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E-MailMorgan Ricks is Professor of Law at Vanderbilt University Law School, and Lev Menand is an Academic Fellow, Lecturer in Law, and Postdoctoral Research Scholar at Columbia Law School. This post is based on their recent paper, forthcoming in the University of Chicago Law Review.
It is a bedrock (though still controversial) principle of American business law that corporate formation and governance are the province of state, not federal, law. But for more than a century and a half there has been one giant exception to this basic principle of American federalism: around 1,200 national banks, which hold $13 trillion in assets. National banks aren’t just federally licensed; they are federally chartered. And as the federal government’s creations, they reside outside the jurisdiction of any state’s corporate laws. The Office of the Comptroller of the Currency (OCC), a century-and-a-half old federal government agency, issues national bank charters and promulgates rules governing national bank formation, governance, and dissolution. By contrast, other federally regulated businesses—including stock exchanges, broker-dealers, investment companies, and bank holding companies—although licensed by federal agencies, owe their corporate existence to the states.
In a forthcoming paper, Federal Corporate Law and the Business of Banking, we examine this corporate law anomaly. Our paper reinterprets the National Bank Act (NBA)—the organic statute governing the OCC and national banks—as a corporation law and analyzes the business of banking through a corporate law lens. It reveals that national banks are a corporate governance solution to an economic governance problem. National banks were designed as federal instrumentalities charged with creating money—a delegated sovereign privilege. Congress recruited private shareholders and managers as an economic governance device: to serve as a check on monetary overissue as well as to avoid politicized asset allocation within the federal government’s monetary framework.
Since 1980, the federal courts (and legal scholars) have lost sight of the NBA’s purpose, allowing the OCC to extend its unusual and understudied body of federal corporate law to an ever-wider range of business activities. And until last week, what was shaping up to be the most important banking law case of the century—and one of the two most important of the past one hundred and fifty years—was before the U.S. Court of Appeals for the Second Circuit: Vullo v. Office of the Comptroller of the Currency, 378 F.Supp.3d (S.D.N.Y. 2019), appealed sub nom., Lacewell v. Office of the Comptroller of the Currency [“Lacewell”], No. 19-4271 (2d Cir. 2020). At issue was the definition of “banking” and, accordingly, the extent of the OCC’s chartering authority. The OCC argued for an expansive definition that would permit it to offer federal charters to “fintech” companies that lend money but do not take deposits. While the Second Circuit sided with the OCC on standing and ripeness grounds, the issue is far from resolved.
The OCC’s attempt to abandon depository activities as essential to the “business of banking”—coupled with its successful expansion of the outer bounds of national banks’ permissible activities over the past fifty years—could portend a radical transformation in the organization of American enterprise. Were the courts to permit the OCC to charter nondepository “banks,” they would make the OCC’s chartering authority coextensive with the full range of national banks’ permissible activities. The OCC would be free to offer federal “bank” charters to most types of nondepository financial enterprises and many traditionally commercial enterprises too. A huge portion of the American economy would be eligible to opt into the NBA’s peculiar body of federal corporate law. And companies would face major enticements to do so, because charters from the OCC come with highly valuable perks, including exemption from many state consumer lending laws, access to “discount window’” loans from the Federal Reserve, attractive Fed “master accounts” and payment services, governance rights over the Fed’s twelve Reserve Banks, and special exemptions from federal securities and investment company laws. Hence, something approaching federal general incorporation may be on the horizon—but not through congressional deliberation and adoption of state-of-the-art corporate law provisions as its proponents have long intended, but rather due to the efforts of a quasi-independent bureau in the Treasury Department.
To be clear, this paper takes no position on the merits of extending federal regulatory oversight to “fintech” and other parts of the financial sector that are currently regulated primarily at the state level. A reasonable case can be made that such an extension would be desirable. But, while it is possible the OCC’s approach would improve prudential regulation, it is by no means assured. Because the proposed charter would be purely voluntary, coupling it with onerous regulation would discourage uptake. At the same time, the charter would allow companies opting into it to sidestep key state consumer protection laws. Accordingly, the effect of the OCC’s proposed charter expansion on prudential regulatory outcomes is ambiguous. The paper concludes that these speculative benefits are not compelling enough to justify stretching U.S. banking law past the breaking point.
The complete paper is available for download here.
