Banks, OCC Face Uphill Fight over Preemption

By Hopkins, Cheyenne | American Banker, May 4, 2010 | Go to article overview

Banks, OCC Face Uphill Fight over Preemption


Hopkins, Cheyenne, American Banker


Byline: Cheyenne Hopkins

WASHINGTON - Large banks have repeatedly prevailed in battles to preserve federal preemption in Congress and the courts, but that victory string is likely to be broken by the regulatory reform bill being debated in the Senate this week.

With so many other provisions requiring the large banks' attention, such as a crackdown on derivatives and a ban on proprietary trading, most of them will lack the time or attention to fight curbs on federal preemption.

Without their help, the Office of the Comptroller of the Currency, which has been quietly pushing for changes in the bill, is not expected to prevail.

"The large banks are playing more defense than they thought they would," said Raj Date, the chairman and executive director of the Cambridge Winter Center for Financial Institutions Policy. "That means the OCC won't have as much help from its national-bank allies."

Though the Senate bill would not eliminate preemption, it would force the OCC to jump through several legal hoops before declaring that national banks need not comply with a state law. These include proving that an existing federal regulation sufficiently addresses the issue a state was trying to rectify.

Under other circumstances, this would probably be a top priority of the industry's trade groups and the largest banks. But they are focused on other parts of the bill they view as more important, including the so-called Volcker Rule, which would ban proprietary trading, and provisions to regulate derivatives.

"We're spread as thin as we can possibly be spread, and it's a real problem," said Ed Yingling, the president and CEO of the American Bankers Association.

The Senate bill would reestablish the so-called "Barnett" Supreme Court standard that allowed the OCC to preempt state laws on a case-by-case basis but also forced the agency to show that a federal law exists to regulate the activity addressed by the state law.

"When people say that we are simply adopting the Barnett standard, that is simply not correct," said Robert Cook, a partner in the Hudson Cook law firm. "They are adopting the Barnett standard and a couple hurdles you need to leap. ... I would be thrilled if we ended up with simply the Barnett standard. I'm afraid we are going to get much worse."

Even state regulators are pushing for changes in the bill, including replacing references to the Barnett standard with language that says a state law cannot be preempted unless it prevents or significantly interferes with a national bank's business operations.

John Ryan, the executive vice president of the Conference of State Bank Supervisors, said that relying on a reference to the 1996 Barnett decision would create confusion since the states and the OCC interpret the Supreme Court ruling differently. "It's up to Congress to write law, not to make a circular reference back to a court decision that has been misconstrued and taken out of context," Ryan said. "You just can't make a reference when there is nuance."

If the provision goes unchanged, the current language does favor the states. The bill would give attorneys general power to enforce federal and state laws against national banks and overturn the Supreme Court's 2007 Watters v. Wachovia decision, which said that national banks' operating subsidiaries enjoy the same preemption rights as their parents.

Sen. Tom Carper, D-Del, is working on an amendment to address some of the industry's concerns. Though it is still being drafted, sources said the amendment would remove the hurdles the OCC must clear in order to preempt a state standard and attempt to codify current preemption law.

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Banks, OCC Face Uphill Fight over Preemption
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