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Public Hearing on Preemption Petition
Public Hearing on Preemption Petition
Testimony for Federal Deposit Insurance Corporation Hearing on the
Financial Services Roundtables Petition for Interstate Parity for State-chartered Banks
Background of the Alabama Banking Department in interstate bank regulation
General Comments Important Questions Concerning the Petition
Question: Is there really a problem that needs to be addressed?
Answer: Yes. The OCC Preemption has caused a critical competitive disadvantage for state-chartered banks trying to do an interstate business.
Our banks want to remain state-chartered; however, their business plans and markets change. With every merger where they are the acquirer, with every new state that they enter, and with many new activities in which they engage, they have to reevaluate whether they can continue to do business with a state charter. There also is a cumulative weight of regulation that grows as our institutions add states to their market footprints. With each state added, multiple regulators, licenses, and ongoing legal costs are added. The greatest problem, however, is a lack of certainty for state-chartered interstate banks.
Question: How important is it that the FDIC act on this petition?
Answer: We believe that this petition is the most important issue before the FDIC.
The future viability of the dual banking system depends on steps that we take now to restore parity for state-chartered, interstate banks. The decisions made by the FDIC on this petition are a critical step in preserving that system. For state-chartered banks, state bank regulators, the Federal Reserve, and FDIC, this decision will come home to roost. Our experience has taught us that decisions made today determine the shape of our banking system ten to fifteen years later. We believe that the OCC field preemption has accelerated that clock. We see a shift in bank charters to the national charter. We believe that this is a part of the inevitable development of a truly nationwide banking system. We also believe that, without efforts to rebalance the dual banking system, state-chartered banks may have no place in this nationwide system. A system where state-chartered banks can operate only within their states borders is not a dual banking system. A system where an interstate bank only has one choice of charter and regulator is not a dual banking system. This denial of choice harms all banks large, small, state, and national.
Question: Does the FDIC have the authority to act on this petition and is it the proper venue for addressing these questions?
Answer: The FDIC has the authority to act and is the appropriate regulatory body to decide these issues. There is also a critical need for the FDIC to step into the role of deciding the myriad questions surrounding state-chartered banks interstate operations.
The FDIC is the proper forum and arbiter of these questions. Its your law to interpret. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 is codified in the Federal Deposit Insurance Act as was the Riegle-Neal Amendments Act of 1997 (Riegle-Neal II). States have scrupulously avoided going to court to resolve disputes and questions. This has resulted in state-chartered banks being subject to actions, prohibitions, licensing, fees, and examinations by certain host states that are inconsistent with federal law. More often though, with no authoritative source for interpretation and guidance on federal law we (as home and host states) have simply been left with confusion and compromises as we improvised our own rules from state to state. Where compromises regarding the same activity by the same bank differ from state to state, additional inconsistencies result.
As a state bank regulator, we dont ask our banks to interpret our state banking laws as best they can and if challenged by someone with a different interpretation to acquiesce or go to court to settle the question. We provide rulemaking and guidance to give answers and certainty. Our department and our banks now need similar rulemaking, guidance, answers, and certainty from the FDIC on federal banking law.
Question: What is the real question before the FDIC?
Answer: We believe that the real question before you is one of parity.
I urge the FDIC to define its deliberations in terms of and focus on the real question of parity. We would hope that your deliberative process does not get sidetracked by questions or concerns that can only be addressed at later dates in other forums. Congress has consistently expressed its support of and intent to preserve the dual banking system and parity for state-chartered banks. The laws that the petition is based on clearly show this intent. We choose to use this opportunity that you have provided us as a rare chance to stand up for the dual banking system. We ask that parity be the overriding focus of your deliberations on this petition.
Questions: Are there important issues that cannot be resolved by the FDIC in the context of this petition? Should these other issues be decided before the FDIC acts on this petition?
Answers: The answer to the first question is yes. Certain important questions and concerns have been raised which can only be decided at later dates in other forums. However, the FDIC can and should act on this petition to reaffirm parity for state-chartered banks and preserve the dual banking system without waiting for other bodies to solve every issue.
We have not chosen to use this hearing to dwell on other issues that we believe can only be decided at later dates in other forums. Some of these issues that we believe cant be decided here are:
The OCC Preemption - Beyond emphasizing the significant competitive disparity that exists for state-chartered, interstate banks, we do not wish to dwell on the OCC field preemption, nor would we wish to see this hearing digress solely into a platform to debate that OCC preemption. We submit that the outcome of the questions surrounding the OCC preemption should and will be decided in other venues such as the courts and Congress.
Others have questioned whether the FDIC by deliberating on this petition is acting prematurely before the appeals of court cases on the OCC preemption are decided. We can observe that, while court cases regarding the OCC preemption are on appeal, we have seen little indication that the preemption will be overturned. It appears to us to be a reality that will be with us for the long run. We believe that preserving parity for state-chartered banks is and should be treated as an independent, time-critical issue.
Whether you are opposed to or support the OCC preemption, if you care about preserving a dual banking system that has served this country well for over 140 years, it is time to act to preserve parity. In the time that it takes to exhaust all appeals and other judicial actions or during the time it might take for Congress to act on that preemption, if it even chooses to do so, we could see irreparable harm done to the dual banking system.
Whatever the outcome of those questions, parity is just that. One of our bankers has referred to this as parity up or down. If the FDIC acts favorably on this petition for parity, and the courts or Congress scale back the OCC preemption, then parity dictates that the same scaling back would apply to state-chartered banks.
Consumer Protections and The Race to the Bottom - You have heard and will hear from those who have sincere concerns for the impact that the requested rulemaking could have on states rights and consumer protections. We believe that, while it is proper and important to hear and understand these concerns, most of them can only be addressed at later dates in other forums. We believe that, by maintaining focus on the question of parity, we will preserve the dual banking system while these other issues are resolved. If, on the other hand, we wait on other bodies to resolve these other issues before we reaffirm and provide for parity, we may lose our dual banking system.
For example, there are those that are concerned about the potential for a race to the bottom in terms of consumer protections. In this scenario, they predict that if state-chartered banks have parity with national banks and home state law governs the activities of state-chartered banks and their subsidiaries in a host state because the OCC has preempted the host states laws, banks will en masse relocate to states where the consumer protection laws are the weakest.
This wholesale relocation of banks hasnt happened so far. What has happened is state-chartered banks have converted to national charters. We believe that this is due to the perception that, for these banks, the national charter and the OCC preemption provide one set of rules and certainty about those rules. To do a nationwide business, our banks want and need one set of rules. We have determined, through our discussions with our interstate banks that they do not want the most lax rules. They just want one set of rules with which they can operate with certainty. We do not believe that a system where, in order to obtain that certainty, banks have only one choice of charter and regulator is consistent with Congressional support of the dual banking system. We believe in the sincerity of those who are concerned with the potential for a race to the bottom. However, we believe that this is only a potential problem, of which weve so far seen little evidence. We should weigh the concerns over this potential problem against our concerns over the real weakening of the dual banking system that we are currently seeing.
We also believe that the FDIC cannot fully address this potential problem. In declaring its support for the preservation of the dual banking system in an interstate environment, Congress (through the Riegle-Neal Amendments Act of 1997) has established the principle of home state law governing the activities of state-chartered, interstate banks. We believe that we must work within that framework unless Congress elects to change it. We do not believe that it would be proper or productive to reopen the debate here over the principle that, when host state law is preempted for national banks, home state law will govern the conduct of activities for state-chartered banks in a host state. That principle has been firmly established by Congress. We also wish to point out that, for activities conducted through branches of state-chartered banks, this principle has been at work since 1997. In the eight years since passage of the Riegle-Neal Amendments Act of 1997, we have not seen a race to the bottom to find the weakest laws governing branch activities.
For those unhappy with the current threshold level of consumer protection, we would ask the following questions: What is the proper bottom or floor in terms of consumer protections? Is it New York law, Wisconsin law, Georgia law, Alabama law, or the OCC rules? Some have proposed a federal consumer protection law as a solution to what they see as a potential problem. If Congress determines that the present nationwide consumer protection laws are not sufficient, we could and would support the establishment of additional federal consumer protection laws that apply to all banks. However, we do not believe that the FDIC can establish this floor. We also do not believe that the FDIC should wait to address parity pending the establishment of a different floor.
We also wish to point out that, from our experience with interstate bank operations, preemption is not necessarily a method of avoiding consumer protection laws. Our experience tells us that eight years after the advent of interstate bank branching, we are still feeling our way toward a fully functioning nationwide banking system. There are many laws still on the books of the states which predate interstate branching and which primarily serve the purpose of limiting competition or protecting turf. Our state is no exception. Even when the main purpose of a state law is to provide consumer protection, there are widely varying approaches and rules from state to state to address the same issue. In these cases, the cost to our institutions that do business in multiple states to determine all of the rules, procedures, and licensing requirements with which they must comply is significant. The process of surveying this landscape can be extended and involves considerable resources of research time and legal fees. In general, the more states in which a bank does business, the more daunting becomes the process of just asking a question. This is particularly true for community banks which have far fewer resources to devote to research of and compliance with multiple sets of rules. For all state banks, but particularly for community banks who wish to do an interstate business, we consider the petition to be a major effort at regulatory relief. When the questions are asked, the differences in approaches toward dealing with the same issue may be as simple as the number of copies to be filed or the length of publication periods for notices. In other instances, there are more substantive differences; however, we believe that, in a well-functioning nationwide banking system, banks will have one clear set of rules to follow.
We believe that the FDIC should now focus on the question of whether state banks should be a part of this nationwide banking system however it evolves. Our conclusion is that Congress, through its passage of the Riegle-Neal Amendments Act of 1997, firmly asserted that state-chartered banks should have a place in the nationwide banking system, and, where one set of rules apply to national banks, one set of home state rules should apply to state-chartered banks.
Question: Are there some particularly important issues in the petition on which, to restore parity, the FDIC can and should act?
Answer: Yes. Of particular importance are state bank activities (as distinct from activities of branches) and activities of state bank operating subsidiaries.
Activities - Because we believe that Congress clearly intended for state-chartered banks to be part of the nationwide banking system, we believe that Congress also intended for state banks to take part in that system through all means by which banking products and services are delivered to the nation. We believe that state-chartered banks should not be confined to a branch delivery system. We see no difference between an account opened through the internet and an account opened at a desk in a branch. We see no difference between a withdrawal made at an ATM and one made at a teller window in a branch. We see no difference between a trust established by a bank at a deposit taking branch office and one established at a trust office. We do not believe that mortgage loans made through a mortgage office of a state bank should face restrictions that the same mortgage loan made in a branch of the same bank would not face.
We believe that the concept of parity should apply to activities versus activities of branches in a post Gramm-Leach-Bliley, nationwide banking system. We also believe that the concept of activities versus activities of branches applies to the most basic of banking products and services.
When I think of activities, the case of one of our community banks that wanted to establish a cash-dispensing only ATM a few miles across the state line from the bank immediately comes to mind. The bank, which is located in a rural area, has a number of farm customers who live a few miles away in another state. To serve these customers better, our bank wanted to put an ATM in a similarly rural area in the other state. Our bank was not permitted to do so by the other state. When I spoke about this with the state bank regulator in the other state, I was told that the other state had a law that prohibited out-of-state banks from owning ATMs in that state. I then questioned how a large, national bank with no branch offices in that state was permitted to have ATMs in almost every gas station in one of that states major cities. I was told: Thats a national bank, and were preempted by them, but your bank cant put one here. The other state regulator then went on to explain that this was a law that predated the interstate laws, but regardless of how he felt about the rightness of discriminating against out-of-state, state-chartered banks, it was the law and he was compelled to enforce it. This is a clear example to me of why activities outside of branch networks should be given the same stature as the same activities conducted in a branch. In this case, the real losers were our banks customers who had to drive across the line to access their funds.
Subsidiaries - At the heart of the contention surrounding the OCC preemption is the question of whether operating subsidiaries of a bank should be treated differently than the bank. Again, if the focus of your deliberations is on parity, the question before you becomes: Does an operating subsidiary of a state-chartered bank deserve to be treated differently than an operating subsidiary of a national bank? We think not.
We think that it would be incorrect to buy into the perception that a state bank operating subsidiary is somehow a lawless, unregulated entity engaging in all sorts of activities which are distinctly different from and more nefarious than those in which the bank itself engages. In some ways, a state banks operating subsidiaries may be subject to more regulation than a national banks operating subsidiary. An operating subsidiary of a state-chartered bank is subject to all of the federal consumer protections to which the bank is subject. This includes regulation and examination by the state and a federal bank regulator. Our banks operating subsidiaries are, by law, subject to the same examination authority by our department as the parent banks themselves. Where required by our law, we license and examine banks operating subsidiaries, for compliance with our consumer lending laws. As far as the activities of these subsidiaries, they are those in which the bank itself could engage. For example, we dont allow our banks to engage in payday lending activities. Consequently, their subsidiaries do not.
Summary of General Comments
We understand that there may be reluctance to get between states regarding issues on which the states are unable to reach clear consensus. However, we submit that (as you have heard from the Conference of State Bank Supervisors) there is consensus among the states that the dual banking system is out of balance. The solutions to that imbalance are the controversial questions. I believe that we must first preserve parity and the dual banking system before addressing other questions. I do not believe that reaffirming parity for state-chartered banks precludes addressing our other concerns at later dates in their proper forum. Whether or not we get the answers that we want, we need answers to the questions raised in the petition. I urge you to act as quickly as possible to answer those questions.
Specific Requests of the Financial Services Roundtables (FSR) Petition for FDIC Rulemaking--Interstate Parity for State-chartered Banks1
The Financial Services Roundtable petition asks the FDIC for rulemaking that would provide parity for state chartered banks operating in more than one state. The following bullet points summarize the specific requests in the petition. After each bullet point, I give the Alabama Banking Departments position on each point. In summary, the petition asks the FDIC to adopt rules that:
Specific Questions Posed by the FDIC on the Financial Services Roundtable Petition
G-1. Is a preemptive rule in these areas necessary to preserve the dual banking system?
A rule to preserve parity for all interstate operations and activities of state banks and their subsidiaries with the operations and activities of national banks and their subsidiaries is necessary. Please refer to my general comments. State-chartered banks face a significant competitive disadvantage in interstate operations due to the OCC preemption. We are observing a real shift in bank assets from the state charter to the national charter. This is not the normal ebb and flow of charter conversions, but risks becoming a flood the longer the disparity lingers. A system where interstate banks have no choice of regulator is not a dual banking system. A system where state banks cant do an interstate business and the state charter has only 17% of the bank assets is not a dual banking system.
G-2. What would be the impact on consumers if a preemptive rule were issued in these areas?
Please refer to my general comments regarding consumer protections and the race to the bottom. There would be no impact on consumers who do business with an out-of-state, state bank in a host state. Without a rule, it is generally accepted that the preemption already exists for consumers who do business through bank branches. The bank is still subject to federal consumer protection laws and home state law. For customers of banks doing business through other means such as a subsidiary, the internet, ATMs, trust offices, and mortgage offices, there is only a potential impact. Under a rule that treated all activities of banks and their subsidiaries the same, these customers would still be subject to federal and home state consumer protections. As of today, we have seen no evidence of a race to the bottom in terms of consumer protections to which bank branches are subject. We believe that banks want one set of certain rules not the most lax set of rules. We have seen evidence that, if the rule is not adopted for state banks, consumers will be subject to preemption by national banks anyway.
G-3. What are the implications of rulemaking in these areas for state banking regulation?
Certain states report that they would lose a large number of bank operating subsidiary licensees in their consumer protection areas. They could lose these licensees anyway if the parent banks convert to national charters.
The implications of not adopting the rule are extreme for our state and many others. A dual banking system where only intrastate banks can hold state charters would dramatically cut revenues, resources, and manpower devoted to safety and soundness. Such a system would significantly increase the costs of regulation for the smaller, intrastate community banks.
G-4. Would the measures urged by Petitioner achieve competitive balance between federally chartered and state-chartered financial institutions as advocated by the Petitioner?
They would come pretty close. At least, they would come as close as is possible under current law. The application of the principle of interstate parity to all activities of a bank and its subsidiaries would bridge the major, existing competitive inequities between state and national banks.
G-5. Are there alternative mechanisms available that would achieve the policy goals advocated by the Petitioner? and
G-6. Should the issue of competitive parity in interstate operations be left to Congress?
The answers to these two questions are related. If the FDIC does not act to restore balance to the dual banking system, the only other alternative is to go back to Congress to preserve the dual banking system. That would be a long process during which irreparable harm could be done to the dual banking system. Since Congress has already clearly expressed the principle of parity and determined that we should have a nationwide banking system and that state banks should be a part of that nationwide system, it would also be like asking Congress Are you sure?
We believe that the FDIC should act. Congress already has clearly expressed its intent on competitive parity in interstate operations and has given the FDIC the rulemaking authority to carry out that intent.
G-7. If the FDIC determines that it has the legal authority to proceed with a preemptive rule, are there reasons why the FDIC should decline to do so? If so, what are they? and
G-8. What would be the negative impact, if any, of the FDIC adopting a preemptive regulation as suggested by the Petitioner?
The answers to these two questions are related. The answer to the first question is there are no reasons why the FDIC should decline to provide for parity. Delay on the part of the FDIC would do harm to the dual banking system. Some have cited potential negative impacts from the adoption of this rule as reasons why the FDIC should not act on the petition. These potential negative impacts should be weighed against the real weakening of the dual banking system that we are experiencing. One such potential negative impact is the supposed race to the bottom on consumer protections. We have seen no evidence of this in terms of bank branch operations.
At any rate, the FDIC can do nothing about this. Congress has determined that, when a host state law is preempted for a national bank, home state law applies. This effectively sets the level of consumer protections at the level set under home state law and existing federal consumer protection law. It is beyond the power of the FDIC to change this concept of home state law governing where host state law is preempted for national banks. Please refer to my general comments.
G-9. Do states have a legitimate interest in how banks conduct business within their borders that would be undermined by the Petitioners request?
States legitimate interests in how banks conduct business within their borders would be better served if the Petitioners request is granted than if it is not and interstate banks convert to national charters. Through the Nationwide Cooperative Agreement, states share extensive information on the operations of state-chartered, interstate banks and share information on and have agreed upon procedures for handling consumer complaints.
G-10. Can state banks be expected to benefit if the FDIC were to preempt state law in the area of interstate banking operations? If so, how?
Please see my earlier, general comments. All banks, state and national, would benefit from having choice of charter and regulator in conducting interstate operations. This choice of regulator encourages regulatory efficiency. State banks can be expected to benefit from the requested rulemaking. As I stated earlier, state banks need certainty, and they need one set of rules of which they can be certain. As state banks expand their market footprints and enter more states, they encounter additional layers of licensing and regulations. At some point they may reach a critical mass of such regulations that no longer allows them to pursue their interstate business plans under a state charter. Over a large enough market footprint, the process of just surveying the numerous and varying regulations and licensing requirements can be a daunting task requiring significant time and expensive legal research that delays the delivery of products and services to consumers. For community banks with smaller market footprints but far fewer legal resources, this cost of simply asking a question can be prohibitive. We would consider the proposed rule to be regulatory relief for community banks wishing to do an interstate business. We believe that the failure to adopt such a rule will have an even larger impact on community banks with the advent of de novo interstate branching because more community banks will be involved in interstate branching if they dont have to buy a bank charter. The majority of community banks in this country are state chartered. For that majority of our banks, failure to adopt this rule will have an unintended financial consequence. As state-chartered, interstate banks convert to national charters to do their interstate business, the burden and expense of state regulation will fall more heavily on the intrastate community banks. That would certainly be the case in Alabama if we lose all of our interstate banks. We believe that it would also be the case nationwide as assets continue to shift from state to national charters.
G-11. What considerations should the FDIC take into account that either support or challenge the proposition that Congress intended to provide the comprehensive parity envisioned by the Petition?
We believe that the FDIC should consider the parity granted by Section 27 of the Federal Deposit Insurance Act as evidence that state-chartered banks not be disadvantaged in conducting an interstate business. We believe the FDIC should consider the clear Congressional statement made in The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 that we should have a nationwide banking system and that state-chartered banks should play a part in that system. We believe that the FDIC should consider the clear statements of the Riegle-Neal Amendments Act of 1997 that state firmly: (1) state-chartered, interstate banks should have parity with national banks in the nationwide banking system, (2) preserving that parity and the dual banking system takes a higher priority over preserving host state laws that only apply to state-chartered, interstate banks, and (3) where host state laws are preempted for national banks, home state laws should govern the activities of state-chartered, interstate banks. We believe that Congress, in section 104(d) again confirmed its broad intent that state law should not discriminate against state-chartered, interstate banks. Most importantly, we believe that the FDIC should not consider these Congressional statements in isolation but together as a progression and consistent pattern to provide broad and comprehensive parity for state-chartered banks in a nationwide banking system. By considering the whole pattern and progression of these laws and their consistent reaffirmation of interstate parity, we see that the principle of parity applies regardless of whether we anticipate the future delivery methods for bank products and services.
G-12. Is there a need for clarification on what law applies to the interstate operations of state banks?
Yes. As I have previously mentioned in my general comments, state-chartered banks need certainty. Frequently, the perceived lack of certainty and means of obtaining definitive answers to questions results in compromises being made among states and by state-chartered banks which may conflict with federal law. The fact that states feel compelled to make such compromises results in differing treatments from state to state of the same question by the same bank. Without access to clear written guidance, the turnover in the ranks of state banking commissioners comes into play. We occasionally have to revisit our verbal, compromise agreements when a new commissioner comes into office. As of last year, of the 50 banking commissioners that were around in 1997 for the advent of interstate branching and the signing of the Nationwide Cooperative Agreement between the states, only eight signers of the Agreement remained in office. We can only assume that there are fewer now. There is also significant uncertainty over which host state laws are preempted and to what extent. The FDIC should step into the role of arbiter of federal law questions for state-chartered banks and establish a process whereby the states and state-chartered banks can get definitive answers and certainty.
1 This summary of the specific requests in the Financial Services Roundtables petition was prepared by Buz Gorman, General Counsel of the Conference of State Bank Supervisors (CSBS). The positions stated regarding each request solely represent the views of the Alabama Banking Department and, in no way, represent a CSBS position.
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