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Public Hearing on the Financial Services Roundtable's Petition For Rulemaking to Preempt Certain State Laws
May 24, 2005

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Panel 1

DIRECTOR CURRY: Welcome, gentlemen. Please identify yourselves before you speak for the record. We'll start with Mr. Muckenfuss.

MR. MUCKENFUSS: Mr. Director, members of the senior staff, good morning. My name is Chuck Muckenfuss. I'm here today on behalf of the working group of state chartered commercial banks that are members of the Financial Services Roundtable.

Each is among the largest state chartered banks. Each is grateful for your leadership in responding to the roundtable's petition. The petition asks the FDIC to promulgate rules which would provide state banks parity with national banks in their ability to operate across state lines under a clear, certain and consistent framework of law, regulation and supervision.

At stake is nothing less than the continued vitality of the dual banking system. My own background provides a pertinent, in some respects, unique perspective. I'm a partner at Gibson, Dunn and Crutcher, where I practiced in the field of financial regulation for nearly 24 years.

More than 31 years ago, I came to the FDIC to work for Director George Lemaistre, a national banker from Alabama, who became chairman in 1977.

In 1978, I became one of three senior deputies to the then Comptroller of the Currency, John Heimann, who had previously served as Commissioner of Banking in the state of New York.

George would be pleased, and I'm sure John is pleased, that the states of Alabama and New York are so ably represented here today.

31 years ago, the framework of bank regulations seemed to me unnecessarily complicated and remarkably inefficient. I believed when I got here that a single federal regulator of banks and their holding companies would be far superior to the patchwork that we have.

My experience at the FDIC and the OCC changed that view. The reason is quite simple. In a world in which few of us are wise enough and lucky enough to get it right all, or even most, of the time, the evolution and implementation of public policy are best served by more than one locus of authority and accountability.

The public good, like private good, is ill served by monopoly. Diversity works. Choice works. That's the important insight of federalism and it's the peculiar genius of bank regulation in the United States.

The facts before us reflect the danger to this engine of reform and innovation. Absent parity and the ability to operate with certainty under a single framework of law, regulation and supervision, the only viable choice for interstate banks, like those in the working group, will be a national charter.

Conversions will continue and perhaps accelerate. That, in short, spells the death of the dual banking system. Because the roundtable petition reflects our work, we request that it be incorporated as part of this testimony.

In our prepared statement, we responded to the questions set forth in the notice of hearing. Rather than attempting to summarize these documents, I will highlight several key points.

First of all, the petition does not request a federal preemption of state law in the ordinary sense. Rather, it seeks to provide clarity and certainty in the full implementation of the parity framework embodied in the 1997 amendments to the Riegle-Neal Act for determining which state law applies when state banks operate across state lines.

Absent such clarifying rules, state regulation and enforcement will become irrelevant to interstate banking.

Second, the principle of parity as a mechanism of maintaining balance in the dual banking system and the actions requested by the petition are neither radical nor path breaking. Congress chose this approach in enacting the McFadden Act as well as Section 27 of the FDI Act and, finally, Riegle Neal II.

Supreme Court often cited the principle of competitive equality in its decisions implementing the McFadden Act. In each case, sovereignty has been constrained to maintain the equilibrium of the dual banking system.

Third, the FDIC has ample authority to take all of the actions urged in the petition, including full implementation of the statutory and policy template enacted by Congress in the 1997 amendments and reinforced by Section 104 of the Gramm-Leach-Bliley Act.

Because the promise of the acts has not been fulfilled, FDIC action is required. There is a clear need for the FDIC to interpret these existing statutory provisions and to fill any statutory gaps through a comprehensive rulemaking.

As set forth in the petition, Sections 8 and 9 of the FDI Act, and the well settled principles of administrative law as enunciated by the Supreme Court, fully support the FDIC's authority to do so.

Fourth, the petition asked the FDIC to perform exactly the function contemplated for administrative agencies in our system of government. The success of the OCC and the OTS in addressing the needs for a seamless web of supervision and regulation of interstate banking is illustrative.

A comprehensive rulemaking, even one which must deal with the difficult issues framed in this hearing, is preferable to uncertainty, confusion and litigation. It is certainly preferable to the not so slow death of a robust system of state and federal regulation for banks of all sizes and strategies.

Indeed, the working group believes the scope of the FDIC's broad authority carries with it a systemic responsibility that requires the requested actions.

Fifth, it is important to underscore that the stakes are greater than the role of the states in the dual banking system. The direct roles of the Federal Reserve and the FDIC in the regulation of banks are derivative of the federal system of state and national charters.

Diversity and choice at the federal level, along with a uniquely successful experience of state/federal cooperation, will be lost if interstate banks, multi-national, regional or community, must, of necessity, opt for a national charter.

Sixth, the task we are asking you undertake is as difficult as it is important. Neither the petition nor this testimony answer all the questions and concerns that must be addressed.

Inherent in the framework embodied in Riegle-Neal II in Section 104 and requested in the petition are at least three related challenges that must be addressed in its architecture.

One, a parity framework must reflect the determination that a race to the bottom is unacceptable.

Two, a parity framework must provide the resources to assure effective supervision and regulation of state banks and effective and vigorous protection of all customers no matter where they reside.

The working group believes that these resources are and will be available through the respective states and the Federal Reserve of the FDIC and through the work of CSBS in the evolution of cooperative agreements between and among the states.

Three, a parity framework, like a regime of federal preemption, must not be or be perceived as a device to avoid appropriate and necessary regulation.

To put a finer point on the issue, the framework sought by the working group must not, for example, be a mechanism to avoid eradication of predatory practices.

In this regard, we support the roundtable's efforts to obtain federal legislation, creating a uniform national standard with respect to predatory lending.

We also urge the banking agencies to make aggressive use of their considerable authority to advance uniformity in combating these intolerable practices.

Finally, time is of the essence. The clear statements of members of Congress closest to this issue in 1997 were eerily and profoundly prophetic. We are now experiencing exactly the dynamic that Riegle-Neal II sought to prevent.

The working group can testify directly that absent clarity and certainty of an implementing rule for state banks operating interstate, we're in the endgame and the result is clear cut. A single dominant framework for the regulation of interstate banks. Action is required now.

The FDIC Board must weigh carefully the judgment that inaction at this time itself constitutes a choice. A choice to ratify the end of the unique American system of bank regulation as we've known it for 140 years. Now is not the time to sit on the sidelines.

The directions from Congress to preserve the dual banking system were clear, yet the goals of their actions remain fulfilled.

The working group challenges those who have not been supportive of the roundtable's request for an FDIC rulemaking to engage in this discussion in a thoughtful, constructive and positive manner.

We must do our best to work together in a non-adversarial fashion to craft and implement a framework that preserves the dual banking system and protects the public interest.

In our judgment, the failure to do so will have long-term adverse systemic consequences and impose unnecessary costs and burdens on state and national banks as well as the customers they serve.

Accordingly, the working group stands ready to work with the FDIC and all interested parties to continue the important process begun today. Thank you for your time and concern.

DIRECTOR CURRY: Thank you. Commissioner Allison?

COMMISSIONER ALLISON: Good morning, Director Curry and members of the panel. I'm John Allison. I'm Commissioner of Banking and Consumer Finance for the state of Mississippi. I currently serve as Chairman of the Conference of State Banks Supervisors -- we friendly call CSBS. The professional organization of 54 state supervisors and a national organization dedicated to protecting and advancing the state banking system.

I'm very pleased to represent CSBS and my colleagues at today's hearing and I appreciate this opportunity to express our views.

The CSBS commends Chairman Powell and the FDIC for holding today's hearing. We'd also like to thank the Financial Services Roundtable for highlighting a problem in the dual banking system and for seeking the FDIC Board's views on these issues.

We can overstate the importance of today's topic. The OCC's recent preemption rules have already significantly altered the financial regulatory system and threatened the future of our nation's dual banking system.

How we, and ultimately the Congress, address these issues and the policy questions involved will have long-term systemic ramifications for banks, their customers and our economy.

We sympathize with multi-state institutions' need for consistency, but we must be mindful of how we accomplish this. These issues affect a sizeable portion of the state banking system.

At year end 2004, 48 of the largest 100 commercial banks were state chartered. Using FDIC's data we calculate that 224 state charted banks currently operate across state lines. These banks hold a vast majority of assets in the state system.

Additionally, many other state chartered banks have customers in states other than their own because they operate near state lines, provide credit cards nationwide or are involved in internet banking.

Even those banks that do not operate across state lines can feel the impact of these sweeping branching decisions.

The OCC's February, 2004 preemption rulings present grave concerns to me and my colleagues. We believe that the OCC has exceeded its authority and has erred in its interpretation of the relevant statutes.

The length of the OCC's preemption determinations continue to grow well beyond the national banks they were created to supervise.

Late in 2004, the OCC opined that preemption would apply to an operating subsidiary or a national bank's total ownership of that operating subsidiary was only ten percent.

Based on our readings of the OCC's determination on this issue, it would appear that a national bank could own as little as one percent of a subsidiary and the preemption would still float to that entity.

These rulings have created a major regulatory imbalance and need to be reexamined before irreparable damage is done. We welcome and encourage the FDIC's thoughtful consideration of this issue.

As primary federal regulator of approximately two-thirds of all state chartered banks, the FDIC plays an important role in the dual banking system and cannot sit on the sidelines.

Because of the many complex issues presented in the roundtable's position, CSBS cannot either support or oppose the proposal in its entirety. Within CSBS, the state bank supervisors have serious disagreement on how we, the FDIC, or the Federal Reserve should respond to the OCC's preemptive actions.

Speaking for CSBS and for the state of Mississippi, I appreciate these divergent views on this topic and I'm happy to see that individual states will be representing their own testimony to the FDIC later today and through written comments.

This should convey the importance of these issues to all of us and the need to continue this discussion.

However, CSBS feels strongly that the federal banking agencies and Congress need to open these questions to real public debate as current law requires.

CSBS does agree with the need to codify existing FDIC General Counsel Opinions 10 and 11 for banks and on the need to highlight current applicable law found in Riegle-Neal II for interstate branches of state banks.

We must address the needs of the 21st century financial marketplace together, weighing the appropriate roles of federal and state policy. These issues are too important to be left to a single agency that is not held accountable for its actions.

Dual chartering and supervision have been the essential elements of the American banking system since the 1860's. The healthy tension that has traditionally characterized our dual banking system has helped to create an economy envied and imitated around the world. Federal preemption has always been a part of this dynamic. It has often been helpful and necessary for the system as a whole.

At these times, CSBS has supported preemption, most recently in federal Fair Credit Reporting Act. But our federal system of government demands that preemption take place only with Congressional oversight and direction.

This is the basis of our legal system and this was reaffirmed again in the Riegle-Neal Interstate Banking and Branching Efficiency Act. State bank supervisors' goals have been consistent since the first adoption of interstate banking laws.

We want a safe, sound and efficient banking system that does not disadvantage state chartered banks or smaller institutions simply because of their choice of charter or structure.

We prefer approaches that increase powers for all financial institutions rather than policies that curtail the powers of a given class of institution.

This is not merely a turf battle between state and federal chartering agencies. There are real potential consequences for chartering and supervising community banks and, accordingly, for our local economies.

Diversity in our financial system is not inevitable. Community bank is not inevitable. These are the products of a consciously developed state and federal system. A responsive and innovative state banking system that encourages community banking is essential to creating diverse local economic opportunities.

The state charter has been, and continues to be, the charter of choice for community-based institutions because the supervisory environment matches the way these banks do business.

Our goal, a safe and sound financial system that meets the needs of all of our communities, requires that we find a balance between encouraging economic opportunity and protecting our citizens.

Our dual banking system, unique in the world, has survived for 140 years for three fundamental reasons: accountability, creativity and effectiveness.

What makes the American banking system unique even among our own regulatory agencies is the breadth of its accountability. The federal banking agencies are accountable not only to Congress and not only to the President, but to each other -- to the state agencies, to the industry, and directly to consumers.

The existence of multiple agencies makes it extremely difficult for any one regulator to become a rogue and requires the development and consensus on best practices and emerging risk.

The existence of a banking department in each state provides immediate accountability for consumers who can usually make a local call to ask a question or voice a complaint. In addition, state bank commissioners are accountable to their governors and legislators.

Eliminating all state authority over national banks eliminates this accountability as well. States have served as the incubators for almost every major creative change in the banking industry over the past 100 years.

It is usually easier to pass a law at the state level than at the federal level and individual states have been able to experiment with bank products and services before they were ready for the national market.

Branching adjustable rate mortgages, automated teller machines and interest bearing checking accounts are just a few of the services that were originally authorized at the state level.

Congress has often looked to the states for helping to determine when the national market is truly ready for major changes in the industry, such as nationwide branching or expanded powers for banks.

Most recently, states have been the innovators in developing new methods of consumer protection. We can look to the Georgia legislature for one excellent example of the state laboratory.

When the industry strongly objected to the initial predatory lending law in Georgia, the state legislature was able to act quickly to modify its law. Now, Georgia and North Carolina, among other states, have formed these models for discussions of a national anti-predatory lending policy.

My colleague from North Carolina is testifying today on Capitol Hill as to the findings of the various studies on the North Carolina predatory lending law.

With the OCC and the OTS branch and rules in place and the state system maintaining only a third of all banking assets, this laboratory becomes much less relevant.

Conflict between state and federal regulators, and occasionally among the federal regulators, is not only the nature of the dual banking system, but the source of many of its benefits.

This conflict produces consensus on best practices and new activities and serves to keep any one element of the system from overpowering the others. Overreaching actions by any one federal agency will stifle this dynamic tension.

Left unchecked, this concentration of power threatens to eliminate many of the benefits of the dual banking system.

The Financial Services Roundtable Petition and today's hearing have spurred CSBS to seek a position that respects state authority, but does not disadvantage interstate banks that operate under the state charter.

To that end, CSBS has held numerous meetings and the subject has been on the agenda of every board meeting since the OCC's proposal first came forward.

We've also held a series of conference calls with the state banking departments over the past month to discuss the issues -- the ideas raised in the roundtable's petition.

As you can imagine, with 50 states and the US territories, all with different legal and legislative pressures, it is nearly impossible to reach a unanimous agreement.

Dissenting views on this particular issue are very strong and well-reasoned. On many of the issues raised in the roundtable petition, our members our evenly split.

State bank supervisors understand that if the current OCC preemption is allowed to remain, major state chartered interstate banks will likely migrate to a national charter.

We are hearing from some of the largest state chartered banks that the OCC's unilateral action to preempt state laws and authority is putting them at a significant competitive disadvantage. They are telling us that if the imbalance in the system is not addressed, the state charter may no longer be an option.

Although the state system retains 75 percent of all bank charters at year end 2004, national banks held more than two-thirds of the total assets in our banking system.

Compare that to 2003 where state banks' share of total assets was around 45 percent. Much of the decrease in asset share can be attributed to two of three large charter conversions that occurred in 2004 after the OCC issued its branching rules.

If the current imbalance caused all 100 of the largest banks to become nationally chartered, the state system would supervise only 17 percent of US commercial banking assets and the damage to our dual banking system would be immeasurable.

The states would be left with infra-state community banks and a few large state chartered interstate banks that operate on a wholesale basis or strictly through a multi-state branching network. It is not clear that such a system would be sustainable.

Given time, we believe that we can resolve most, if not all, the issues. However, time is not on our side. Our daily Congress would enact legislation to rationalize applicable law and reassert its role and determine the appropriate balance of state and federal law supervision and enforcement.

We strongly urge the FDIC and other federal banking regulators to work with CSBS in requesting that Congress address and debate these issues to clarify its position of the dual banking system.

In the absence of Congressional action, however, CSBS seeks to cooperate with the industry, federal banking regulators and other industry parties to find a workable solution that will meet the needs of banks with interstate operations regardless of charter type.

These are policy questions before us. Is it good for the industry to have only one viable charter alternative for banks that operate in numerous states? We say no.

Is it good public policy to have the largest banks subject to supervision by a single charter authority? We say no.

Will the state banking system which has served the country so well retain its relevance and political significance if it charters only 17 percent of the nation's banking assets? We say no.

Is it good to lose the FDIC and the Federal Reserve's current role in regulating and supervising these large interstate banks? We say no.

These are serious public policy questions for the state banking regulators, the FDIC and the Federal Reserve system, the banking industry and the general public.

Only Congress must address these questions. States must be a part of that discussion. As our Founding Fathers recognized, we need federalism, not just federal, in our banking system.

A realistic choice in chartering of all institutions is essential to maintain the preeminent banking system

in the world, whereas the FDIC in its leadership role to ensure that this debate continues past this hearing.

CSBS commends the FDIC for beginning debate about real concerns in the dual banking system and we look forward to participating in this discussion as it continues. We thank you for this opportunity to comment.

DIRECTOR CURRY: Thank you, Commissioner Allison. According to my watch, we have roughly 20 minutes for questioning, which should leave about five minute for each of the panelists here.

In terms of my own questions, Commissioner Allison, as I understand your testimony, you've identified this really as a federal problem that the states can't fix -- this imbalance in the regulatory system.

Could you elaborate on what the states are doing to try to at least alleviate the problems associated with this imbalance?

COMMISSIONER ALLISON: Well, first, I'd say before I get further down in your question, Director Curry, the overreaching preemption rules promulgated at the OCC created, I think, the current imbalance in the system.

Federal regulations created the problem through a willful misrepresentation of Congressional intent and judicial decisions. Riegle-Neal clearly set out that generally state laws on consumer protection and community reinvestment would apply to national and state chartered banks to the same extent.

With that as a background, we've certainly gone headlong in developing cooperative agreements within the states to share information to make it as seamless as possible to have a single regulator at the home state level.

We've worked with our counterparts, the FDIC and the federal reserves to have similar cooperative agreements. We've came up with a federal best practices document last year. We have multi-state agreements on trust and we have agreements with insurance commissioners.

So we're doing everything that we can to profess that even. We're in the laboratory right now of creating a nationwide database for the mortgage industry which has been one of the biggest problems that have been across the state lines to give a central location to register in any of all the states.

So I think we're doing our part to try to do that, but we still feel like we are at a disadvantage in the system that's out there now.

DIRECTOR CURRY: Thank you Commissioner Allison. Mr. Muckenfuss, common themes throughout all the -- or many of the statements have been submitted to the FDIC is the issue and I think you referenced it in your remarks as well as this race to the bottom issue.

You, particularly in the area of the adequacy of consumer protections and also supervision and enforcement, you make reference to these problems being readily dealt with and being solved, could you elaborate on those?

MR. MUCKENFUSS: Well, first of all I think that there are several mechanisms that the FDIC and the other agencies could employ. One in crafting and architecting a regulation, it's possible through interpretation of various provisions to place constraints on the ability to choose a charter, to switch from one state to the other.

There are a variety of formulas that people have come up with that one could embed in the regulation. Second point is that through action, that both the states and the banking agencies could take the incentives to switch to a state or a jurisdiction of which was the lowest common denominator would be overcome.

For example, if it's perceived that a particular form of abuse is being sought to be avoided, then you can bring into play the, I think, very substantial federal powers to address that particular abuse.

I'm confident that in one of various ways it's possible to put in place rules in architecture that prevent it from happening. I guess I also want to say that, and this gets to a larger point in this hearing, and I, over the weekend, had the opportunity to read the excellent testimony and the comments of some of the folks that were most critical of this proceeding and of the roundtable's petition.

I think there is a theme running through it. There're two themes running through it that are disturbing and that I'd like to put on the table and that I think ought to be worried about and worried over.

The first thing is that is one of cynicism and mistrust. There is a perception that this petition is all about getting the FDIC to somehow go along with what is perceived as the OCC's attack on consumer laws.

I don't think that's right with respect to the OCC and my understanding of it and I don't think it is right and appropriate in terms of what public officials in the FDIC and the states can put in to place.

But one of the things I'd like to say is that among all of us and I've made the reference to getting rid of this sort of adversarial approach to things, I think -- I am more of an optimist about the ability of government officials working with people who have interests and concerns to deal with those interest and concerns. That's the first point.

The second point is it would be factious of me to say that looking at the use of the migration to particular states for certain kinds of banking activities it would be factious to say that the race to the bottom is not a matter of concern.

I've not been -- deliberately not been precise about the solution, the particular solution that I would put in to place. I can think of two or three or four, all involve tradeoffs.

But what I want to emphasize that this is the underlying theme of our testimony. What I want to emphasize is that it is just this kind of problem that -- for which agencies like the FDIC and the Federal Reserve and the OCC were created.

It's the ability for people with expertise to wrestle in a transparent and open way with difficult questions and come up with frameworks and architecture that work.

Now, count me naive, but I am more optimistic than I read in some of the criticism, it's so much harder not to take it personally, but some of the criticism of the proposal is -- it seems to me reflects a mistrust about our ability to go forward, cooperatively, and in good faith.

Sorry, this is more than the answer to your question, but it really is spawned by it.

DIRECTOR CURRY: All right. Thank you. Mr. Bovenzi?

MR. BOVENZI: Mr. Muchekfuss, on -- you said a couple just like Riegle-Neal II and Gramm-Leach-Bliley has given us reason to enact a broad rule.

MR. MUCKENFUSS: Right.

MR. BOVENZI: To what extent does it matter how we interpret Gramm-Leach-Bliley? Is Riegle-Neal II, if we had a broad interpretation of that, is that really sufficient to cover it? Does Gramm-Leach-Bliley add anything to it?

MR. MUCKENFUSS: I think there are two axis. One is that -- and this gets technical and we can respond in a more technical way.

MR. BOVENZI: I'm all ears.

MR. MUCKENFUSS: I think it's fair to say that Riegle-Neal, that I believe that when you put Riegle-Neal II together with your existing authority under Section 8 and Section 9 that it is -- that you have the discretion to go forward fully. I'll come back to that.

I think two that 104, that the non-discrimination provisions of 104 both reinforce that and in my judgment properly interpreted themselves may give you the authority to do -- to go forward and fully implement the Riegle-Neal II Home State Template.

Now, I'm fully aware that the use of the term branch in Riegle-Neal II can be read as being constraining. For my point -- and I would say that if you put in -- if you go forward with a rule that stopped there, that would -- and a rule combined with codifying Section -- the Section 27, interpretations, I think you would have done something that was highly constructive.

Now, that said, and this goes back to what Congress did, a full understanding of what Congress did when it put in place Riegle-Neal II and I'm going to give you some examples and I hope I can make them clear cut.

What Riegle-Neal II says, I mean quite literally and it's interesting. I've done some polls with legal groups that it's amazing, have a few people go back and read stack sheets.

But, what Riegle-Neal II says on its face is that if a New York bank branches in to Connecticut and the OCC has preempted Connecticut Law, then New York Law applies. That's very clear, full stop face of the statute.

What that means is that if -- it certainly means at the minimum that if you conduct an activity in Connecticut by or through or out of the branch or a branch that you -- that New York Law applies. That's pretty clear. Not well understood. That's the law today for sure.

Now, the question is does it -- did Congress intend to go beyond that. Obviously Congress chose to use the word branch. Think about it. Our whole edifice prior to Riegle-Neal was to create offices which avoided branches.

Take an LPO. An LPO is the ability for a New York bank, before Riegle-Neal, to lend money in Connecticut, keep the sidus of the transaction in New York, and by the way, OPSUBs have the same device and credit cards are structured in some ways much the same way.

So that the loan is actually made in the home state, not in Connecticut. Note, note what happens is that, let me get this straight, if you don't generalize the Riegle-Neal II framework, then what it means is that in the case of a transaction conducted in, by, through, out of the branch that is to say the sidus of the transaction is in the host state.

Home state law applies. But in the LPO, where the transaction is conducted in the home state, the sidus of the transaction's the home state, host state law applies. I don't believe that that's the result Congress intended in putting in place, Riegle-Neal II.

I think that the consequence, I don't know where the tipping point is, but I think that the FDIC has ample authority to provide that generalization. I think 104 reinforces it. I would also note, sorry to go on, but it's complicated.

I would also note one thing. That is to say interestingly enough an OPSUB under both FDIC and OCC interpretations, an OPSUB that involves a disbursal of funds on a loan has to -- is a branch under the definition of the branching laws so that part of -- and what that reflects is that if you go forward even limiting it to branches, it has a sweeping effect.

MR. BOVENZI: I'm just going to follow-up on Mr. Allison on that. If the law's clear that the statute at least covers a branch that's operating within the host state, it's preemption, and there's sufficiency in interpreting that more broadly to main office or other offices; is there a downside to the FDIC issuing a broad rule while we're working with CSBS and others for legislation?

COMMISSIONER ALLISON: I think it comes into the fact that these definitions of branches and OPSUBS and so forth and so on are some of the sticking points. I think the true interpretation of Riegle-Neal II gives what should be in place of how the difference to the certain consumer laws in a state and I think that consistency would help tremendously in us regulating.

We strive hard to have a single point of contact with a home state, but in working so where these host states have more definitive consumer laws, if you will, we work together in that way.

In my own state, for example, Louisiana has some definitive consumer laws and when we do examination of Bancorp South we rely heavily on the Louisiana -- our contract with Louisiana examiners to perform those functions of those loans that Bancorp South has made.

Albeit their housed Tupelo, Mississippi, we allow Louisiana examiners to come in and sample loans predicated on their home state laws. With our cooperation I alluded to earlier, that's -- we feel like that's an even way to work and that's taken the narrative of Riegle-Neal II to its fullest.

I think -- but to have some underlying support and to enforce that, I think would be better for the state banking system.

DIRECTOR CURRY: Thank you. Mr. Kroener?

MR. KROENER: Let me follow up with Mr. Muckenfuss on the legal issues that you were pursing in Mr. Bovenzi's questions. I guess I'm as good a financial engineer as any of them and I've used a lot of the laws you were referring to over the course of a long career.

I think I understand the argument on Gramm-Leach-Bliley and the distinction between institutions and non-depository institutions in one section and institutions and others in the other and how you get to a literal language that would support the -- a literal language in the statute that would support your argument.

Then you have the legislative history and the policy. I have somewhat more difficulties on Riegle-Neal II and particularly as you expanded on that question, I just have a hard time -- the courts do look for an ambiguity.

It seems to me to the extent your proposed rule would cover activities by a state chartered institution in a host state, where that institution has no branch, no LPO that you can say is a branch, no physical presence of any sort you can get to the argument that Riegle-Neal II says that the home state -- you may be able to get to the argument that the home state law applies for other reasons.

Seems difficult though to get there to me under Riegle-Neal II and maybe you can help me with that last step, which I don't think you covered, or at least I didn't hear in your earlier answer. That seems to me the hardest step of the legal argument.

MR. MUCKENFUSS: No question. I'm sorry you can't get there.

MR. KROENER: I simply said help me get there.

MR. MUCKENFUSS: I think there's no question that that's the -- that on the face of a literal rating that's the more challenging step and I'd say three things.

You -- I think you have to, in going forward with a comprehensive rule making, that it is possible to read the Riegle-Neal II template together with 104 and to combine that with your very broad authorities under Sections 9 and 8 in the interest of providing certainty in clarity in choice of applicable law and taking in to account conflicts of law principles.

I think that it is appropriate to come up with a comprehensive rule and I think you have the discretion to get there and if you got there through an administrative process that has the kind of diligence and openness that this hearing reflects, I believe that a court would uphold it.

I think that where different people would draw different lines. I happen to believe that this kind of forum in agency is a better place to resolve hard questions than in the courts and frankly in the press and where Congress has already spoken, I think there is an interest and an obligation for the agency to use its tools as best it can and not duck hard policy calls.

But -- and we'll try to be more helpful in writing, but I think that you're not wrong about where the challenging issue is. That said, I think when you take the -- your broad -- general authority combined with these statutes that it's appropriate and possible to get there.

DIRECTOR CURRY: Mr. Zamorski?

MR. ZAMORSKI: Mr. Allison, if I heard your testimony correctly you indicated that this is not merely theoretical but in the last year the relative equilibrium of federal state assets has gone from about 55/45 percentage to 67/33.

That's a rather dramatic change. Is -- that sounds like what you were saying in one year, there's been a big shift in an $11 trillion industry. But, in any event, you also indicated that as the state commissioners discuss this issue there's a split and healthy debate.

I can take a guess at what some of the major points of contention are, but what would be the one or two most contentious issues that your dealing with that are the subject of divergent use?

COMMISSIONER ALLISON: Well, if you've had the job of herding cats you kind of know what this has been like. But, we've had some long intense discussions. Some states by statute have a lot more protectionism for their consumers and that's what they are guarding most diligently.

To make sure that the wishes of their state legislature is being carried out to all citizens and that's the biggest thing that's out there right now, I think.

We -- it's difficult but there is and I -- your perception of what I alluded to is correct. That there's been an imbalance in the assets of the system. It affects us in how we operate as banking departments because we do get our funding from these and we feel like, not in that in and of itself is a problem which we've been able to deal with and in most states we have other avenues of supervision that we get money from that we can still operate on.

But it's the total imbalance of the system that we feel like is not going to be on an even level playing field when citizens in one state are totally disregarded in being looked after for their protection as afforded by their particular states. I think that's the most paramount, Mr. Zamorski.

MR. ZAMORSKI: Thank you. Mr. Muckenfuss, it seems to me, well it's obvious the threshold issue is whether the legal authorities asserted to the fact exist and its been discussed already by Mr. Bovenzi and Mr. Kroener.

If there is ultimately a conclusion that the assertive legal chain does not work, how do you see this playing out with this going from relative equilibrium to where we are now.

Is there legislative fix in the offing? Is there another legal interpretation that might deal with this issue? Is there another role making? How do you see this, if the threshold issue doesn't work?

MR. MUCKENFUSS: One, I'm obviously optimistic that you will conclude that it does. Two, and I think this is very very important and that is that by holding this hearing and continuing to go forward not in some slow walk fashion, but in a serious and diligent way, the FDIC and perhaps others will create a process in which solutions will be reached.

I think you do have the authority and if you don't have the authority, obviously the place to get authority is in the Congress so that would be on the table.

Secondly, as I said before and I want to underscore this, really two things. One is that it will be constructive and terribly important for you to go forward and to interpret these statutes formally in -- so that we know what they mean in your interpretation because silence has meant that they're a dead letter.

I mean, 104, the double negative structure and most of the people here have probably haven't forced themselves to read it, the double negative structure in Section 104 of Gramm-Leach-Bliley I was in the -- I didn't put it past the double negative, I was involved in the creating that stuff.

Every time I look at it, I start to get a migraine. Okay. So, it's not surprising that people are having trouble with these concepts. So first point is, it's important whether you agree with me or not to go forward and formally interpret this and put it in place in a way that people can have clarity and certainty at least about what you think the statutes mean, point one.

Point two, if you don't go all the way and there are gaps then Congress is the appropriate place to go. Three, if they think you went to far, people can sue you or Congress can change the law and that's the way it's supposed to work.

Now the other piece as I've said, if you went forward with 27 in implementing the Grimm-Leach- Riegle-Neal II template as far as you thought you could go and you know what I think.

Then, I don't know whether that in and of itself would avoid the tipping point, but if you did that and did that quickly, it would certainly alter the momentum of this process whether it's enough to change things for people in the working group I think it depends on people's particular circumstances.

DIRECTOR CURRY: Thank you. Mr. Murton?

MR. MURTON: Yes. Mr. Allison, if the situation isn't as dire as some people suggest do you think we have time to wait for Congress? I think that should count. How do you respond to that and to that situation?

COMMISSIONER ALLISON: We did say time is of the essence. Congress acts slow and methodical. I think that would be the ultimate fix of the whole thing and that's one of the reasons we're here today to getting out of hopefully this snowball pick up speed getting down the hill and get the issues out further and get to Congress.

Because I think to have a true understanding I think some definitions in the federal law needs to be in place. But then, I think with the FDIC looking at it and giving us some reasonable hope and putting in and codifying the things that we're asking for, I think will give us some -- shore up a little bit and then move it forward in the whole arena of discussion.

As I said, we can't support the total roundtable petition in its entirety, but we do support a couple of things about the codification of ten and 11 and I think that would go a long way at helping us get our -- continue to stay in the ballgame.

MR. MURTON: Since time's short I'll ask a question. I want to reflect my ignorance on the law here to be answered by a yes/no by Mr. Muckenfuss. If we move forward with this, does the Federal Reserve need to be involved in this rule making for state members?

MR. MUCKENFUSS: They could. They don't need to, but in certain respects you might wish to involve them or if they might wish to be involved.

DIRECTOR CURRY: Thank you. Gentlemen thank you for your very thoughtful testimony and I will now turn the chair over to our General Accounts, Mr. Kroener.

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Last Updated 8/10/2011

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