Introduction : American Banking Law

-Research in the american banking law field is a difficult task. The statement is
not exagerated.
Indeed, Banking Law suffers from complexity. Te field is subject to a fast pace
of change and developments. In the past twenty years alone, for example,
federal statutes governing this area have been broadly amended at least eight
times. These legislative changes and as well the « increasingly frequent
intervention of the Supreme Court have repeatedly rearranged the furniture »
(Michael P. Malloy, Bank Regulation, West Group, p.7).
Complexity, diversity and the dynamic nature of Banking Law in the United
States set also in the context of intense globalization of banking.
The multiplicity of sources, fragmenting bank regulation is an undeniable factor
of complexity. ® Banks (and other bank –like entities) are limited and controlled
in their corporate and business activities by (relatively) specific statutory
provisions.
-These activities are regulated not only by State Law, but also by Federal Law.
Indeed, in the US, banking is regulated at both the federal and state level.
In this context, federal law extend far beyond disclosure requirements as
regard Federal Securities Regulation, (see, for ex, Securities Exchange Act of
1934 imposing disclosure requirements for publicly traded companies (listed
companies). It includes also substantive provisions of transnational and
corporate law, including incorporation under federal law.
Morevover, the degree of state and federal regulation is extending to such
issues as establishment of a corporation intended to enter the banking
industry, expansion into other geographic or product markets, merger and-or
acquisition of existing entities within the banking market, recapitalization or
other reorganization of the entity. –Each of these actions –and virtually any
other activity undertaken by an entity within the bank industry –is subject to
regulatory oversight or approval of one or more of the regulators.
-And last but not least, underlying the present policies applicable to banking
and the « current » policy controversies affecting the banking industry is a long,
often unstated, historical dialogue. –And this involves both legal and
constitutional debate over the utility of banking and the proper role of state
and federal regulation of the banking industry.
As a result, we can say, we all remain students of the subject, no matter how
long our experience.
-Let us set banking regulation in historical perspective. Current bank regulatory
policy (and even the latest reform) is still rehearsing the historical controversies
surrounding the development of banking and bank regulation.
For two centuries, the history of US Banking Law has been the strong « push
and pull » between federal and state authority, played out from one financial
crisis to the next.
The ascendancy of the first Bank of the United States, then the second Bank of
the US marked the first period of federal control.
The creation of the first bank in the US situated in a context of controversy (see
the debate between Thomas Jefferson and the the Treasury Secretary,
Alexander Hamilton).
The american dual banking system is to some extend a product of a context of
controversy.
Controversy surrounded also the birth of the Second Bank of the United States.
-Following these controversial events, a long period of state premacy in bank
regulation set in, with disparate and inconsequential results.
-A second federal period of US bank regulation marked the banking system.
-A third federal period began in the aftermath of the 1929 stock market crash.
This period established the complex structure of federal regulation more or less
as we know it today.
® -While the overall structure of the United States bank regulation has changed
remarkably little since the mid 1930’s, the statutory interstices of that structure
have grown increasingly complex.
Complexity affects also the current regulatory environment of US banking
system. The environment in which depository institutions (banks) operate is
defined by a complex set of regulators that charter, supervise, examine, and in
many cases specifically approve or disaprove the activities in which the
institutions engage. This environment is then, decidedly, regulatory in
character.
-Regulatory funtions performed by the State and Federal regulators may be
divided into three broad categories :
-Chartering and the administration of other, secondary entry restrictions.
-Supervision.
-Examination (which is complementary to the supervisory function).
® The US banking industry evolved remarkably. What was once a financial
system consisting of highly segmented geographic markets, has, for many kinds
of banking services, been transformed into a competitive nationwide
marketplace (See Marquette National Bank v.First of Omaha Serv. Corporation,
439, US (Supreme Court), 1978).
Banking regulations have faced many developments beginning from the 1980’s.
The period between 1980 and 1994 saw more legislative and regulatory
changes affecting banking industry than any other since the 1930’s. Congress
passed five major laws beween 1980 and 1991. Banking Law continued to be
the subject of several and significant changes.
New laws have been adopted in rapid succession in 2008, 2009 and 2010. The
legislator answered (or tried to answer) to the credit crisis that began in 2007-
2008 in the sub-prime real estate market but soon spread to all facets of credit.
Banks needed and still need strongly to restore trust in their banking practices.
The Dodd Frank Wall Street Reform and Consumer Protection Act was adopted
on July, 21, 2010 (the regulation contains more than 1500 provisions, set the
stage not only for new agencies, new regulatory authorities but also for
extensive interpretive regulations, and judicial interpretation implementing
such changes).
-A statement imposes itself, however, the global financial services industry in
2020 continues to face a severe test.
Implementing the new rules is not easy.
-Bank regulation field of peculiar volatility- needs a strong basis for research
and analysis- probably the most complex problem involving bank regulation.
-Trying to overcome these obstacles and difficulties, the study is intended to
offer (we hope) a comprehensive treatment of basic rules, principles and issues
relating to the law of bank regulation.
-In the first step, as a preliminary matter, we will consider the regulated
environment of banking (Preliminary chapter).
-Then the study will focus on entry rules –basic rules that govern initial entry
into the industry of banks (depository institutions) (Chapter one).
-The study of bank regulation requires also the examination of transactional
rules (Chapter two).
Finally, we will discuss the application of policy objectives to banks (Chapter
three).
US BANKING LAW
Preliminary chapter : Regulated Environment of Banking

The environment in which depository institutions operate is regulatory in

character. This environment is defined by a complex set of regulators that
charter, supervise, examine, and in many cases specifically approve or
disapprove the activities of the institutions.
Consequently, the regulatory functions have to be specified (§1).
At the same time, we have to examine the regulated entities (§2).
On the other hand, we will consider the regulators (§3).
§1 Regulatory Functions
We need to remind the regulatory functions performed by the state and
federal regulators may be divided into three broad categories.
1) Chartering
The chartering function is performed by the Office of the Comptroller of the
Currency (and previously by the Office of the Thrift Supervision which bacame
part of the OCC in 2011-See Dodd Frank Act abolished the OTS) among the
federal regulators and by various state regulators and regulatory bodies in each
state.
® The Office of the Comptroller of the Currency charters, regulates, and
supervises all national banks and federal thrifts as well as branches and
agencies of foreign banks.
 2) Supervision
The supervision of the activities of depository institutions involves not only the
promulgation of regulators pursuant to statutory authority, but also the
issuance of more or less formal interpretations of the statutory responsabilities
imposed on these institutions and the practices they should follow, through the
use of circulars, memoranda, releases, and other publicly available
guidanceThe supervisory function also includes informal interpretative services,
as well as the use of their statutory enforcement and investigative authority to
inquire into cases of possible violations and abuses. Various federal regulators
as well as the state regulators exercice this supervisory function. Principally,
the following federal regulators exercice supervisory authority over depository
institutions : the Office of the Comptroller of the Currency (OCC), the Board of
Governor of the Federal Reserve system (FED), the Federal Deposit Insurance
Corporation (FDIC).

3) Examination
The examination function is complementary to the supervisory function. On a
periodic basis, whether or not violations or interpretive problems exist,
depository institutions are subject to examination by the staffs of the
regulators that supervise them.

® A depository institution may be subject to the authority of more than one

regulator (for example, a state chartered commercial bank that has FDIC
insurance corporation ans is a member of the Federal Reserve system is of
concern to its state chartering authority, under the FDIC and the FED. A
national bank, which is required to be a member of the Federal Reserve system
(FED) and to carry FDIC insurance, is of concern to the OCC, the FED, and the
FDIC). We have to notice there are certain areas of regulation that apply not
only to depository institutions but to all participants in the commercial and
financial activities, such as antitrust and securities regulation. Here, the primay
federal regulators of depository institutions have been given specialized
responsabilities. In the area of antitrust law, for example, these regulators have
been given the statutory responsability to review certain transactions in
advance of any action by the traditional anti trust regulator, the Department of
Justice (DOJ) (see USCA, §1828, ©, Bank Merger Act).However, DOJ retains
authority to review and regulate in the final analysis. In the area of securities
regulation, the primay federal regulators of depository institutions have
generally been given exclusive statutory responsability of the federal level,
preempting the usual authority of the Securities Exchange Commission SEC)
(See USCA, §78 (i) (authorizing primary regulators of depository insitutions to
administer Securities Exchange Act of 1934 with respect to securities of
supervised institutions).
It should be obvious from this brief review that the structure of the regulatory
envoronment is complex.
In order to sort out some of this complexity, we will try to identify the various
types of depositoty institutions authorized by federal and state law and the
corresponding federal regulators.

§2 Regulated Entities
As we have already noticed it, since the 1960’s, there is a wide range of
« financial intermediaries » (commercial banks, savings associations, credit
unions, insurance companies, securities firms…).
-The concept of the « depository institution » which has become a significant
category in regulatory policy has been given formal statutory definition
through the Depository Institutions Deregulation and Monetary Control Act of
1980 (MCA).
Section 103 of the MCA (USCA, §461) contains a formal statutory definition of
the term « depository institution » as including :
-any commercial bank the deposits of which are federally insured or eligible for
federal insurance ;
-any mutual savings bank which is federally insured or eligible for insurance
-any stock savings bank which is federally insured or eligible for insurance
- any credit union which is insured or eligible for insurance….
-any savings association that is insured or eligible for insurance …
The advantage of this definition, from the point of view, of consistent
formation of regulatory policy, is that it provides a legally cognizable generic
category to cover a wide range of banking and bank like institutions.
® But this kind of « circular » definition can be criticized.
The latest reform the DFA has also defined the term « depository institution »
(title III DFA) in an another effort of simplification (USC §1813).
The act states that the term « depository institution » means any bank or
savings association.
The term « insured depository institution » means « any bank or savings
association the deposit of which are insured by the corporation (that is to say
the FDIC-Federal Deposit Insurance Corporation).
The term « insured depository institution includes any uninsured branch of
agency of foreign bank…
The term « state depository institution » means any national national bank, any
federal savings association and any federal branch.
The term « state depository institution » means any state bank, any state
savings association, and any insured branch which is not a federal branch.
This generic concept of depository institution is definitely –a term of reference
for regulatory policy.
However, still the distinct types of depository institutions remain subject to
differing regimes.
-Banks (also known as commercial banks). Banks remain in terms of percentage
of financial assets held and in terms of the range of their products and services,
the dominant category of depository institutions. They are to be distinguished
from savings associations and which unlike banks are not empowered to offer
the full range of banking services, including demand deposit accounts (that is to
say checking accounts) for business and personal use, savings (See –Franklin
National Bank v. New York, US, 1954) and time deposits, investment and loan
services and the like.
® Despite the distinction between commercial banks and savings banks, the
two types of entities (and indeed all of the depository institutions) do overlap
services.
-What actually distinguishes them is the regulatory jurisdiction to which they
are suject (See Franklin National Bank v. New York, US, 1954, already cited). In
Franklin National, the question held was to what extend are national banks
subject to state law ? Except for situations in which federal statutes contain a
contrary provision, national banks are fully subject to state laws, including
those concerning collection of debts, transactions in commercial paper, bank
deposits, contracts and the like.
Commercial banks should also be distinguished from investment banks,
financial intermediaries whose business consists primarly of underwritting and
distributing securities and acting as brokers and dealers in securiries already
distributed. Since 1933, federal law has generally required that such activities
be carried on by entities other than commercial banks and has prohibited most
affiliations between commercial and investment banking entities (the clarity of
this separation of commercial and investment banking has been strongly
litigated. (See Securities Indus. Assembly v. Board of Governors (FED), US,
1984).
Some attempts at an affirmative definition of « commercial banks » or banks
have been attempted. The traditional definition defines a commercial bank as
an institution whose business consists of discounting commercial paper ,
accepting deposits, and making loans.
-Savings banks. Savings banks are a relatively early form of the savings
associations. They have traditionally been limited by statute to non commercial
deposits and lending activities. In the United States, savings banks have taken
two distinct forms -1) the mutual savings bank which has no capital stock or
stockholders and operates as a mutual association for the benefits of its
members (in other words depositors), and (2) the stock savings bank, which
does operate as a corporate entity with stockholders distinct from depositors.
® The former has a board of trustees rather than a board of directors (and its
earnings to the mutual benefit of its members). The latter is managed as any
other corporate entity.
Definition of savings associations and related terms , see USC, §1813.
-Savings and loan associations are the largest category of savings associations.
Their main statutory purpose is the financing of homes.
-Credit Unions. Credit Unions may be either state or federally chartered.
Nowadays, credit unions are cooperative associations created to promote thrift
among its members the membership of a credit union is limited to individuals
who have a « common bond » of association, occupation or residence in a well
defined geographical area (See for more details, National Credit Union Adm v.
First Nat. L Bank and Trust Co., US, 1998).
TRANSACTIONAL RULES (chapter 3)
Introduction
A first observation needs to be made : as a practical matter, state and national
banks appear to be equally and entirely subject to state laws governing,
collection of debts, transactions in commercial paper, bank deposits, contracts
and the like. For national banks, however, there is one important exception to
this rule.
-Federal law, primarly that administered by the OCC (Office of the Comptroller
of the Currency) defines the rights and obligations of national banks as
corporate entities (USC, §24) –See also Easton v. Iowa, US, 1903(recognizing
sole power of Congress to define powers of national banks).
It is this balance of generally applicable state transactional law and
fundamental federal corporate law, that defines the framework in which banks
operate. Hence, it has long been accepted that national banks : « are subject
to the laws of the State, and are governed in their daily course of business far
more by the laws of the State than of the Nation…It is only when the state law
incapacitates the banks from discharging their duties to the government that it
becomes unconstitutional (First Nat’L Bank v.Kentucky, US, 1870).
However, federal law has come to play an increasingly important role in the
powers of depository institutions, to engage in particular types of transactions.
There are a number of reasons for this development. –First, and more
importantly, despite the dual nature of the banking industry, it has become
markedly federalized, primaly due to the the fact that virtually all depository
institutions are subject to federal supervision through the federal deposit
insurance system. –Second, at a technical level, standards of conduct in
transactions are subject to a distinctive federal regime.-Otherwise, when
examining the powers of any depository institution to engage in particular
types of transactions, one must keep in mind that these institutions have their
constitutive statutes. -This principle has traditionally been interpreted by the
courts as defining the limits of the constitution’s power to engage in
transactions (See City of Yonkers v. Downey-US, 1940).
-Banks generally have authority only to exercise express statutory powers and
powers necessarily incident to such express powers (See Bank of California
v.Portland, 2 nd Circuit Court, 1937). –Typical express powers include the
powers to make contracts, to sue and be sued, to elect and appoint executive
management, to adopt bylaws, and to carry on the business of banking (USC,
§24).
-Above all, the role of federal law has increased either through the latest
legislative changes –see, the Dodd Frank Act.
Consequently –carrying on the business of banking – in effect the theme of this
study –has become complicated. –Firstofall, we will consider the issue of
lending (§1). –Then, we will examine the issue of deposits (§2).
§1 Lending
Commercial banks generally have the broadest lending powers, both as to
types of loans and extensions of credit and as to types of borrowers (See USC,
§24).
Lending is however, suject to statutory and regulatory limitations with respect
to, for example, lending limits, certain specified limitations on loans to insiders,
and traditional usury prohibitions.
-Federal lending limits
Federal lending limits restrict the total amount of loans and extensions of credit
by a national bank to any one persone at any one time in an amount equal to a
statutorily specified percentage of total unimpaired capital and surplus of the
bank (USC,§84). –This is a common and traditional regulatory device of state
and federal law. –It is intended to ensure the safety and soundness of banks by
preventing excessive concentration of lending to one person (or to related
persons that are financially dependant –See Valente v. Dennis, District Court of
Pennsylvania, 1977). This device also has the effect of promoting diversification
of loans and equitable access to banking services. ® The applicable lending limit
will vary depending upon whether or not the loan is fully secured by readily
marketable collateral.
-Limitations on types of loans
Loans to directors, officers, principal shareholders, and affiliates are subject to
special statutory restrictions.
-Usury rules
Statutory usury provisions, limiting the amount of interest, that may be
charged on a loan (or extension of credit) appear in both federal and state law.
Federal law is peculiar in this regard because, under certain circumstances, it
references to state law to determine the maximum allowable interest rate
(USC, §85).
-Nevertheless, the rate, even if , derived from state law, is governed by federal
law (See Marquette Nat’L Bank of Minneapolis v.First of Omaha Serv.Corp, US,
1978). Hence, if a national bank is operating an interstate credit card business,
for example, the maximum rate to be charge dis still the rate of the state in
which the bank is located, if that is the highest permissible rate under the
federal statute (See Marquette Nat’L Bank).

§2 Deposits
Depository institutions have express statutorily authority to take deposits
(USC, §24 –national banks).
-In the case of commercial banks like national banks, this power typically
extends to all types of deposits, and deposits for all types of depositors
whether individuals, business entities, non profit organizations or
governmental (USC, §24).
Chapitre 4 : Bank Regulation and Social Policy

The depository institutions policy is grounded on certain objectives. Primary

among these policy is the promotion of the safety and soundness of the
banking system (see USC-§1818 (b) -1) and correspondingly the maintenance of
public confidence in that system. Where these objectives are not realized in
specific cases, an additional policy objective involves the resolution of troubled
or failing institutions with the least risk to the deposit insurance funds and with
preference given to the interests of depositors (USC-§1821). Related policy
objectives include the encouragement of competitiveness in the provision of
depository institutions.
Otherwise there are, other policy objectives, applied to banks that may be
unrelated, or only indirectly related to the core objectives of depository
institutions’ regulatory policy. Some of these objectives may focus on the
effects of the concentration of economic power and ressources within the
banking industry , such as nondiscriminatory credit policy (see USC, §1691).
Other objectives may simply use the regulation of depository institutions as a
convenient mechanism for achieving other, unrelated objectives, such as the
attainment of foreign policy objectives (see USC-§ 1701).
Moreover, some regulatory initiatives have a particular policy objective. For
example, various initiatives apply specialized rules to money transfer
transactions of depository institutions, among other entities (see Anti-Money
Laundering Act-1992). The objective here is primarly the identification of
criminal activity by persons engaged in the laundering of proceeds of illicit
activity. And compliance with such initiatives is extremely important for banks.
This study discusses the application of policy objectives to depository
institutions. This set of issues is examined through a discussion of selected
areas of regulation. This discussion will focus on the area of social policy (with
significant implications for banks), rules requiring significant community
reinvestment by depository institutions (§1) and then rules prohibiting
discrimination in the provision of credit (§2).

§1 Requirements of the Community Reinvestment Rules

The Community Reinvestment Act (CRA) is based upon a public policy
encouraging depository institutions « to help meet the credit needs of the local
communities in which they are chartered consistent with the safe and sound
operation of such institutions » (USC, §1901). (See also, Hicks v.Resolution
Trust Corp, 7 th Circ.Court, 1992).
The CRA explicitly links itself to the traditional banking factor of « convenience
and needs », which is « constantly » applied by regulators in deciding a wide
variety of applications. This concept is a flexible one.
The basic tools used to implement CRA policy are the assessment and
evaluation. In examining an insured depository institution, the bank’s federal
financial supervisory agency must assess its record of « meeting the credit
needs of the entire community including low and moderate-income
neighborhoods, consistent with the safe and sound operation of such
institution (USC, §2903).
The impetus of the CRA are as following :
-In order, to be chartered, and for other regulatory approvals, banks are
required to demonstrate that their deposit facilities serve the convenience and
needs of the community in which they are chartered to do business (USC,
§2901).
-The convenience and needs of the community includes the need for credit
services as well as deposit services (USC, §2901).
-Therefore, depository institutions have a continuing and affirmative duty to
help meet the credit needs of the local communities in which they are
chartered (USC, §2901).

§2 Equal Credit Opportunity Rules

Under the Equal Credit Opportunity Act (ECOA), it is unlawful for any creditor
to discriminate against any applicant for credit (See, for example, Roberts
v.Walmart Stores Inc, Montana, 1990), with respect to any aspect of a credit
transaction on the basis of race, color, religion, national, origin, sex or marital
status, or age.
Finally, creditors are prohibited from discriminating against a credit applicant
because the applicant has exercised in good faith any right against under the
ECOA or related laws (see, Bryson v.Bank of New York, SDNY (US District Court
for the Southern of NY), 1984).