Federal pre-emption of bank regs curtailed by Supreme Court


Seeking Alpha notes a Supreme Court ruling on federal pre-emption of state regulation of banks. Google on Angry Bear OCC for posts on the issue.

In a surprising 5-4 vote, the Supreme Court ruled that national banks are still subject to the laws of the states they operate in. What made the ruling unusual is that Justice Scalia wrote the opinion and the other four conservative judges were in dissent (Roberts, Thomas, Alito and the normal swing vote Kennedy).

The ruling overturned an appeals court ruling that said that state attorneys general cannot investigate banks if they operate in more than one state.

The case in question involved the enforcement of fair lending laws in N.Y. State, specifically allegations that some banks were charging minorities higher interest rates. Instead, even though these are state laws, the appeals court had said that only the Office of the Comptroller of the Currency (OCC) had the power to investigate. In practice, this means that the laws were null and void, since the OCC has a lousy track record on such issues.

Enforcing state laws is simply not a priority for a division of the Treasury Department. While clearly there can be a problem if multiple agencies have jurisdiction in regulation, allowing things to slip through the cracks, there can also be problems when there is only one regulator and that regulator is in the pocket of the regulated. It is harder to capture all 50 state attorneys general and the OCC, than it is just the OCC alone. Make no mistake, the head of the OCC, John Dugan, a holdover from the last administration, is very much a creature of the big banks he is supposed to be overseeing. The OCC ranks just behind the OTS in being an ineffectual regulator during the bubble.

While the state attorneys general will not be able to issue subpoenas on their own authority (they need approval from a state judge), it does mean that they do not have to sit on their hands if they think the banks are breaking the law. It also will mean a more fair application of the law.

Update: Remember that John Dugan is the regulator who insisted it was the job of banks to validate their own risk models.