Public Hearing on Preemption Petition
Testimony of David G. Sorrell
Commissioner of Banking & Finance State of Georgia
Before the Federal Deposit Insurance Corporation Board of Directors
May 24, 2005
Hearing on Financial Roundtable's Petition for FDIC Rulemaking
To: FDIC Board of Directors and Hearing Officers
Good morning. I am David G. Sorrell, Commissioner of the Georgia Department of Banking and Finance. In my position, I am responsible for regulating 275 banks with assets over $200 billion. Eleven of those banks operate on an interstate basis.
The Utah Commissioner of Financial Institutions has expressed to me Utah's support for Georgia's testimony. I am pleased to add G. Edward Leary as an additional signer to the Georgia position.
I would like to thank the FDIC for proposing a public hearing on this important issue to hear the public's perspective. It is a matter of major importance to the dual banking system. I also thank the Financial Roundtable for petitioning the FDIC on this issue.
I am here today to express our Department's support for the Financial Roundtable's petition for FDIC Rulemaking in areas that we feel will provide interstate banking parity for insured state banks.
Our Department knows the downside risk of this rulemaking is interpretive preemption of state law. However, we are deeply concerned regarding the competitive imbalance that has been created between the interstate state charter and the national charter because of the recent preemption of state laws by the Office of the Comptroller of the Currency (OCC). Several states have instituted legal action regarding the preemption of their state law. We believe that our views on parity reflect support of the actions taken by these states, several of which are currently under appeal. Georgia, too, has litigated preemption issues to enforce state law.
Our concerns remain focused on maintaining the viability and competitiveness of the state charter, especially one operating in an interstate banking environment. In so doing, the strength and viability of the dual chartering system for all banks is maintained.
I will address the petition in three ways: (1) by making some general observations of the current environment; (2) by addressing the general questions FDIC asked to be addressed by the public and (3) by commenting on the Roundtable petition's main rulemaking requests.
A. General Observations.
- Most affected parties agree that the dual banking system is out of balance in reference to operating an interstate bank. Parity needs to be reestablished as a result of the OCC's Preemption of most State Laws;
- Most banks in Georgia do not want the OCC's Preemption to be rolled back but want parity with national banks. This makes most banks hesitant to testify or comment as it relates to the Roundtable's petition to FDIC. These banks are reluctant to take any action that might impact the OCC's preemption.
- The FDIC is the primary federal regulator for state non-member banks and the backup regulator for state member banks in Georgia. FDIC insurance is required for a Georgia banking charter.
- The FDIC, through Sections 24 and 46 of the FDI Act, has authority over the activities of state chartered banks and their subsidiaries by approving those activities beyond those of a national bank. This establishes a clear relationship between the FDIC and state banks, their subsidiaries' activities, and the FDIC's responsibility to maintain a safe and sound, responsive, and competitive state banking system.
- This is an interstate banking issue. The last federal law codification with an interstate banking issue was the codification of Riegle Neal 1994 and the subsequent amendment, Riegle Neal 1997, which was codified into the FDI Act, Section 24 (j) .
- The business model for banking has changed since the amendment to Riegle Neal in 1997 and banking activities and activities incidental to banking are being conducted outside of the formal branching structure. It is important that both national and state banks have the flexibility to address these competitive market changes.
- Banking is being conducted on an interstate basis. Business is conducted more efficiently especially across state lines when (a) federal laws control (e.g. Interstate Commerce Act) or (b) through uniform state laws adopted by the states such as Uniform Commercial Code.
- Conducting an interstate banking operation should be charter neutral, bringing the maximum economic benefit to consumers, and allowing the dual chartering system to continue to provide a viable choice for all banks.
B. The FDIC also requested the public's view on 12 questions related to the petition. My remarks on these questions follow:
- G-1 - Is a preemptive rule in these areas necessary to preserve the dual banking system?
I answer this question with another rhetorical question. Will the dual banking system be effective if all the large and interstate banks are national and all the small banks are state chartered? I do not believe the dual banking system will be balanced or effective. So, in effect what have we preserved is a dual banking system that has the state charter at a competitive disadvantage with less power and effectiveness. Why, then, would you want to be a state chartered bank even if your fees were less? If the states have a choice and the state laws are already preempted for national bank and national bank subsidiaries, what is so bad about allowing the interstate state banks to compete on par with the national banks? Federal law (1997 amendment to Riegle Neal; FDI Act Section 24 (j) already preempts host state law for branch activities if that host state law is preempted for national bank branches operating in the state. This petition simply asks the FDIC to extend the parity to all activities of the bank, regardless of the form in which the bank chooses to conduct those activities.
- G-2 - What would be the impact on consumers if a preemptive rule were issued in these areas?
The consumers would be protected by Home state law and federal law. If the level of federal law protection needs to be changed, Congress can change it for the entire banking community. Perhaps the EGRPRA study can focus on establishing a federal level of consumer protection that applies as a minimum level of consumer protection to all financial entities operating in that product or activity area. States are understandably worried about consumer protection minimum standards.
- G-3 - What are the implications of rulemaking in these areas for state banking regulation?
We would still regulate the activities of the interstate state chartered bank for safety and soundness and compliance with Home state and Federal law. The Georgia legislature, since the federal preemption of the Georgia Fair Lending Act, has looked at proposed consumer protection laws to determine the possibility of federal preemption if the Georgia law is enacted. I believe that is a good review for states to undertake before passing consumer legislation. The states, obviously, are not prohibited from passing more restrictive consumer protection legislation.
- G-4 - Would the measures urged by Petitioner achieve competitive balance between federally chartered and state chartered financial institutions as advocated by the Petitioner?
- Time will tell as it always does. The request by the petitioner would, in my opinion, rebalance the dual banking system more completely. It would cover for interstate state chartered banks and their subsidiaries all activities under Home state and federal law which would be known quantities to the state chartered institution similar to national bank treatment and conditions. We cannot roll back the reality that there is a fully functioning interstate banking system today.
- G-5 - Are there alternative mechanisms available that would achieve the policy goals advocated by the Petitioner?
The other mechanism is Congress passing additional legislation to rebalance the dual banking system for interstate banking. This would provide another amendment to the FDI Act. If you want to rebalance the dual banking system forever, federal preemption is neutralized by treating, equally, both state and national banks that operate in an interstate banking environment through federal law. States also can pass a law allowing parity on an intrastate basis for state banks not operating on an interstate basis. Then, a bank, regardless of charter and preserving the choice of charter, is able to compete on par with other institutions to serve its customers the best it can. This ultimately gives the consumer and the banks more options and better products.
- G-6 - Should the issue of competitive parity in interstate operations be left to Congress?
It will be left to Congress if the FDIC finds that the FDI Act does not empower it to rebalance the dual banking system through rulemaking as petitioned. However, Congress has empowered the FDIC to make decisions regarding the activities of state chartered banks and the safety and soundness of those activities. Several parts of the petition, GC Opinions 10 and 11, as well as writing a rule on what the Riegle Neal Amendment of 1997 provided, are clearly within FDIC's authority granted by Congress in Sections 27 and 24 of the FDI Act respectively.
Furthermore, the OCC has broadly expanded the powers of national banks and their subsidiaries through its rule-making process. Why shouldn't the FDIC use the Rulemaking process to provide similar parity to state chartered banks and their subsidiaries that are active on an interstate basis? This process would also follow the Congressional guidance to FDIC through the 1991 FDIC Improvement Act, the 1994 Riegle Neal Act, and the 1997 Riegle Neal Amendment.
- 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?
I cannot think of any other reason than to allow the federal charter to maintain a competitive advantage. However, many state banking departments feel supporting the Roundtable's position of this petition may weaken the states attempt to overturn either judicially or legislatively the OCC's and OTS's preemptions. I respectfully disagree. The FDIC should assess the role it has been given to maintain a balanced dual banking system by the FDIC Improvement Act of 1991, the Riegle Neal Act of 1994, and the Riegle Neal Amendment of 1997. If the FDIC believes in the dual chartering system and maintaining a competitive and viable dual chartering alternative for the state charter, then I don't see any currently available and timely alternative except to support the Financial Services Roundtable's request. I have to believe that even the federal chartering agencies would recognize that an imbalance between the state and federal charters does not strengthen the banking system.
- G-8 - What would be the negative impact, if any, of the FDIC adopting a preemptive regulation as suggested by the Petitioner?
I believe the positives of rebalancing the dual banking system for all banks operating in an interstate system outweigh any possible negatives. Some argue that there will be a race to the bottom and state banks will gravitate to states with little or no consumer protection. I find that argument leaves out the myriad of federal consumer protection laws that already protect every consumer of financial products. Some say the preemption of their own state laws cannot be tolerated. Their state laws are already preempted for national bank subsidiaries operating in their states. Why not have parity for interstate state bank subsidiaries? Level the playing field. If the courts or Congress rollback the OCC preemption of February 2004, so be it; both the federal and the state charter should be equally impacted. The state and national system of interstate banking should be in equilibrium to best serve all those bank's customers and to maintain true choice in the dual banking system.
- G-9 - Do the states have a legitimate interest in how banks conduct business within their borders that would be undermined by the Petitioner's request?
Yes, the states have a legitimate interest in how banks conduct business within their borders. Does that legitimate interest apply equally to interstate state banks and national banks? Yes, it should. The OCC's preemption of state laws with their broad rulemaking in February 2004 undermined this legitimate interest. The Petitioner's request is not the undermining vehicle. That vehicle has already driven through the state law system. The Petitioner's request asks for like entities (interstate state and national banks) to be treated the same to protect a system that has served the states and this country well for 140 years.
- 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?
Yes. The dual banking system and the choice it provides are rebalanced. State banks operating or planning to operate interstate outside of branches are able to execute their business plans the same as a national bank with interstate business plans. The major overlay of consumer protection laws are known to the bank and will be enforced by home state and federal banking regulators.
- 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?
The testimony given in the 1997 Amendment to Riegle Neal provides full support for maintaining a viable and functioning dual banking system for the benefit of the banks and this country. This amendment to the Riegle Neal Act of 1994 was codified in Section 24 of the FDI Act. The FDIC has been empowered by Congress to make sure the banks in this country are safe and sound in order to maintain confidence in the banking system. The FDIC, through the FDIC Improvement Act of 1991, was given authority to determine what activities state banks and their subsidiaries, Sections 24 and 46, could safely and soundly conduct. In hindsight, the only thing that was not discussed in the Riegle Neal Amendment in 1997 was conducting activities on an interstate basis outside of a branch. I believe if activities rather than branches had been discussed, we would not be here today since there would be no petition and no imbalance in the dual banking system. Federal preemption, in effect, would be neutralized in interstate banking.
- G-12 - Is there a need for clarification on what law applies to the interstate operations of state banks?
By law or rule, there obviously is a need for clarification as the system stands today. Clarification will produce certainty. The National Banking Act was clarified by rule. If institutions have certainty, all parties benefit.
C. Petition's Requests for FDIC Rulemaking and the Department's Comments/Views.
The petition asks the FDIC to adopt rules in a number of areas. The Department will address the following areas as we feel they are the most important requests to provide state banks interstate parity with national banks to the fullest extent possible
- Request 1 - Parity for interest rate exportation and operating subsidiaries (opsubs).
Comment on Request 1 - FDIC should establish a rule on GCO 10 and 11 to clarify a state equality in interest rate exportation already expressed in Section 27 of FDI Act. FDIC has full authority to do this. This act would provide certainty in an interstate banking environment for state charters.
To the extent FDIC can, it should also re-establish equilibrium for state bank opsubs with national bank opsubs on interest rate exportation principles established by Section 27 of FDI Act. Bank opsubs are examined with the bank and affect the safety and soundness of the bank since they have a direct liability affect on the bank. Federal treatment of opsubs should be consistent, regardless of charter, to facilitate the safety and soundness standards of activities conducted in an opsub. This treatment would focus safety and soundness and consumer protection attention to the opsub as it should be.
- Request 2 - Equality for state and national banks in the activities conducted in other states, regardless of what vehicle the bank uses to conduct the activity
Comment on Request 2 - Activities in states where interstate branches are located - FDIC has clear authority in Section 24 on out-of-state state bank branches and should, through rule, establish clear and complete guidance on the application of home state law to those interstate branches of state banks. Clarification of this issue by rule will definitely help answer many questions that are discussed on this issue across this country on a daily basis. A rule also carries more force of law than a general counsel's opinion.
The FDIC also already enforces, through Sections 24 and 46 activities of state banks' and their opsubs, limiting them to the powers of a national bank or its opsub. A rule that interprets this similar treatment and its application to any location where the bank or opsub operates is a natural extension of the FDIC's responsibility of maintaining a safe and sound banking environment. With all this FDIC authority over the limits of the bank or its opsub, FDIC should be able to extend these limits, as it should, for safety and soundness of the bank and to apply equally to all business of the bank in that state, whether through the branch, the opsub, or other non-branch office. If it cannot do so under the current Act, then the FDIC should request the FDI Act be modernized to give it the full authority for safety and soundness of the insurance fund and to give full statutory authority over all activities of the insured bank.
- Request 3 - Expressly provide through FDIC rules that an interstate state bank or its opsub may operate under home state law if a national bank or its opsub falls under OCC law where the bank has no physical presence via branch in the host state.
- Request 4 - Equal treatment of state bank opsubs with national bank opsubs where not already covered.
Comment on Requests 3 and 4 - FDIC would have to interpret the FDI Act in Sections 24 and 46 to allow this for interstate bank activities outside a branch. If interstate parity is to be re-established, an out-of-state state bank's non-branch activities, for reasons cited above, should have equal status and treatment to a national bank or federal thrift's non-branch activities in a host state. Interstate banking, whether through a bank branch or non-branch, is a market process that has been implemented in the United States. Bank activities, whether conducted in a branch or not, have safety and soundness effects. FDIC is the governor of the risks of bank activities whether done in a branch of the bank or outside (Sections 24 & 46). All participating interstate banks, whether state or federal, should be allowed under federal law to be equal participants in that market in order to improve the offering and delivery of better and more affordable financial service products to consumers across the country. If a state wanted to grant its state banks operating within its borders parity with national banks, it could pass law accomplishing this parity on an intrastate basis. Some states have already taken this step.
D. FDIC's Role in Protecting the Dual Banking System for State Chartered Banks
Since the FDIC Improvement Act of 1991, bank and bank subsidiary activities have been governed by federal law - National Banking Act and FDI Act Sections 24 and 46. These federal laws established the natural bias by Congress of allowing the OCC to approve national banks to conduct new activities. Activities beyond those a national bank or subsidiary can conduct require FDIC permission. The State's functioning as a laboratory of change in banking is now governed by permission from the FDIC under Sections 24 and 46. The FDIC needs to look at their mission and decide if the mission is just to be reactive and not proactive to banking safety and soundness issues. Activities of state banks and their subsidiaries are definitely safety and soundness issues, whether conducted in the bank, subsidiary, or otherwise. The OCC has decided they have a proactive role in their regulatory mission for national banks. This automatically affects the FDI Act because Sections 24 and 46 activities are limited to those of a national bank or national bank operating subsidiary.
It is important for this nation's banking system, as it has been for the last 140 years, to have a viable alternative to federal charters. The natural consequence of the lack of preemption parity is expected to be a system with large national banks and small state banks. The relative size and importance of the two groups will ultimately adversely affect the smaller state system. The dual banking system will lose the dynamic forces that make the system work. Banks will lose choice, a very valuable item.
The FDIC states in every statement that it was created by Congress to maintain public confidence, safety, and soundness in the nation's banking system. The FDIC has been very successful in executing this purpose. I question whether this FDIC mission and purpose will be as easily accomplished in the future with an out-of balance dual banking system. The petition asks the FDIC to adopt rules addressing five different areas regarding state banks' interstate parity with national banks. This is a federal issue and needs a federal response. The FDIC has the federal authority in this area. I urge the FDIC to give clear direction to the petitioner's request for rulemaking. If the FDIC concludes it cannot adopt rules to clarify and correct this imbalance, it should recommend these issues to Congress to clarify and correct this competitive imbalance in our dual banking system.
We believe that the intent of federal law, including the Riegle Neal Act of 1994, the Riegle Neal Amendment of 1997, and the Gramm Leach Bliley Act of 1999 is to maintain the competitive balance between the state and national charter. The FDI Act has been amended by each of these congressional acts. By taking the actions proposed by the Financial Roundtable in their petition, the FDIC Board will provide consistency between activities conducted through a bank branch and other activities and will reflect the market realities that have occurred in the banking industry.
We believe that a dual chartering system that effectively prevents an interstate bank from choosing a state charter because of competitive inequality does not serve the interests of the banking industry or consumers.
We are appreciative of the opportunity for input by the public to discuss why we believe this issue is so vital to the dual banking system and why the FDIC has authority to re-establish parity in the dual banking system.
David G. Sorrell, Commissioner
Georgia Department of Banking and Finance
G. Edward Leary, Commissioner
Utah Department of Financial Institutions