We cannot overstate the importance of the FDIC opening the debate on the health of the dual banking system. The Office of the Comptroller of the Currency's (OCC's) recent preemption rules, as well as similar actions by the Office of Thrift Supervision (OTS), have significantly altered the financial regulatory system, and threaten the future of our nation's dual banking system. How we address these issues and the policy questions involved will have long-term, systemic ramifications for banks, their customers, and our economy.
The OCC's February 2004 preemption rulings present grave concerns to CSBS. We believe that the OCC has exceeded its authority provided by Congress and the National Bank Act in these instances. We believe that the OCC erred in extending the definition of "national bank" to cover operating subsidiaries especially, as recently published by the OCC, to those subsidiaries where a national bank owns only 10% of the outstanding shares of stock, and that the OCC also erred in overriding the provisions of the Riegle-Neal Act that ensure states' rights to protect their consumers. These preemption decisions have created a major regulatory imbalance in the system, and need to be reexamined before irreparable damage is done.
We hesitate to turn such decision-making authority over to any one federal banking agency. Ultimately, Congress must enact legislation to rationalize applicable law, and reassert its role in determining 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 vision of the dual banking system.
A sizable portion of the state banking system is impacted by these issues. As of year end 2004, 48 of the largest 100 commercial banks are state-chartered. Using FDIC data, we calculate that 224 state-chartered banks currently operate branches across state lines. While that number is a relatively small percentage of state-chartered banks, they hold the vast majority of assets in our 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 will feel the impact of these sweeping preemption decisions.
State banking 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 relative to national banks. They are telling us that if this imbalance in the system is not addressed, the state charter may no longer be a viable option. The states could be left with intrastate community banks and very few, if any, large state-chartered interstate banks that operate on a wholesale basis or strictly through a branching network. It is not clear that such a system would be sustainable.
There is a clear imbalance in the dual banking system. The Roundtable's preemption petition is meant to bring balance back to the dual banking system by providing state chartered banks with "preemption parity". However, because of the many complex issues presented in the Roundtable's petition, CSBS can neither support nor oppose the proposal in its entirety. Within CSBS, the state bank supervisors have serious and well-reasoned disagreements on how we, the FDIC or the Federal Reserve should respond to the OCC's preemptive actions.
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.
The FDIC plays a crucial role in the interstate supervision of state chartered banks and in monitoring the banking industry's health. In its leadership role, we urge the FDIC to ask these public policy questions:
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 chartering authority? We say no.
Will the state banking system, which has served this country so well throughout our history, 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 roles in regulating and supervising these large, interstate banks? We say no.
Our dual banking system, unique in the world, has survived and flourished for 140 years for three fundamental reasons: accountability, creativity, and effectiveness. We believe these are essential elements to any successful banking system.
American government is built upon the concept of checks and balances. Regulatory agencies at both the state and federal levels implement the laws passed by legislatures and the policies established by the elected executives, subject to judicial review in the courts.
What makes the American banking system unique even among our own regulatory agencies, however, is the breadth of this 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. State banking regulators have the same accountability pressures at the state level. The existence of multiple agencies makes it extremely difficult for any one regulator to become a "rogue," and requires the development of consensus on best practices and emerging risks.
States have served as the incubators for creativity on almost every major 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. Recently, state laws have served as models for Congressional discussions on a national predatory lending law.
The U.S. banking system serves as the model of efficiency, integrity and prosperity around the world. 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 much 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 action by any one federal agency stifles this dynamic tension. Left unchecked, this concentration of power threatens to eliminate many of the benefits of the dual banking system.
Our federal system of government, however, demands that preemption take place only after Congress has fully aired and reviewed the issues at hand, and has explicitly authorized preemption. States must be part of the discussion. This is the basis of our legal system, and this was reaffirmed again in the Riegle-Neal Interstate Banking and Branching Efficiency Act.
A realistic choice in chartering for all institutions is essential to maintain the preeminent banking system in the world. CSBS commends the FDIC for beginning this debate about real concerns in the dual banking system. We look forward to participating in this discussion as it continues, and we thank you for this opportunity to comment.