Author: Lev Menand & Morgan Ricks
When it comes to U.S. monetary policy, the Federal Reserve looms large. But a lesser-known agency also plays an important role: The Office of the Comptroller of the Currency (“OCC”). Congress created the OCC in 1863 – fifty years before it set up the Fed.[1] Congress charged the OCC with chartering, regulating, and supervising a system of “national banks.” Today there are 1,200 of these privately-owned federal instrumentalities. They issue and maintain $15 trillion of deposit balances, and these balances – not the paper notes issued by the Fed – make up the vast majority of the U.S. money supply.
Exactly two years ago, the OCC announced that it would begin granting new “special purpose” national bank charters to financial technology (“fintech”) companies that do not issue or maintain deposit balances. These new national banks would be exempt from federal regulations governing depository institutions, while still benefitting from the federal status national banks enjoy. Thus, they would be entitled to ignore many state business regulations as well as large portions of the federal securities laws (from which banks are explicitly exempt).
In September 2018, the Superintendent of the New York State Department of Financial Services (“DFS”) challenged the OCC’s proposed charter in federal court.[2] It argued that a nondepository national bank was an oxymoron. In October 2019, the Honorable Victor Marrero agreed, entering judgment in favor of New York and enjoining the OCC from issuing its proposed charter. In December, the OCC appealed. The substantive question presented in the appeal is whether the OCC has the authority under the National Bank Act (“NBA”) to charter nondepository national banks.
This week, thirty-three banking law scholars[3] filed a brief in support of the DFS.[4] The brief – available below – argues that the OCC has no such authority. It explains that the OCC’s position is based on a fallacy: that “banking” is just another word for “lending.” As the amici put it:
Banking involves lending, but mere lending does not constitute banking. When a bank makes a loan, it posts a credit in the amount of the loan to the borrower’s deposit account. It need not have any cash on hand. By contrast, before a nonbank lender can lend, it must procure cash or its equivalent. Thus, while nonbank lenders “deal” in money, “banks do not merely deal in[,] but are actually a source of, money.” United States v. Philadelphia Nat’l Bank, 374 U.S. 321, 326 (1963) . . . [I]t is for this reason that banks are subject to strict federal oversight.
A ruling in favor of the OCC would conflate banks’ permissible activities with their essential activities. While, under prevailing doctrine, national banks are permitted to engage in a wide range of financial commerce, the OCC does not have the power to charter entities that do not augment the money supply. The OCC’s contrary position contravenes not just the text and purpose of the NBA, but also the Federal Deposit Insurance Act, the Bank Holding Company Act, and the Federal Reserve Act, the last of which it would undermine by giving nondepository companies that play no role in monetary policy the ability to participate in selecting six of the nine members of the Boards of the regional Federal Reserve Banks. The consequences of a judgment in favor of the OCC would also extend far beyond money and banking – opening up the possibility of general business incorporation at the federal level for much of the financial sector and perhaps large portions of the nonfinancial sector.
For those who are interested in the case, we have included links below to other public documents, including an amicus brief filed by Wharton Professor David Zaring in support of the OCC’s position and several amicus briefs filed in support of DFS.
Documents Related to Spotlight:
Brief of 33 Banking Law Scholars
Brief of State Credit Regulators
Brief of State Conference of Banking Supervisors
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[1] And twenty-five years before it created the Interstate Commerce Commission, what is often erroneously considered to be the country’s first regulatory agency.
[2] DFS is the oldest banking agency – and oldest independent regulatory agency in the country – predating the OCC by twelve years. See Lev Menand, Why Supervise Banks? The Forgotten Past and Uncertain Future of a Distinctive Form of Governance, 71 Vand. L. Rev. __ (forthcoming).
[3] Hilary J. Allen, Dan Awrey, Mehrsa Baradaran, Lawrence G. Baxter, Prentiss Cox, John Crawford, Nakita Cuttino, Christine Desan, Adam Feibelman, Gina-Gail S. Fletcher, Anna Gelpern, Erik F. Gerding, Jeffrey N. Gordon, Robert Hockett, Kristin N. Johnson, Jeremy Kress, Adam J. Levitin, Da Lin, Jamie McAndrews, Patricia A. McCoy, Lev Menand, Saule Omarova, Christopher K. Odinet, Nadav Orian Peer, Christopher L. Peterson, Katharina Pistor, Sarah Bloom Raskin, Morgan Ricks, Heidi Mandanis Schooner, Graham Steele, Joseph Sommer, Jennifer Taub & Arthur Wilmarth.
[4] Brief of Thirty-Three Banking Law Scholars as Amici Curiae in Support of Appellee in Lacewell v. OCC, No. 19 Civ. 4271 (2d Cir. July 29, 2020).