Why are America's financial system and economy the strongest in the world? In a word, choice. Our market-driven system provides maximum choice to consumers and businesses — including the choice for businesses like banks to operate under uniform national rules that minimize the cost, disruption and confusion of a patchwork of local rules. The freedom to choose a single set of
Today, a troubling threat to this system is emerging in both red and blue states across the country. In Illinois and Florida, for example, state legislatures — one Democrat-led, and one Republican-led — are requiring nationally chartered banks to comply with new state rules that would regulate
These new state requirements fly in the face of what President Lincoln and Congress envisioned when they created the national banking system in the 1860s. The previous decades had seen a rash of bank failures and national panics resulting in part from weak supervision and conflicting state laws. As a solution, Lincoln's idea of national bank preemption allows local citizens and companies to choose between banks that want to operate under state standards and national banks that work under federal standards.
National banks are subject to one set of rigorous rules overseen by the office of the comptroller of the currency, which we both had the honor of leading — rules that apply to a national bank's operations throughout the United States. These preemption standards have been affirmed by the U.S. Supreme Court multiple times. The court has carefully outlined a prudent balance, later endorsed by Congress after the financial crisis, between core national banking standards and a state's appropriate power over its local economy. Just a few months ago, the court confirmed its longstanding position unanimously in Cantero v. Bank of America.
Earlier this month, the OCC rightly chose to defend the dual banking system by calling for a federal judge to invalidate a new Illinois law. The regulator filed an amicus brief in federal court backing an industry challenge to the Illinois Interchange Fee Prohibition Act, or IFPA, that bars interchange fees on the tax and tip portion of a debit or credit card transaction in the state. The OCC action followed a speech this summer from acting Comptroller of the Currency Michael Hsu in which he said the agency would continue to defend preemption of federal law over state banking laws "as it is central to the dual banking system and cuts to the core of why we exist and who we are."
The regulator cited Axiom Bank for unsafe and unsound practices as well as violating the Bank Secrecy Act and anti-money laundering requirements.
In its brief, the OCC said the new Illinois measure was an "ill-conceived, highly unusual, and largely unworkable state law that threatens to fragment and disrupt this efficient and effective system." The OCC added that if the court didn't act, "it may well trigger a domino effect of other states and localities enacting similar laws, thereby creating a fractured, highly inefficient, and unworkable payment system that would materially affect interstate commerce."
Allowing states to undermine our national economy and set standards for banks not under their jurisdiction, as Illinois and Florida are attempting to do, is an unwelcome throwback to the pre-Civil War wildcat era. Under Florida law HB 989, national banks lost discretion to make day-to-day lending and other risk management decisions free from state interference and scrutiny. The law hasn't faced a legal challenge yet, but the OCC's action in Illinois should put Florida and other states on notice.
If these state laws are allowed to stand, other states could require national banks to adhere to their interfering state rules on a variety of banking activities, balkanizing finance in the United States much as it was historically balkanized in Europe. Learning from the United States, Europe is now attempting to adopt uniform standards for the European Union to better serve its citizens and compete in a world market. Here at home, with the rise of interstate branching and online banking, national standards are more important than ever.
The bottom line is that attempts by states to deprive national banks, consumers and businesses of a uniform set of standards and practices is anti-free market, anti-consumer and contrary to the safe and sound operation of national banks. To allow these state practices to stand will undercut the safety of America's banking system and hurt American businesses and consumers. We should all thank acting Comptroller Hsu and the OCC for drawing the line in Illinois and defending a national banking system that works for all of us.
