By Dale Baker
ABA Viewpoint
America’s dual banking system, which enables banks of all sizes and charters to innovate and offer products and services to consumers and businesses in every market in the United States, is easy to take for granted. The clarity and efficiency that this system offers banks operating across state lines has quietly powered America’s economy for nearly 200 years. But new legislation at the state level threatens to disrupt what makes our dual banking system special.
Recently, several state legislatures have enacted or debated banking legislation that disregards existing federal law and that would notionally give their state regulators authority over basic national bank operations. These state laws have taken a variety of forms — from creating new standards around opening and closing accounts to mandating new operational processes and restructuring specific bank services. But, as the U.S. District Court for the Northern District of Illinois recently acknowledged in an order granting the Illinois Bankers Association and ABA’s motion for a preliminary injunction against enforcement of the Illinois Interchange Fee Prohibition Act, federal law remains clear. Federal regulators retain the authority to supervise nationally chartered banks, and the consequences of these misguided state efforts could damage the banking ecosystem for consumers.
Absent a strong national bank preemption standard — which ensures state and national banks are chartered and supervised by different levels of government — national banks cannot function efficiently across the country as they do today. Instead, national banks would be subject to an unwieldy and sometimes conflicting patchwork of state banking laws. For more than 150 years, Congress has provided the Office of the Comptroller of the Currency ample authority to appropriately shield national banks from state laws that would otherwise materially interfere with core national bank activities. And the OCC has a history of articulating and defending a strong national bank preemption standard, which the Supreme Court has time and again roundly affirmed. Without this commitment, it is unlikely our dual banking system would be so healthy or even have survived so long.
Fortunately, the OCC has taken note of the recent state developments. In a speech at the Exchequer Club in Washington, D.C., in July, Acting Comptroller of the Currency Michael Hsu described the OCC as a bulwark against states’ “performative politics” masquerading as sound banking policy. He emphasized the importance of national bank preemption, stating that “the OCC has and will continue to vigorously defend preemption, as it is central to the dual banking system and cuts to the core of why we exist and who we are.” And the OCC’s amicus brief in support of IBA and ABA’s motion for a preliminary injunction was nothing less than a full-throated defense of national bank preemption.
However, absent more decisive OCC action, these threats to our dual banking system will likely spread quickly and compound already obvious risks. Other states may enact banking laws that directly conflict with these early state laws, forcing national banks into the untenable position of being compelled to engage in certain activities in some states and prohibited from engaging in identical activities in other states. But state banking laws that intrude on national bank supervision and examination authorities risk more than making it impractical — or even altogether impossible — for national banks to serve consumers and businesses in multiple states.
Industry and federal lawmakers and agencies have identified risks some state banking laws pose to national security. In response to a recent bipartisan letter from Reps. Josh Gottheimer (D-N.J.) and Brad Sherman (D-Calif.) and now former Rep. Blaine Luetkemeyer (R-Mo.), Treasury Under Secretary for Terrorism and Financial Intelligence Brian E. Nelson expressed Treasury’s concern that state banking laws “severely restricting the factors banks may consider when assessing risks . . . create uncertainty and may inhibit effective anti-money laundering and countering the financing of terrorism and sanctions compliance programs, undermining efforts to promote national security.” Further, state banking laws requiring the state to “issue investigative reports following complaints of account closures or restrictions directly to the individuals who submitted them risk[s] disclosing sensitive information regarding suspicious activity reports, which must be kept confidential under federal law.”
However tempting it may be to take well-functioning parts of the American economy for granted, the consequences can be enormous. That’s why it’s incumbent that the OCC’s current and incoming leadership remain keenly attentive to state legislatures’ dangerous overstepping – whatever its pretext – and exhibit the resolve necessary to timely and forcefully protect the dual banking system. The costs of doing anything less are far too high.
Dale Baker is VP for trust policy in ABA’s Office of Financial Institution Policy and Regulatory Affairs.
ABA Viewpoint is the source for analysis, commentary and perspective from the American Bankers Association on the policy issues shaping banking today and into the future. Click here to view all posts in this series.
