Federal Deposit
Insurance Corporation

Federal Deposit Insurance Corporation
Petition for Rulemaking to Preempt Certain State Laws
Testimony of James Roselle, Associate General Counsel
Northern Trust Corporation
May 24, 2005

Northern Trust Corporation (“Northern Trust”) respectfully submits this testimony to the Federal Deposit Insurance Corporation (“FDIC”) in support of the Petition for FDIC Rulemaking Providing Interstate Banking Parity for Insured State Banks (the “Petition”). Northern Trust appreciates the serious consideration that the FDIC is giving to the Petition.

It is clear that national banks now enjoy a competitive advantage compared with state banks in connection with interstate banking activities. The parity of treatment that was envisioned by Congress in Reigle-Neal II and Gramm-Leach-Bliley has not been realized; state banks continue to labor under confusing and often conflicting state laws when they try to do business across state lines. Time is running out for the dual banking system. Unless state banks can be put on an equal footing soon, the movement from state charters to national charters will accelerate and the dual banking system envisioned by Congress will cease to exist in any meaningful way.

Since its inception Northern Trust has preferred to operate with its lead bank under a state charter with supervision by the Federal Reserve. Competitive pressures require Northern Trust to look ever more carefully at the relative disadvantages of operating with a state charter and multiple other charters in today’s marketplace. Northern Trust encourages the FDIC to take action promptly to correct the regulatory and cost disadvantages that now must be borne by insured state banks and their customers that result from lack of parity with national banks and federal thrifts.

Background
Northern Trust is a multi-bank holding company headquartered in Chicago, Illinois. Northern Trust is a leading provider of investment management, asset and fund administration, fiduciary and banking solutions for corporations, institutions and individuals nationally and worldwide. Northern Trust has a growing network of 83 offices in 17 U.S. states and has international offices in 6 countries. As of March 31, 2005 Northern Trust on a consolidated basis had assets under custody of $2.6 trillion, and assets under investment management of $589 billion.

Due to the current regulatory environment, Northern Trust conducts its banking operations primarily through three different charter types. Northern Trust’s primary bank, The Northern Trust Company, was organized in 1889 as an Illinois state chartered bank with its headquarters in Chicago, Illinois. The Northern Trust Company has nearly all of its domestic banking offices in the State of Illinois. The bank engages in interstate lending, fiduciary and other banking activities to the extent permitted under applicable law.

Northern Trust also conducts banking activities through four national bank charters and one federal thrift charter. Northern Trust’s national banks are headquartered in Arizona, Florida, California and Texas, and operate through 52 offices in these states plus one office in Colorado. These national banks were acquired by Northern Trust at various times and they conduct private banking and trust activities in these home states and in various other states. Northern Trust also formed a federal savings bank called Northern Trust Bank, FSB (“FSB”) in 1998 for the purpose of conducting banking activities in various other states under nationwide branching powers. The FSB is headquartered in Michigan and currently has offices in 12 states.

Northern Trust is committed to building a national, and a global, franchise for our key businesses to better serve our clients and to provide attractive returns for our shareholders. It is sub-optimal both economically and organizationally for Northern Trust to have to do business across state lines through different banking charters primarily to avoid confusing business qualification rules or conflicting state laws. Moreover, many of our customers prefer to do business with The Northern Trust Company, as the largest and most creditworthy institution in our affiliated group. If operating through a state charter continues to present incremental cost and legal risk that is not inherent in a national bank charter or federal thrift, Northern Trust will find it increasingly unattractive to retain its state charter rather than convert to a national charter.

Northern Trust enjoys good relationships with each of its bank supervisors. In particular, Northern Trust has found the Illinois Department of Financial and Professional Regulation to be a highly competent and responsive supervisor and regulator. We have also benefited from the highly professional supervisory staff at the Federal Reserve. Northern Trust would prefer to continue these relationships, and we see no reason why our firm should be disadvantaged because our primary supervisors are the Illinois Department of Financial and Professional Regulation and the Federal Reserve rather than the Comptroller of the Currency.

It should also be noted that the certainty provided to our national banks and our FSB through the preemption and other rules and regulations of the OCC and the OTS make it increasingly attractive for Northern Trust to engage in interstate activities through these charters rather that deal with the risk and uncertainty of engaging in such activities through our state chartered bank.

The above description of our banking charters illustrates some of the complexities we must deal with in connection with interstate activities, and some of the increased costs that result from having to maintain multiple banking charters to conduct interstate activities. In our view, if the FDIC were to adopt a rule providing interstate banking parity for insured state banks with respect to national banks and federal thrifts, it would considerably ease the legal risk and regulatory costs that now exist for Northern Trust, and it would result in greater convenience for our customers.

Examples of Risks for State Banks in the Absence of Rulemaking
Some examples may illustrate the risks and disadvantages that Northern Trust and other state chartered banks face when they do business across state lines in the absence of federal rulemaking. Both the lack of certainty about applicable law and conflicts between a home state law and the host state law contribute to these problems.

Fiduciary Activities
The Illinois Corporate Fiduciary Act permits Northern Trust to conduct fiduciary activities in another state that are permissible for a trust institution chartered in that state, provided the activities are not prohibited by the laws of Illinois (205 ILCS 620/4A-1). In conducting fiduciary activities in other states, however, it is often not clear whether Northern Trust is required to register, obtain a license or otherwise qualify as a fiduciary. This uncertainty could have an adverse effect not only on Northern Trust’s ability to accept a fiduciary appointment, but also on clients that seek to use the bank’s fiduciary services. In cases in which the applicable law is not clear, Northern Trust has had to enter into fiduciary appointments through a different legal entity, usually one of our national banks or the FSB.

This uncertainty has led to greater complexity and increased costs related to interstate fiduciary activities. It also can be confusing to our customers, who are increasingly mobile or have more than one home, and cannot understand why Northern Trust may not be permitted to deliver services from our home state into other states through a single legal entity. In addition, probate judges and other judicial officials in host states are called on to make decisions from time to time concerning qualifications of an executor or trustee in that state. Given the current lack of certainty as to whether an out-of-state state bank is properly qualified to take on a fiduciary appointment in the host state, many judicial officials tend to favor either a local state bank or a national bank for an appointment and may disqualify the out-of-state state bank.

Contrast this result with the clarity with which national banks are able to conduct the same activities. The National Banking Act provides essentially the same rights for national banks to conduct fiduciary activities interstate that are contained in Illinois law (12 U.S.C. 92a), but the OCC through regulation and interpretation has provided clarity that national banks can conduct fiduciary activities nationally on the same basis as banks located within the host state (12 C.F.R. 9.7(a); see also, OCC Conditional Approval #658, October 13, 2004: “A national bank’s exercise of fiduciary powers in a state is deemed not in contravention of state law if the state permits its own state banks, trust companies, or other corporations that compete with national banks to exercise such powers.” p.3 footnote 5). This degree of certainty articulated by a federal regulator creates an advantage for national banks in conducting such interstate activities compared with state chartered banks.

Lending Activities
In some cases host state laws specifically discriminate against out-of-state state chartered banks. For example, Section 3-502 of the Oklahoma Uniform Consumer Credit Code (Okla.Stat. Title 14A-3-502) provides that no person may engage in the business of making “supervised loans” in Oklahoma unless that person is a “supervised financial organization” or has obtained a license to operate from the state. The law defines a “supervised financial organization” as a bank or other financial institution organized or chartered under the laws of Oklahoma or the United States. A state chartered bank that is not chartered in Oklahoma may not make the same loan that a non-resident national bank would be able to make. Moreover, the penalty for making such a loan in violation of the law is that the loan is void and the debtor is not obligated to repay the loan.

Alabama also has a statute that makes it illegal for a foreign corporation, including a bank, to transact business in the state without a certificate of authority. If an out-of-state state bank were to make a mortgage-backed real estate loan in Alabama, the loan could be declared void and uncollectible. (Code of Alabama Section 10-2B-15.02). National banks do not face this risk because the OCC preemption rules would protect the national bank from these restrictions (12 CFR 34.4).

These are just a few examples. Laws such as the above that result in adverse treatment for state insured banks are directly contrary to the intent of Section 104(d) of GLB. Moreover, to the extent that state banks could either be penalized or be unable to enforce a loan due to an inadvertent violation of the host state’s doing-business requirements, safety and soundness issues are raised that the FDIC should correct. It simply is not practical for state banks to challenge these laws individually; nor is it appropriate to leave state banks subject to the risk that these laws present.

The Comptroller of the Currency has taken steps to provide clarity of treatment and prevent disparate impact on national banks through the regulatory process by issuing regulations and interpretations that articulate the applicable laws that should govern certain interstate activities of national banks. In order to correct the imbalance that has resulted for state banks, it is incumbent on the FDIC to adopt a rule that implements the Congressional mandate requiring parity of treatment for state banks.

Petition Seeks Parity of Treatment Consistent with Congressional Intent
It is worth making a few points as to what this Petition would or would not do. First, it is a misnomer to describe the Petition as a “Preemption Petition”. The Petition is essentially a request for parity of treatment so that state banks have a single set of laws that govern their key banking activities across state lines to the same extent as national banks and federal thrifts. We view the Petition as a means for state banks to have a clear mechanism for determination of applicable law for their interstate activities. We believe the appropriate law to govern such interstate activities is the state bank’s home state. The result will be that state banks will be in the same competitive position as national banks and federal thrifts when they engage in banking activities across state lines.

Second, the Petition does not seek to exempt state chartered banks from the provisions of appropriate laws that protect consumers and communities. The Petition only seeks clarification that the applicable law relating to interstate banking activities is that of the home state if national banks have that same privilege. Consumers and other affected parties would continue to have the same rights and remedies with respect to state chartered banks that they now have with respect to national banks.

Consumer Protection Considerations
Northern Trust is aware that various persons or groups purporting to represent consumers will oppose the Petition out of concern that consumer rights may not be adequately protected. Northern Trust is committed to fair dealing with all consumers and we have observed the same high standards in our dealings with consumers whether the activity is carried on in our state bank, our national banks or our FSB. We would add that Illinois has enacted a range of laws designed to protect consumers and deter unfair consumer practices, and Illinois authorities receive and evaluate complaints that consumers may have concerning financial institutions. We do not believe there is any evidence to support the notion that consumers will be less protected if the FDIC adopts rulemaking as requested in the Petition.

Moreover, it is our experience that consumers generally shop for banking products based on price and service and would not normally expect different rules to apply depending on whether the financial institution is federally or state chartered. Northern Trust sees no benefit to consumers from perpetuation of an environment in which national banks can benefit from preemption of certain host state laws when they conduct business in those states but out-of-state state banks must bear the risk of violating host state laws when they conduct those same activities.

In any event, Northern Trust believes that consumers deserve to be treated fairly and with respect. We encourage the FDIC to work with state and other federal authorities to develop uniform high standards to deal with predatory lending and other abusive practices. The FDIC should take into consideration steps that have already been taken by the Conference of State Bank Supervisors to provide for means of cooperation among supervisors with respect to consumer protection, safety and soundness. We would also note that, just as the Comptroller of the Currency has authority to deal with abusive practices that certain national banks may engage in (see 12 C.F.R 7.4008), the FDIC has authority under the FDI Act (12 U.S.C. 1818) to deal with abusive practices of insured banks to the extent that such practices may not be adequately dealt with by state banking regulators or by other federal authorities such as the Federal Reserve or the Federal Trade Commission.

We are aware that the preemption issue has sparked an emotional debate over the extent to which a single national standard should apply to certain banking practices or whether host states should be free to adopt their own standards to protect consumers. On balance, Northern Trust favors a single standard for many business practices, such as qualification to do business, privacy and lending standards because increasingly banking is becoming a truly national business and the potential for different standards to apply in each state is not beneficial to banks or consumers. We believe application of the home state’s law to a bank’s interstate activities provides both fairness and clarity to the bank and its customers. This Petition does not require the FDIC to make a judgment about the merits of preemption. The Petition simply requests the FDIC to provide the same benefits to state banks that are provided to national banks and federal thrifts so they can be fully competitive.

Interstate Activities
The Petition requests that the FDIC provide for parity for state banks whether or not the activity is conducted through a branch in the host state or through a subsidiary. Northern Trust concurs with the Petition that the form of organization should not determine whether parity of treatment is available. Although Riegle-Neal II dealt specifically with branches of out-of-state banks, there is no indication that Congress meant to provide parity only for branches and not for other forms of operation. We note that the principles expressed in Section 104(d) of GLB and Section 27 of the FDI Act do not differentiate between business conducted through a branch or by the home office. Moreover, since the preemption rules pertaining to national banks do not depend on whether or not the activity takes place through a branch, it is more consistent with the Congressional intent that the FDIC issue a rule that provides for parity without regard to the particular form of organization through which the activity is carried on.

We encourage the FDIC to maintain a close dialogue with the OCC with respect to preemption matters so the principle of parity of treatment can be maintained. Although questions will arise from time to time as to whether preemption applies to a particular matter, we do not see any particular difficulty with state banks and state bank supervisors engaging in a consultative or opinion process with the FDIC or the OCC similar to what national banks follow now with the OCC.

Issues Presented by the Petition
Northern Trust would like to respond to some of the specific questions and issues raised by the FDIC in the announcement of a public hearing on the Petition.

Is rulemaking necessary? It is our view that adoption of a rule as requested in the Petition is the only way to prevent continued erosion of the dual banking system that Congress sought to preserve. Section 9 of the Federal Deposit Insurance Act (12 U.S.C. 1819) (the “FDI Act”) vests sufficient power in the FDIC to implement regulations to carry out provisions of the FDI Act; this authority is very similar to the authority vested in the Comptroller of the Currency under the National Bank Act (12 U.S.C. 93a), which was a principal basis on which the OCC issued its preemption regulations. Moreover, Northern Trust believes that the FDIC is the only regulatory body that has the regulatory authority to issue regulations that will carry out the intent of Riegle-Neal II and GLB to provide parity for state chartered banks.

Does Section 104(d) of Gramm-Leach-Bliley provide a basis on which the FDIC may issue a rule? Northern Trust believes that Section 104(d)(4) of GLB sets forth a broad rule of parity for state banks and national banks that covers a full range of banking activities. The FDIC is best equipped to adopt rulemaking that will implement the Congressional mandate set forth in Section 104(d). In addition, Section 9 of the FDI Act provides ample rulemaking power for the FDIC to implement the rulemaking requested in the Petition.

Should the FDIC adopt a parallel rule implementing Section 27 for state banks similar to 12 CFR 7.4001 and 12 CFR 560.110? It appears clear that Section 27 of the FDI Act was enacted to provide state banks with competitive equality with national banks with respect to charging of interest. We concur with the request set out in the Petition that the FDIC adopt a rule that will clearly provide the same treatment for state insured banks that has been provided by rule for national banks and federal thrifts.

Northern Trust appreciates the opportunity to present its views to the FDIC. We commend the FDIC for considering actions that should be taken to maintain the dual banking system by providing parity of treatment for insured state banks. We encourage the FDIC to implement rulemaking without delay.