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  • Banking Law for the General Practitioner

    National Academy of Continuing Legal Education

    Kathleen A. Scott, Esq.

    Senior Counsel

    Norton Rose Fulbright US LLP

  • Introduction

    Banks are not ordinary business corporations organized under the general business corporation laws of the various states; there are specialized state and federal banking statutes

    A bank may be chartered by either the U.S. Government or a state banking department, and is subject to the banking laws of the chartering authority, oftentimes with a federal overlay of regulation and supervision

    Liquidation of a bank is done according to federal or state bank liquidation laws, not federal bankruptcy laws

    Banks vs. investment banks

    Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) made major changes to the federal banking laws

    2

  • Bank regulators Federal

    Board of Governors of the Federal Reserve System (Federal Reserve Board)

    Monetary policy and bank supervisory responsibilities

    In the bank supervisory area, has jurisdiction over:

    Bank holding companies and savings and loan holding companies

    State-chartered banks that are member banks of the Federal Reserve System

    Non-U.S. banks with operations in the United States

    Office of the Comptroller of the Currency (OCC)

    Charters and supervises national banks and federal thrifts

    Licenses and supervises offices of non-U.S. banks that choose the OCC as licensing authority

    3

  • Primary federal bank regulatory agencies (contd)

    Federal Deposit Insurance Corporation (FDIC)

    Provides federal deposit insurance for state and national banks, and state and federal thrifts

    If a bank has deposits subject to federal deposit insurance, federal deposit insurance is required

    During the economic crisis, deposit insurance temporarily was raised to $250,000 per ownership category; Dodd-Frank made it permanent

    Primary federal regulator of state non-member banks and state-chartered thrifts

    Office of Thrift Supervision (OTS) previously had chartered and supervised federal thrifts and holding companies and some state-chartered thrifts, but was abolished by Dodd-Frank and jurisdiction divided among Federal Reserve Board, OCC and FDIC

    4

  • Consumer Financial Protection Bureau

    Bureau of Consumer Financial Protection (CFPB)

    Established as part of Dodd-Frank reform bill

    Most consumer laws and regulations transferred to CFPB, such as:

    Mortgage regulations

    Remittance regulations

    Equal credit opportunity

    Privacy

    SEC, CFTC and FTC also have jurisdiction in certain areas

    Adds federal level of supervision over large banks and certain nonbank financial institutions

    Larger participants in the automobile financing market, consumer debt collection, international money transfers, and student loan servicing market

    5

  • Banking Statutes and Regulations - Federal

    Bank Holding Company Act (12 USC 1841 et seq.)

    Regulates the activities of bank holding companies and financial holding companies

    What makes a company a bank holding company

    Bank holding companies can engage in banking and activities closely related to banking (limited insurance and securities underwriting authority, and restricted ability to engage in, or invest in companies that engage in, non-banking-related activities)

    In 1999, the Gramm Leach Bliley Act authorized bank holding companies to become financial holding companies (FHCs)

    FHCs can engage in activities considered financial in nature or incidental or complementary to a financial activity (insurance and securities underwriting authority, merchant banking)

    12 CFR Part 225, Regulation Y

    6

  • Principal federal statutes and regulations (contd)

    National Bank Act (12 USC 21 et seq.)

    Provides for the chartering of national banks

    Regulates activities of national banks

    12 CFR Chapter 1, starting with Part 1 and following

    Federal Reserve Act (12 USC 221 et seq.)

    Provides for membership of state banks in the Federal Reserve System (national banks must become member banks)

    Regulates certain activities of member banks

    Establishes the Federal Reserve Bank system

    12 CFR Part 208, Regulation H

    7

  • Principal federal statutes and regulations (contd)

    Federal Deposit Insurance Act (12 USC 1811 et seq.)

    Establishes a system of federal deposit insurance

    Regulates at the Federal level the activities of state-chartered insured banks that are not member banks of the Federal Reserve system

    Establishes the procedures for conservatorship, receivership and liquidation of insured banks

    12 CFR Parts 303-369

    8

  • Principal federal statutes and regulations (contd)

    International Banking Act (12 USC 3101 et seq.)

    Provides authority for the Federal Reserve Board to approve or revoke the ability of a non-U.S. bank to establish a branch, agency, representative office or commercial lending company in the United States

    Provides that the non-banking activities in the United States of non-U.S. banks that have banking operations in the United States must conform to the activities in which a U.S. bank holding company (or FHC, if the non-U.S. bank qualifies to be treated as such) may engage

    12 CFR Part 211, Regulation K

    9

  • Principal federal statutes and regulations (contd)

    Home Owners Loan Act (12 USC 1461 et seq.)

    Provides for the chartering of federal savings banks and federal savings and loan associations (federal thrifts)

    Regulates the activities of insured thrifts

    Regulates the activities of holding companies for insured thrifts

    12 CFR Parts 100-197 (principally)

    CFPB (12 USC 5481 et seq.)

    Establishes jurisdiction of agency under certain federal consumer financial laws; must consult with federal banking regulators in proposing and finalizing regulations

    Supervision limitations

    No authority over commercial transactions or sale of nonfinancial goods or services

    10

  • State banking laws and agencies

    Banks can be chartered by the OCC or by a state; each state allows banking organizations to be formed

    The state code will authorize the categories of banking institutions permitted to be organized in the state, set forth the authorized activities and requirements for each category and prescribe the supervisory oversight of the state regulator

    The types of banking organizations authorized are similar to those chartered at the federal level, although there are some differences

    11

  • Corporate Requirements

    Some states and the OCC allow banks to be formed as LLCs or Subchapter S corporations

    A national bank in its charter must elect a corporate governance law: law of the state in which the main office of the bank is located, the law of the state in which the holding company of the bank is incorporated, the Delaware General Corporation Law, or the Model Business Corporation Act

    Usually Delaware law or law of the state in which its head office is located is chosen

    Usually there is a separate banking code, although corporate governance may be the same as for regular business corporations in that state; in some states the proposed bank forms under the corporations law but then receives a banking license or charter

    12

  • State vs. federal charter?

    Why choose a state or a federal charter?

    Ultimately it is a business choice in line with business plan

    Pre-emption of state law for national banks and federal thrifts

    History at OCC and OTS of aggressive pre-emption determinations

    Controversial pre-emption decisions included pre-emption of state laws dealing with predatory lending and bank sales of insurance to customers

    Dodd-Frank Act restricted use of preemption, including eliminating it for operating subsidiaries of national banks and federal thrifts

    Laws generally not preempted: contracts; torts; criminal law; rights to collect debts; acquisition and transfer of property; taxation; zoning; and any other laws as determined by the OCC

    13

  • Capital requirements

    Banks must abide by certain capital and liquidity requirements

    Risk-based capital requirements

    The more risky the asset, the more capital that needs to be reserved

    International standards developed by the Basel Committee of the Bank for International Settlements international group of regulators

    Basel I: assigned risk weights

    Basel II: more reliance on internal models

    Standard option similar to Basel I

    Models need to be approved by regulators

    Needed to be adopted by each country, but implementation in the United States was delayed

    14

  • Capital requirements: post-economic crisis

    Basel III: Changes made after the recent economic crisis

    Capital standards strengthened

    Leverage ratio

    Strengthened liquidity requirements

    Capital surcharge on large systemically significant banks

    Supplementary leverage ratio

    New proposal Total Loss-Absorbing Capacity (TLAC)

    Additional Dodd-Frank Act changes to capital rules

    Collins Amendment directed federal banking agencies to establish, on a consolidated basis, minimum leverage capital and risk-based capital requirements not be less than what would be applicable to insured depository institutions

    Applicable to insured

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