Remarks by
Chairman Donald E. Powell
Federal Deposit Insurance Corporation
Before the
Conference of State Bank Supervisors Annual Convention
San Antonio, Texas
June 3, 2005
FOR IMMEDIATE RELEASE Media Contact:
PR-49-2005 (6-3-2005) Frank Gresock (202) 898-6634
When I think of a strong dual banking system, I think of strong communities. I think of
local and regional engines for economic growth and job creation. I think of choice,
innovation and diversity. The dual banking system is a unique strength we have long
enjoyed in this country.
I think everyone in this room understands that the dual banking system is at a
crossroads. The share of banking activity conducted through state banks is dwindling
and there is every reason to believe that trend will continue. The issue goes well beyond
market share, to fundamental issues about states' ability to enforce laws protecting
consumers.
I am going to talk today about these trends and about a petition the FDIC received to
expand certain preemptions for state banks. I will also discuss a recent public hearing
we had at the FDIC on these issues. Since much of this relates to the OCC's 2004
preemption regulation, I will start there.
Ever since their creation in 1863, National Banks have enjoyed some degree of
exemption from state law. In Riegle-Neal, Congress provided for state law to apply to
the interstate branches of national banks in four key areas, as long as these laws did
not discriminate against national banks on the basis of their charter. Those key areas—
known as "the big four"—are interstate branching, consumer protection, fair lending and
community reinvestment.
OCC legal interpretations and court decisions since Riegle-Neal suggest that a number
of specific state laws that might have seemed to be within the big four are preempted.
Also, the OCC regulation determined that a national bank's preemptions extend to its
operating subsidiaries. For example, a consumer doing business with a mortgage
company, title insurance company, finance company or retail securities brokerage may
subsequently discover that some of his state's consumer protections do not apply,
because these businesses are subsidiaries of a national bank.
Chairman Donald E. Powell
Federal Deposit Insurance Corporation
Before the
Conference of State Bank Supervisors Annual Convention
San Antonio, Texas
June 3, 2005
FOR IMMEDIATE RELEASE Media Contact:
PR-49-2005 (6-3-2005) Frank Gresock (202) 898-6634
When I think of a strong dual banking system, I think of strong communities. I think of
local and regional engines for economic growth and job creation. I think of choice,
innovation and diversity. The dual banking system is a unique strength we have long
enjoyed in this country.
I think everyone in this room understands that the dual banking system is at a
crossroads. The share of banking activity conducted through state banks is dwindling
and there is every reason to believe that trend will continue. The issue goes well beyond
market share, to fundamental issues about states' ability to enforce laws protecting
consumers.
I am going to talk today about these trends and about a petition the FDIC received to
expand certain preemptions for state banks. I will also discuss a recent public hearing
we had at the FDIC on these issues. Since much of this relates to the OCC's 2004
preemption regulation, I will start there.
Ever since their creation in 1863, National Banks have enjoyed some degree of
exemption from state law. In Riegle-Neal, Congress provided for state law to apply to
the interstate branches of national banks in four key areas, as long as these laws did
not discriminate against national banks on the basis of their charter. Those key areas—
known as "the big four"—are interstate branching, consumer protection, fair lending and
community reinvestment.
OCC legal interpretations and court decisions since Riegle-Neal suggest that a number
of specific state laws that might have seemed to be within the big four are preempted.
Also, the OCC regulation determined that a national bank's preemptions extend to its
operating subsidiaries. For example, a consumer doing business with a mortgage
company, title insurance company, finance company or retail securities brokerage may
subsequently discover that some of his state's consumer protections do not apply,
because these businesses are subsidiaries of a national bank.
I have read Superintendent Taylor's Congressional testimony on this issue, and it is
powerful, passionate testimony. I will read one paragraph aloud, because it truly
captures just how fundamental these issues are. She wrote:
"Ultimately, you must decide whether you are comfortable putting your constituents in
the hands of an unelected official who, with the stroke of a pen, seeks to sweep aside
all state consumer protection laws, and has effectively declared all national banks and
their operating subsidiaries in your state exempt from the authority of your Governor,
your state's Attorney General, your state legislature and your state's financial
regulators."
This language transcends 21st century banking. It gets to the heart of how our federal
union should work. This is Andrew Jackson language. This is 1787, the Constitutional
convention.
Now like any truly tough issue, there is more than one side to this story.
While many people sincerely believe the OCC's 2004 regulation was an overreach, it is
the courts, or perhaps Congress, that ultimately will decide. An "ultimate" end to
uncertainty, in this case, could take many years. That is why most bankers, who have to
plan their business based on today's realities, are probably considering OCC
preemption as a fact of life.
The facts of life today with regard to preemption are fairly simple. A state chartered
bank that wishes to do business across state lines is at a severe competitive
disadvantage, compared to a national bank or federal thrift. The national institution can
operate with somewhat uniform standards, while the state bank must comply with a far
greater range of localized requirements in the states in which it does business.
No one I know in banking is complaining about compliance with the law. Every banker I
know wants and expects to comply with the law. The issue for these is simply the
expense and business uncertainty when laws and requirements for the same activity
are different from state to state.
I understand and respect that the states have been laboratories for innovation in the
area of consumer protection. A state can be far more nimble than the federal
government, and you have led the way in addressing abusive practices where federal
regulators were slow to act.
The flip side, of course, is you are now victims of your own innovation and diversity of
practice. And that is because many state bankers, who have no intention to defraud or
exploit their customers, now believe they can more efficiently serve those customers
under a national charter.
The un-level playing field facing state banks that operate across state lines is affecting
the proportion of assets in the state system. Until recently, the relative share of state
powerful, passionate testimony. I will read one paragraph aloud, because it truly
captures just how fundamental these issues are. She wrote:
"Ultimately, you must decide whether you are comfortable putting your constituents in
the hands of an unelected official who, with the stroke of a pen, seeks to sweep aside
all state consumer protection laws, and has effectively declared all national banks and
their operating subsidiaries in your state exempt from the authority of your Governor,
your state's Attorney General, your state legislature and your state's financial
regulators."
This language transcends 21st century banking. It gets to the heart of how our federal
union should work. This is Andrew Jackson language. This is 1787, the Constitutional
convention.
Now like any truly tough issue, there is more than one side to this story.
While many people sincerely believe the OCC's 2004 regulation was an overreach, it is
the courts, or perhaps Congress, that ultimately will decide. An "ultimate" end to
uncertainty, in this case, could take many years. That is why most bankers, who have to
plan their business based on today's realities, are probably considering OCC
preemption as a fact of life.
The facts of life today with regard to preemption are fairly simple. A state chartered
bank that wishes to do business across state lines is at a severe competitive
disadvantage, compared to a national bank or federal thrift. The national institution can
operate with somewhat uniform standards, while the state bank must comply with a far
greater range of localized requirements in the states in which it does business.
No one I know in banking is complaining about compliance with the law. Every banker I
know wants and expects to comply with the law. The issue for these is simply the
expense and business uncertainty when laws and requirements for the same activity
are different from state to state.
I understand and respect that the states have been laboratories for innovation in the
area of consumer protection. A state can be far more nimble than the federal
government, and you have led the way in addressing abusive practices where federal
regulators were slow to act.
The flip side, of course, is you are now victims of your own innovation and diversity of
practice. And that is because many state bankers, who have no intention to defraud or
exploit their customers, now believe they can more efficiently serve those customers
under a national charter.
The un-level playing field facing state banks that operate across state lines is affecting
the proportion of assets in the state system. Until recently, the relative share of state