Non-Bank Banks Not Restricted by Federal Reserve, Rules Court

Article excerpt

WASHINGTON - The Federal Reserve Board is not authorized to regulate the increasing limited-service ("non-bank") banks, the U.S. Supreme Court said Wednesday in an important ruling for the financial community.

In an 8-0 decision, the court said the Fed lacks the power to check unrestricted growth of the financial institutions.

The decision enlarges the non-bank bank loophole problem, said Laura Pringle, vice president and general counsel for the Oklahoma Bankers Association. The bankers association had filed a brief in the case supporting the Federal Reserve.

"It's our understanding that Congress didn't act to close the loophole because they expected pending litigation would act to close it," she said.

"Since it did not, we would anticipate that there would be Congressional action to give the Federal Reserve Board the authority it needs, or to specifically plug the non-bank bank loophole."

Congress may still have the final say in the dispute. A House Banking Committee bill to expand the Fed's jurisdiction to include limited-service banks has been bottled up in the House Rules Committee.

Chief Justice Warren E. Burger, writing for the court, said the Fed had expanded the definition of a bank beyond what federal law intended.

""Without doubt there is much to be said for regulating financial institutions that are the functional equivalent of banks,'' he said.

But, he continued, ""Congress defined with specificity certain transactions that constitute banking subject to regulation. The statute may be imperfect but the (Federal Reserve) Board has no power to correct flaws that it perceives in the statute it is empowered to administer.''

Burger said if the law ""falls short of providing safeguards. . .to protect the public interest, that is a problem for Congress, and not the board or the courts, to address.''

The Fed appealed to the Supreme Court for support in closing what the agency considers a loophole in federal banking law.

Non-bank banks provide, among other services, either checking accounts or commercial loans. But they do not provide both as do full-service banks.

They therefore said, and the Supreme Court today agreed, that they are exempt from the federal Bank Holding Company Act which bars interstate ownership of banks. …