Federal Preemption of State Bank Regulation: A Conference Panel Summary

By Davis, Erin; Rice, Tara | Chicago Fed Letter, September 2006 | Go to article overview
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Federal Preemption of State Bank Regulation: A Conference Panel Summary


Davis, Erin, Rice, Tara, Chicago Fed Letter


The Chicago Fed's 42nd Annual Conference on Bank Structure and Competition, which took place May 17-19, 2006, included a panel on federal preemption of state banking regulation. The panelists discussed the wide-ranging impact of rules issued by the Office of the Comptroller of the Currency, the federal agency that regulates national banks.

In its new rules issued in 2004, the Office of the Comptroller of the Currency (OCC) said that its regulations "preempt"- that is, override-a number of state laws that conflict with a national bank's exercise of its banking powers.1 Preemption is a particularly timely issue in the Federal Reserve's Seventh District, where the Illinois Speaker of the General Assembly recently requested that official state entities not patronize banks that do not comply with Illinois state law.2 In this Chicago Fed Letter, we briefly review the issues surrounding the preemption debate and summarize the panelists' comments.

The panel on preemption brought together banking and legal experts to discuss the implications for the U.S. banking industry. Among them were Philip Strahan, associate professor of finance, Carroll School of Management, Boston College; Arthur Murton, director, Division of Insurance and Research, Federal Deposit Insurance Corporation (FDIC); James Roselle, associate general counsel, Northern Trust Corporation; Arthur Wilmarth, professor of law, George Washington University Law School; and Hal Scott, the Nomura Professor and director of the Program on International Financial Systems at the Harvard Law School. Douglas Evanoff, senior financial economist and vice president, Federal Reserve Bank of Chicago, moderated the session, which was cosponsored by the Chicago Fed and the George J. Stigler Center at the University of Chicago.

The preemption debate

In the United States, banking is regulated by a complex web of national and local regulatory bodies. State banks (those chartered at the state level) are supervised by either the Federal Reserve System (FRS) or the Federal Deposit Insurance Corporation and by their chartering state. In contrast, national banks (those chartered at the national level) are supervised by the OCC, a division of the U.S. Department of the Treasury, and (currently under debate) are subject to many of the laws of the states in which they, and their subsidiaries, operate.3 This two-charter model spawned the dual banking system, discussed in greater detail in this article.

For most of this nation's history, banks were largely prohibited from expanding either inside or outside the state in which they were headquartered. While restrictions on intrastate expansion were gradually eliminated through changes in legislation, many restrictions remained with regard to interstate branching. The passage of the Riegle-Neal Interstate Banking and Branching Efficiency Act (IBBEA) of 19944 removed the remaining federal restrictions on interstate expansion. Strahan discussed the staggering expansion of multistate banks that has resulted; between 1995 and 2005, the number of out-of-state bank branches in the United States grew from under 100 to almost 25,000.5 As a result of their new multistate operations, banks found themselves subject to the regulations of every state in which they operate, in addition to various federal regulations.

The problem was that as banking organizations grew geographically, they found themselves subject to multiple, often contradictory, sets of state regulations. Banks then began to question whether they should be subject to state laws and began to lobby for a single set of regulations under which interstate banks and branches could operate. One result of this was the passage of the Riegle-Neal Amendments Act of 1997, which sought to streamline the regulations governing state banks by rectifying an unintended consequence of the original Riegle-Neal Act. The original act was thought to have disadvantaged state banks that branch into states with more restrictive laws by requiring these banks to adhere to the laws of their host states; meanwhile, national banks were, for the most part, not subject to the laws of their host states.

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