (MCA).
According to the MCA, a "depository institution" includes:
- Any federally insured commercial bank
- Any federally insured mutual savings bank
- Any federally insured stock savings bank
- Any insured or eligible for insurance credit union
- Any insured or eligible for insurance savings association
This definition helps create a broad category for regulatory purposes. However, some criticize it as a "circular"
definition.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (DFA) further simplified the term
"depository institution."
According to the DFA, a "depository institution" means any bank or savings association.
An "insured depository institution" is one whose deposits are insured by the FDIC. This includes uninsured
branches of foreign banks.
The term "state depository institution" covers national banks, federal savings associations, state banks, state
savings associations, and insured branches that aren't federal branches.
While the concept of a depository institution serves as a reference point for regulatory policy, the specific
types of depository institutions still operate under different rules and regulations.
Banks, also called commercial banks, are the dominant type of depository institution. They hold the largest
percentage of financial assets and offer a wide range of products and services. Defining "commercial banks"
has been a bit challenging. Traditionally, a commercial bank is described as an institution that discounts
commercial paper (short-term debt issued by companies), accepts deposits, and makes loans. This definition
captures the core activities that commercial banks engage in.
Commercial banks differ from savings associations in that they are authorized to provide a full suite of banking
services, including demand deposit accounts (checking accounts), savings and time deposits, investment
services, loans, and more. While there is some overlap in the services offered by commercial banks and
savings associations, the key difference lies in their regulatory oversight.
Regulatory Distinction: The regulatory jurisdiction is what distinguishes commercial banks from other entities,
like savings associations. A landmark case, Franklin National Bank v. New York (1954), clarified that the
regulatory authority to which they are subject is the defining factor.
In Franklin National, the legal question addressed was the extent to which national banks (a type of
commercial bank) are subject to state laws. Unless federal statutes specify otherwise, national banks are
generally subject to state laws, covering aspects such as debt collection, commercial transactions, bank
deposits, contracts, and more. This distinction helps establish the boundaries of regulatory authority for these
financial institutions.
Commercial banks are different from investment banks. Investment banks mainly deal with underwriting and
distributing securities, as well as acting as brokers and dealers in securities.
Since 1933, federal law has generally required these activities to be conducted by entities separate from
commercial banks. The law has prohibited most affiliations between commercial banks and investment
banking entities.
The separation between commercial and investment banking has been legally debated and clarified in court
cases, such as Securities Indus. Assembly v. Board of Governors (FED) in 1984.
Savings banks are an earlier form of savings associations. They are typically restricted by law to non-
commercial deposit and lending activities. In the United States, there are two main types of savings banks:
- Mutual savings banks operate for the benefit of their members (depositors) and have no capital stock or
stockholders. They are managed by a board of trustees.
- Stock savings banks operate as corporate entities with distinct stockholders and depositors. They are
managed like any other corporation.
Savings and loan associations are the largest category within savings associations. Their primary purpose, as
defined by law, is to finance homes.
Credit unions can be chartered either at the state or federal level. They are cooperative associations formed to
encourage thrift among their members. Credit unions have a membership limited to individuals who share a
"common bond" such as association, occupation, or residence within a well-defined geographical area. The
National Credit Union Adm v. First Nat. L Bank and Trust Co. (1998) provides more details on this concept.
3) Regulators:
*The Comptroller of the Currency:
- The Comptroller of the Currency (OCC) oversees national banks chartered under the National Bank Act. The
OCC is part of the Department of the Treasury.
- The OCC administers nearly all federal laws that apply to national banks, including those in the District of
Columbia. It also supervises the activities of federal branches and agencies of foreign banks.
- The Comptroller's approval is necessary for significant actions by national banks, such as chartering,
establishing branches, and making changes to corporate control or organizational structure. The OCC also has
supervisory authority over day-to-day activities, like loan and investment policies, trust activities, and the
issuance of securities.
- Courts usually give a lot of respect to the decisions made by the OCC. In the case of Association of Data
Processing Service Organizations v. Camp (1973), the Supreme Court decided that the Comptroller's decisions
can be reviewed by the courts under the Administrative Procedure Act. Another Supreme Court decision,
Camp v. Pitts (1973), established the standard for this review, stating that the Comptroller's actions should be
considered unlawful only if they are "arbitrary, capricious, an abuse of discretion, or otherwise not in
accordance with law."
- The Camp Case has set the basic approach for judicial reviews of decisions made by regulators overseeing
depository institutions.
*The Board of Governors of the Federal Reserve System (FED):
- Created by the Federal Reserve Act of 1913, the FED oversees a system of regional reserve banks and plays
a key role in implementing monetary and credit policies for the financial system.
- The primary responsibilities of the FED include managing monetary and credit growth and administering
laws related to reserves held by depository institutions against their deposits.
- While the FED doesn't charter banks, it does have supervisory and examination functions for state-
chartered member banks. It also handles regulatory tasks such as overseeing bank holding companies,
managing bank mergers, and administering securities regulations for state-chartered member banks.
- The FED operates as a collegial body with seven members appointed by the President and confirmed by the
Senate.
- The Federal Open Market Committee (FOMC), consisting of FED board members and representatives from
Reserve Banks, directs the FED's activities in buying and selling government securities to influence the
availability of credit in the banking system.
- Membership in the FED includes all national banks by law, and state-chartered banks and trust companies
can choose to apply for and receive membership.
- The FED's decisions, such as granting membership or approving certain activities, are discretionary and are
usually given significant deference by the courts. However, as per the Administrative Procedure Act, the FED's
decisions are subject to judicial review.
*The Federal Deposit Insurance Corporation (FDIC):
- State-chartered member banks, national banks, and federally chartered savings associations are required to
have deposit insurance from the FDIC under the Federal Deposit Insurance Act (FDIA). State-chartered non-
member banks and savings associations can choose to opt for FDIC insurance.
- The primary job of the FDIC is to provide deposit insurance to qualifying depository institutions under FDIA.
- The FDIC's main role is to ensure that customers' deposits in banks are protected, even if the bank faces
financial difficulties. Virtually all state-chartered banks have chosen to be insured by the FDIC.
- The FDIA v. Philadelphia Gear Corp. (1986) case discusses the statutory policy behind the FDIA.
-The NCUA (The National Credit Union Administration) oversees the federal credit union system, handling
chartering, insuring, supervisory, and central banking functions.
-State regulators are crucial in the regulation of depository institutions. They act as chartering authorities for
commercial banks, savings associations, and credit unions within their respective states. State regulators also
supervise and examine these state-chartered institutions. For example, the New York State Banking
Department oversees banks in New York.
TRANSACTIONAL RULES (chapter 3):
*State and National Banks under State Laws:
- In practical terms, state and national banks generally operate under state laws that govern aspects like
debt collection, commercial transactions, bank deposits, and contracts.
- However, there's a significant exception for national banks. Federal law, primarily administered by the OCC
(Office of the Comptroller of the Currency), defines the rights and obligations of national banks as corporate
entities. This federal law framework, balancing state transactional laws and fundamental federal corporate
laws, shapes how national banks operate.
*Role of Federal Law in Bank Powers:
- The framework for banks involves a balance between generally applicable state transactional laws and
fundamental federal corporate laws.
- National banks are subject to both state and federal laws, but the crucial balance is recognized. The general
principle is that banks are primarily governed by state laws unless they interfere with the banks' ability to
fulfill their duties to the government.
- Over time, federal law has gained significance, especially in determining the powers of depository
institutions for specific transactions. This shift is due in part to the federalization of the banking industry,
primarily driven by federal supervision through the federal deposit insurance system.
- The standards of conduct in transactions are subject to a unique federal regime. Courts interpret the
constitutive statutes of depository institutions as defining the limits of their authority to engage in
transactions. This principle underscores the importance of considering the institutional statutes when
evaluating the powers of depository institutions.
*Bank Powers and Federal Law:
- Banks typically have authority only for express statutory powers and those powers that are necessary
incidents to these express powers. For instance, they can make contracts, sue and be sued, elect and appoint
executive management, adopt bylaws, and conduct banking business (as outlined in USC, §24).
- The role of federal law, especially through recent legislative changes like the Dodd Frank Act, has become
more significant in shaping the operations of banks.
*Complexity in Banking Operations:
- The Dodd Frank Act and other legislative changes have added complexity to the business of banking.
- The study focuses on the theme of "carrying on the business of banking," which has become intricate.
- The study first explores the issue of lending (§1), and then it delves into the matter of deposits (§2). This
examination aims to understand and navigate the complexities introduced by federal laws and recent
regulatory changes in these key aspects of banking operations.
**Section 1: Lending:
Lending Powers of Commercial Banks:
- Commercial banks have extensive lending powers, covering various types of loans and credit extensions to
a wide range of borrowers (USC, §24).
Statutory and Regulatory Limitations on Lending:
- Despite broad lending powers, there are statutory and regulatory limitations on lending, including
constraints on lending amounts, restrictions on loans to insiders, and traditional usury prohibitions.
Federal Lending Limits:
- Federal lending limits determine the maximum amount a national bank can loan to a single individual,
calculated as a percentage of the bank's total unimpaired capital and surplus (USC, §84).
- This regulation aims to ensure the safety of banks by preventing excessive concentration of lending to one
person and promotes diversified loans and fair access to banking services.
Types of Loans Subject to Special Restrictions:
- Loans to directors, officers, principal shareholders, and affiliates are subject to specific statutory
restrictions.
Usury Rules:
- Usury laws, limiting the amount of interest that can be charged on a loan, exist in both federal and state
law.
- Federal law, in certain situations, refers to state law to determine the maximum allowable interest rate
(USC, §85).
- Even if derived from state law, the interest rate is governed by federal law. For example, in an interstate
credit card business, the maximum interest rate a national bank can charge is determined by the state in
which the bank is located, following federal guidelines (Marquette Nat’L Bank of Minneapolis v. First of Omaha
Serv. Corp, US, 1978).
**Section 2: Deposits:
Depository Institution Authority:
- Depository institutions, like national banks, are explicitly granted statutory authority to accept deposits
(USC, §24).
Scope of Deposit Powers for Commercial Banks:
- For commercial banks, especially national banks, this deposit-taking power is generally comprehensive,
covering all types of deposits.
- Commercial banks can accept deposits from various types of depositors, including individuals, business
entities, non-profit organizations, and governmental entities (USC, §24).
Chapiter 4: Bank Regulation and Social Policy:
Depository Institutions Policy Objectives:
+Safety, Soundness, and Public Confidence:
- The primary objective of depository institutions' policy is to promote the safety and soundness of the
banking system (USC-§1818 (b) -1).
- Correspondingly, the policy aims to maintain public confidence in the banking system.
+Resolution of Troubled Institutions:
- In cases where the objectives of safety and soundness are not realized, the policy involves the resolution of
troubled or failing institutions with minimal risk to deposit insurance funds. Preference is given to the interests
of depositors (USC-§1821).
+Encouragement of Competitiveness:
- Another policy objective is to encourage competitiveness in the provision of depository institutions.
+Objectives Unrelated to Core Regulatory Goals:
- Some policy objectives may be unrelated or only indirectly related to core regulatory goals. These can
include addressing the concentration of economic power and resources in the banking industry, such as
ensuring nondiscriminatory credit policies (USC, §1691).
- Regulatory mechanisms for depository institutions may also be used to achieve unrelated objectives, such
as the attainment of foreign policy goals (USC-§1701).
+Specialized Policy Initiatives:
- Certain regulatory initiatives have specific policy objectives. For example, specialized rules may be applied
to money transfer transactions of depository institutions, with the primary goal of identifying criminal activity
related to money laundering (Anti-Money Laundering Act-1992).
- Compliance with such initiatives is crucial for banks due to the importance of preventing and identifying
illicit activities.
This study discusses the application of policy objectives to depository institutions.
------> Requirements of the Community Reinvestment Rules (1)
------> Equal Credit Opportunity Rules (2)
1) Requirements of the Community Reinvestment Rules:
Community Reinvestment Act (CRA) Requirements:
+Public Policy Basis:
- The Community Reinvestment Act (CRA) is grounded in a public policy that encourages depository
institutions to contribute to meeting the credit needs of the local communities where they are chartered.
- This encouragement is to be consistent with the safe and sound operation of these institutions (USC,
§1901).
+Link to "Convenience and Needs":
- The CRA explicitly ties itself to the traditional banking factor of "convenience and needs," a concept that
regulators regularly apply in various decision-making processes.
- The "convenience and needs" concept is flexible and adaptable to different situations.
+Implementation Tools - Assessment and Evaluation:
- The CRA utilizes assessment and evaluation as fundamental tools to implement its policy.
- When examining an insured depository institution, the federal financial supervisory agency must assess its
record of meeting the credit needs of the entire community, including low and moderate-income
neighborhoods. This assessment is done while ensuring the safe and sound operation of the institution (USC,
§2903).
+Impetus of CRA:
- For chartering and other regulatory approvals, banks are required to demonstrate that their deposit
facilities serve the convenience and needs of the community where they operate (USC, §2901).
- "Convenience and needs" encompass both credit services and deposit services (USC, §2901).
+Affirmative Duty of Depository Institutions:
- Depository institutions have an ongoing and affirmative duty to actively contribute to meeting the credit
needs of the local communities in which they are chartered (USC, §2901).
2) Equal Credit Opportunity Rules:
Equal Credit Opportunity Act (ECOA) Rules:
+Legal Prohibition:
- Under the Equal Credit Opportunity Act (ECOA), it is unlawful for any creditor to engage in discrimination
against any credit applicant.
- This prohibition applies to any aspect of a credit transaction (Roberts v. Walmart Stores Inc, Montana,
1990).
+Protected Classes:
- Creditors are expressly prohibited from discriminating based on: Race, Color, Religion, National origin, Sex,
Marital status, Age
+Additional Protection:
- Creditors are also barred from discriminating against a credit applicant based on the applicant's exercise of
any right under the ECOA or related laws.
- This ensures that individuals are not penalized for legitimately asserting their rights in the credit application
process (Bryson v. Bank of New York, SDNY, 1984).
