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Public Hearing on Preemption Petition

Testimony of Karen M. Thomas on Behalf of Independent Community Bankers of America Before the Federal Deposit Insurance Corporation on the Petition for Rulemaking to Preempt Certain State Laws
May 24, 2005

Good morning. I am Karen Thomas, executive vice president and director of government relations for the Independent Community Bankers of America.1 I am pleased to testify on behalf of ICBA today on the petition of the Financial Services Roundtable to the Federal Deposit Insurance Corporation for rulemaking to preempt certain state laws. I appreciate this opportunity to present our views.

The subject of today’s hearing is an important—and complex—one. The future health and viability of our nation’s dual banking system is critical to the continued vibrancy and diversity of the banking industry. In turn, a vibrant, diverse banking industry strengthens the overall health of our nation’s economy and enables the provision of efficient and responsive financial services to our nation’s consumers and businesses.

ICBA commends the FDIC and Financial Services Roundtable for helping to focus debate on the crucial issues giving rise to the Roundtable’s petition.

ICBA is a strong proponent of the dual banking system, and of a strong and robust state banking system. However, we are becoming increasingly concerned that the balance between the federal and state systems is being tilted too far in one direction. Assets in the industry are becoming more and more concentrated in the national charter. Over the last few years, developments in federal preemption, including the Office of Comptroller’s February 2004 preemption rule, have made it more and more attractive for large, multi-state institutions to choose the federal charter.

In ICBA’s view, the balance in the dual banking system needs to be restored. However, we have not determined whether the actions the Roundtable recommends are the appropriate solutions, and we question whether this forum, as opposed to the Congress, is the appropriate one. Accordingly, we neither support nor oppose the recommendations of the petition at this time.

Overall, the Roundtable petition highlights the complexities surrounding the issue of what laws—state, national or both—should be applicable to a national bank or a state-chartered bank conducting activities in more than one state. As the banking industry continues to evolve, the marketplace changes, industry concentration increases and nationwide or region-wide operations become more and more dominant, these questions are becoming even more difficult. The petition highlights the challenges that face policy makers in crafting rules that will promote the dual banking system and recognize our nation’s tradition of federalism—where the states retain certain powers—in the face of these changes.

ICBA does not expect that the Roundtable’s petition or the FDIC’s action on it will resolve these issues or be the end of the story. ICBA does have a number of concerns and considerations that we believe policy makers and other stakeholders must consider as the debate and dialogue continue.

ICBA Strongly Supports the Dual Banking System
The dual banking system, with bank chartering, supervision and regulation divided between the federal government and the states, has served our nation and the banking industry well. The ICBA believes that the dual banking system should be protected while also ensuring consumers and businesses have access to a full range of competitive banking products regardless of their bank’s charter. Over the years, the lines of distinction between state and federally chartered banks have blurred and the differences have diminished. Nevertheless, support for a dual banking system remains vigorous among community bankers who value the productive tension between state and federal regulators. One set of rules issued by one federal banking regulator is viewed as an undue concentration of power by many community bankers. Our nation is built on a system of checks and balances, and the dual banking system is part of that tradition and philosophy.

In addition to regulatory choice and dispersion of power, many community bankers view state regulators as more attune to the environment and needs of their state. Just as community banks are locally focused, state regulators are locally focused as well and can be responsive and flexible in addressing local needs.

ICBA’s membership closely mirrors that of the industry in terms of the percentage of national versus state charters—76 percent of ICBA members hold state charters. Only a small percentage of our state-chartered members have branches in more than one state. Many others, however, operate near state borders or are providing products and services electronically and wish to provide services to customers in another state. ICBA’s many members that operate exclusively or predominantly in one state will also be affected by the choices and decisions made in this debate.

ICBA View of the OCC Preemption Rule
In February 2004, the OCC finalized two controversial rules designed to clarify its exclusive authority over national banks and preempt state laws that obstruct, impair or condition national bank lending and deposit-taking activities.

The ICBA understands the impetus for the OCC rule and the desire to bring clarity to the preemption issue. In recent years, the OCC has faced numerous court cases challenging its authority to preempt state laws that might apply to national bank activities. In addition, proliferation of state anti-predatory lending legislation helped move the issue of preemption to the forefront. The final preemption rule is designed to clarify the general applicability of state law to national banks, outline the types of state laws that are preempted (as well as those that generally are not), and provide national banks with a level of certainty in conducting their operations.

According to the OCC, it adopted the two rules to assist national banks and their customers because “the imposition of an overlay of state and local standards and requirements on top of the federal standards to which national banks already are subject, imposes excessively costly, and unnecessary, regulatory burden.” This statement resounds well with community bankers as they face an ever-growing mountain of regulation.

However, in ICBA’s view, it would have been preferable for the OCC to continue to analyze how individual state laws impact national banks and to make preemption determinations on a case-by-case basis, rather than adopt a broad general preemption regulation. In our judgment, the importance of the federal-state relationship mandates that whenever preemption is undertaken other than by Congressional action, it should be carefully considered in the context of an individual statute.2 Each case should be evaluated on its own particular merits. Overall, ICBA has been and remains concerned that the scope of the OCC rule may not maintain the creative balance that characterizes our unique dual banking system.

The Roundtable Petition
In light of the OCC’s preemption rulings, Financial Services Roundtable’s petition requests the FDIC to undertake a rulemaking designed to provide parity between state and national banks in interstate banking. It is designed to restore some equilibrium between state and national banks in order to preserve the dynamic vitality of the dual banking system and avoid having all banks that operate on an interstate basis choose the national charter. Specifically, the Roundtable is asking the FDIC to expand on the current preemption of “host state” law that exists when state-chartered banks operate out-of-state branches. Multi-state state-chartered banks would have greater ability to operate under their home state laws.

Currently, the Riegle-Neal Interstate Banking and Branching Efficiency Act provides parity for state banks in interstate branching so that national banks are not unduly advantaged. Riegle-Neal was amended in 1997 (Riegle-Neal II) to provide that the laws of a host state apply to a branch of an out-of-state bank located in the host state to the same extent that they apply to a national bank. If the host state laws are preempted for national banks (which many are), the host state law does not apply to the out-of-state branch of the state bank. Instead, the bank’s home state law applies.

Among other things, the petition seeks to extend this concept beyond branch activities of out-of-state banks and include any of a bank’s out-of-state activities whether conducted through branches, other offices such as loan production offices, operating subsidiaries, or by the bank directly. In all cases, if host state law is preempted for national banks, it would be preempted for state-chartered banks, and the bank’s home state law would apply. If home state law were silent on the issue, the home state regulator would determine what home state law is applicable.

The petition also requests the FDIC to determine that state bank operating subsidiaries have parity with national bank operating subsidiaries and should be treated under FDIC the same as if they were the bank.

ICBA Concerns
ICBA understands the attraction the petition may have for multi-state state chartered banks. Allowing them greater ability to operate under a single state law (home state law) would provide uniformity similar to that enjoyed by national banks, fostering greater efficiency and certainty in their operations. This would alleviate some of the pressure they otherwise would have to migrate to the national charter. The greater number of states a bank is operating in, the greater the attraction of the national charter to avoid the cost and expense of complying with laws that vary from state to state.

Ensuring that larger multi-state state-chartered banks can retain their state charters may be critical to preservation of the dual banking system. The Conference of State Bank Supervisors has estimated that if the current state-chartered banks in the top 100 converted to national charters, the state system would have only 17 percent of industry assets (down from 33 percent currently, and 45 percent at year end 2003). Would such a system have enough assets to sustain itself? ICBA has grave concerns about whether a state system comprised only of community banks would be viable over the long term.

And yet, we find it ironic that the solution to the situation where national banks have an advantage due to federal preemption of state laws is to deepen and broaden preemption—allowing home state laws to preempt host state laws. ICBA recognizes that current law provides exactly this for branches of out-of-state state-chartered banks (when state law is preempted for national banks). Indeed, ICBA supported the 1997 amendments to Riegle-Neal in order to help restore parity to state-chartered banks, avoid undue advantage to national banks, and help preserve the dual banking system.

The petition, however, seeks to extend the Riegle-Neal concepts and “fill in the gaps” with a rulemaking where the law does not provide for host state law preemption. In doing so, we question whether the petition goes too far, and whether a regulatory forum is the right one to determine these questions, or whether they should be determined in the legislative arena after full public debate.

ICBA is also concerned about a “race to the bottom” in state supervision and regulation that could be engendered as a result of such rulemaking. As states clamor to maintain or gain assets under supervision, they may adopt laws and regulations and institute policies for bank safety and soundness or consumer protection that may be too lax. Those rules will then be “exported” to other states and will have extraterritorial impact on businesses and consumers in host states. We see the danger of a few states becoming the chartering states of choice for multi-state state-chartered banks, and the potential creation of “winner” states and “loser” states.

ICBA also has concerns about the competitive inequities and balance between banks that must adhere to state law and those that do not. ICBA has many members that are single-state, state-chartered banks that would not directly benefit from the rules sought by the petition. These banks will be the only institutions operating in their state that are subject to state law. National banks and out of state state-chartered banks will not. Perhaps this situation is not too different from where we stand today with preemption for national banks and Riegle-Neal preemption for out-of-state banks. If single-state state-chartered banks are discontent with this result, they can always convert to a national charter—which puts us back where we started, with the dual banking system out of balance and further centralization of bank regulation and supervision.

The challenge of maintaining a competitive balance in the dual banking system is a constant one, made more difficult in recent years with the growth, and concentration of industry assets in, institutions of national and regional scope. It has required periodic reassessment and rebalancing of the playing field from time to time. But what is the end game of the current path being sought? If preemption is always the solution, are we inexorably marching toward a national banking system only, or a system where all applicable law is federal law and there is no room for state law?

These are the essential questions that must be considered as we examine the overarching question that underlies the preemption debate and the Roundtable’s petition: what law should be applicable to national and state bank activities? ICBA believes we must continue and widen the debate and dialogue on these issues to find solutions that serve consumers and businesses well, preserve balance in the dual banking system, and promote the health and vitality of the banking sector and the nation’s economy. ICBA looks forward to participating in that process.

1 The Independent Community Bankers of America represents the largest constituency of community banks of all sizes and charter types in the nation, and is dedicated exclusively to representing the interests of the community banking industry. ICBA aggregates the power of its members to provide a voice for community banking interests in Washington, resources to enhance community bank education and marketability, and profitability options to help community banks compete in an ever-changing marketplace.

With nearly 5,000 members, representing more than 17,000 locations nationwide and employing over 260,000 Americans, ICBA members hold more than $631 billion in insured deposits, $778 billion in assets and more than $493 billion in loans to consumers, small businesses and the agricultural community. For more information, visit ICBA's website at

2 ICBA has strongly supported on a number of occasions federal preemption of state laws as they apply to national banks. For example, we supported the OCC when it preempted individual state laws such as the Georgia anti-predatory lending statute, state laws banning ATM fees, and insurance sales laws that restrict how banks can market and sell insurance. Community bankers in various states have expressed concern about the growing trend among state legislatures to pass aggressive consumer protection measures that, although well-intended, increase banks' regulatory burden and have negative unintended consequences for consumers and bank customers.

Last Updated 05/23/2005

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