FDIC Preemption Resurrected?

I've been wondering how long it would take to bring this old nag out of the barn and back to the racetrack. The decision of the Supreme Court in Watters v. Wachovia has generated talk of a proposal that appeared to have died two years ago: FDIC preemption of state laws to the same extent that national banks are preempted from state laws. As originally proposed by former FDIC Chairman Don Powell, "a state bank would be allowed to operate nationwide under the laws and regulations of its home state, to the same extent a national bank could operate nationwide under the laws and regulations applicable to national banks." Powell was the only member of the FDIC Board who was in favor of the proposal, and it was tabled in July 2005 so that FDIC legal counsel could study the legal basis to support a preemption regulation. OCC Chief Counsel Julie Willima (at the time, the acting Comptroller)  scoffed at the notion that the FDIC would find any such legal basis. Then again, Ms. Williams, whuile one smart cookie, has long been known as a proponent of OCC hegemony in all things banking. At least, she has been ever since she brought the virus of federal preemption over from the Federal Home Loan Bank Board and infected the OCC.

As noted in a recent story in The American Banker (paid subscription required), although there's been no definite push from the Financial Services Roundtable (which originally petitioned the FDIC to consider a preemption regulation), there is preliminary chatter.

"We haven't discussed it, either among ourselves on what our next step would be or with the FDIC," said Richard Whiting, the roundtable's executive director and general counsel. "The fact is that the Supreme Court has recognized the ability of national banks now to engage in activities pursuant to uniform national laws. We think that the state part of the dual banking system would benefit from similar treatment."

The American Banker correctly opines that current FDIC Chairman Sheila Bair is unlikely to support a preemption proposal. She seems a savvy politician (and I make that observation in with only a wee bit of sarcasm), and with a Congress controlled by the likes of Frankly Barney and Christopher Dolt Dodd, a move to revive the proposal is likely to bring the heat down on Ms. Bair. Look how courageously she acted on Wal-Mart's and Home Depot's industrial bank applications in the face of pressure from Barney to extend the FDIC's moratorium on ILC charter approvals.

It looks like state banking regulators look upon FDIC preemption as an option of last resort. If that's the last arrow in their quiver to prop up a dual banking system and prevent state banks from converting to national charters, then they'll take it. On the other hand, more preemption of state banking authority by a federal regulator will not favor state banking authorities over the long term. State bank regulators and trade association representatives prefer a legislative "fix," at the federal and/or state level.

John Ryan, the executive vice president of the Conference of State Bank Supervisors, said the agency's 2005 proposal "is part of the discussion" of how to create parity for state and national banks after the court's ruling.

"What was asked of the FDIC was not exactly out of left field," Mr. Ryan said. "Congress had expressed the intention that … state- and federally chartered banks not operate at a competitive disadvantage because of applicable law."

But leveling the playing field between state- and federally chartered banks is not "strictly a regulatory issue," he said. As a consequence of the decision, "Congress will demand a role and, appropriately, should have some role."

Bill Schenck, a former Pennsylvania bank commissioner and now the president of TriState Capital Bank in Pittsburgh, said he believes that "from a competitive point of view, what the FDIC was setting out to do made sense."

But according to Mr. Schenck, the court's ruling produced a larger question: whether states will revise their laws to keep banks from converting to national charters or moving to states with laxer standards.

"This is going to be difficult to get done across the country, because there are some states that have tougher consumer protection laws than others, and there is the concern that banks would move their headquarters to the states with the least regulation," he said. "The only solution for that, arguably, is to get consistency across the country."

Other regulators expressed concern that further preemption sanctioned by the FDIC would only diminish state enforcement authorities.

"At the time of the FDIC's proposal, I thought the OCC was pushing the envelope beyond what was allowed by the National Bank Act," and that the FDIC's authority "was not nearly as clear" as the OCC's, said Maryland Commissioner of Financial Regulation Charles Turnbaugh.

The split court vote and "the vehemence of the dissent" opinion highlights that "the FDIC should not step into this state preemption process," he said.

Frankly (no pun intended), state banks are between a rock and a hard place. FDIC preemption doesn't appear to be "doable," and may ultimately harm the survival of the dual banking system. A state legislative fix doesn't appear likely for the reasons outlined by Commissioner Schenk. We've seen credit card issuers flock to the states of least resistance, and only  a few holdouts on the state level would endanger the survival of state banks in tougher states. Rolling back national bank preemption federal legislation is the most attractive solution from the state banks' perspective; however, there seems to be no momentum for such legislation on Capitol Hill. From his public statements, Barney Frank seems intent on passing a predatory lending bill and would not want that process impeded by a side show on federal preemption. He'd rather hector the OCC and other federal regulators into stepping up their enforcement of state consumer protection laws where state enforcement has been preempted.

I suppose we'll have to file the FDIC preemption proposal back in the "don't hold your breath" file.