Remarks by

John D. Hawke, Jr.

Comptroller of the Currency

Before the

Women in Housing and Finance

Washington, D.C.

Feb. 12, 2002

One of the things I find so impressive about Women in Housing and
Finance is the range of interests, occupations, and backgrounds of its
members \-- so very different from many of the industry organizations,
comprising ever-narrower sub-specialties, with which we bank regulators
spend so much of our time.

WHF, by contrast, has no political ax to grind or hidden agenda to
advance. It brings together women \-- and men \-- who, apart from an
association with the housing and financial industries, broadly defined,
may be united primarily by respect for their mutual accomplishments \--
and by the pleasure of each other's company.

By the same token, it is a genuine pleasure to be in [your]{.underline}
company today.

I want to speak today about a subject that has largely been the preserve
of legal scholars and banking attorneys \-- federal preemption, and,
more specifically, the relationship between the U.S. Constitution and
state laws that are intended by the states to be applicable to banks.

The OCC\'s role with respect to preemption was recently the subject of a
lead article in the [Wall Street Journal]{.underline}. The authors\'
thesis was that in supporting the preemption of state laws for the
benefit of national banks, the OCC was reflecting an \"anti-consumer\"
bias. Instead of going to court \"to check the economic power of banking
titans,\" as the [Journal]{.underline} colorfully put it, the OCC has
consistently defended national banks\' claims of immunity from local
laws intended to protect consumers.

Moreover, the authors argued, the OCC has aggressively supported the
preemption of state laws in order to keep national banks, which, as we
all know, pay two-and-one-half times more on average in supervisory fees
than state banks, from converting to state charters.

Well, as often seems to be the case with such stories, the authors got
it partly right and partly wrong.

There is no question that national banks\' immunity from many state laws
is a significant benefit of the national charter \-- a benefit that the
OCC has fought hard over the years to preserve. The ability of national
banks to conduct a multistate business subject to a single uniform set
of federal laws, under the supervision of a single regulator, free from
visitorial powers of various state authorities, is a major advantage of
the national charter.

To understand [why]{.underline} Congress saw fit to create national
banks as instruments of federal policy with this significant immunity
from state authority, it\'s necessary to step back briefly in time.

Banks have never been the most popular of American institutions, and in
the early days of the Republic, banks that operated under a broad grant
of national authority may have been most unpopular of all. It was
Jefferson who spoke for many of his generation when he said that
\"banking institutions are more dangerous than standing armies.\" Given
what Americans had just been through at the hands of the British Army,
that was saying quite a lot.

But even Jefferson conceded that if banks were an evil, they were a
necessary one. That was the dilemma we\'ve been wrestling with ever
since.

In 1791, at the urging of Alexander Hamilton, Congress created the First
Bank of the United States \-- our first venture into the area of central
banking. When the Bank\'s 20-year charter expired, the Bank expired with
it. But a crumbling economy led lawmakers five years later to create the
Second Bank of the United States, which proved no more popular than the
first. And state-chartered banks, of which there were well over a
hundred by 1816, took advantage of that unpopularity by encouraging
state legislatures to pass a variety of discriminatory laws, hoping to
rein in, if not destroy, the sometimes overbearing Second Bank.

Maryland's contribution was an annual tax of \$15,000 levied against its
Baltimore branch. When the bank refused to pay, it was successfully sued
in state court. In the name of its cashier, J.W. McCulloch, the Second
Bank appealed that verdict to the U.S. Supreme Court.

What emerged was one of the landmark decisions in our history. Speaking
for a unanimous court, Chief Justice Marshall declared constitutional
Congress's creation of a national bank and declared unconstitutional
Maryland's attempt to weaken it through taxation. On the first point,
Marshall elaborated the "loose constructionist" view of federal power
associated with Hamilton, an expansive view based on a strong union.

On the second point, regarding Maryland's attack on the Second Bank,
Marshall invoked the Supremacy Clause \-- paragraph 2 of article VI \--
holding that the Constitution of the United States, and the laws
promulgated under it, are the law of the land and carry a presumption of
supremacy over the states. "The States," Marshall affirmed, "have no
power, by taxation or otherwise, to retard, impede, burden, or in any
manner control the operations" of any agency created by lawful exercise
of federal authority.

Of course, the states could still send elected representatives to
Washington to accomplish the same end by federal legislation or
presidential authority, and under President Andrew Jackson, legislation
to extend the life of the Second Bank was vetoed.

With the loss of this centralizing and stabilizing influence, the U.S.
banking system stumbled into near-anarchy. Indeed, one is hard pressed
to call it a system at all, because standards and practices varied
enormously from state to state. In states like Indiana and New York, new
bank organizers were required to have real capital, and their operations
were subject at least to some degree of government supervision. But in
many states, banks could organize without a dollar's capital to their
name, and supervision was virtually nonexistent. That permitted the
shadiest of operators to enter the field \-- and dominate it in some
states.

The currency of the country consisted of notes issued by those banks,
and the practice of issuing bank notes with no or inadequate real assets
backing them up became a national scandal \--and a huge burden on
interstate commerce, which depended on a reliable currency. To keep
redemption-minded note-holders at a safe distance, bank operators became
experts at evasion, moving their hole-in-the-wall offices to frontier
backwaters "where only the wildcats roamed." Thus did the Wildcat Era in
banking acquire its name.

Like most such characterizations, this one was unfair to the outliers
\-- responsible bankers, in this case, of whom there were many. But the
lack of uniformity in the value of currency was itself a great flaw in
the nation's banking before the Civil War, because it gave rise to
confusion and uncertainty \-- two major obstacles to economic
development.

This situation cried out for a remedy, and the Civil War-era Congress
supplied one that served two important objectives: first bringing
uniformity to the currency; second, financing the Civil War. The Office
of the Comptroller of the Currency was created to charter and supervise
national banks, which would serve as the instruments of a uniform and
secure national currency, and help stabilize and support the national
economy.

When the Comptroller chartered a new national bank, a portion of the
bank\'s paid-in capital was used to purchase Treasury securities, which
not only filled the Union\'s coffers, but which was pledged as backing
for circulating notes issued by the banks with the Comptroller\'s
approval.

Operating under a broad and potent grant of enumerated powers and such
"incidental powers as shall be necessary to carry on the business of
banking," the national banks were designed from the outset to carry on
their business under uniform rules, uniformly high standards, and
uniform federal supervision. And their notes, backed by government
obligations, would circulate at uniform value.

Another feature of national banking was its uniformly national
character. Initially the offer of easy conversion to the national
charter was expected to provide sufficient incentive for state banking
to liquidate itself. But the lagging pace of voluntary conversions led
Congress to adopt the Marshall dictum so nicely expressed in the
[McCulloch]{.underline} case \-- "the power to tax is the power to
destroy." It imposed a \"death tax\" on the notes of state banks, a tax
that congressional backers promised would be every bit as effective in
driving out state banks as an outright ban, which was also considered.

Of course, they were wrong. State banking was able to adapt simply by
substituting deposit-taking for note-issuing, and by taking advantage of
state regulations deliberately tailored to permit them to engage in many
activities deemed too risky for national banks.

The dual banking system was thus born \-- not in fulfillment of a
national plan, clearly, but in spite of it. Reflecting the country's
basic ambivalence about banking and the use of national power, a less
confrontational Congress reconciled itself over time to a dual banking
system rather than a unified one, embracing a more benign view of state
banking as a legitimate expression of state sovereignty and a source of
salutary competition for national banks.

With this outcome, the stage was set for future federal-state tensions.
First, states sought to determine how much control, if any, they would
have over the powerful new federal financial institutions that operated
within their borders. Second, as the sponsors and at least nominal
supervisors of state banks, they had a material interest in ensuring
that those banks remained competitive \-- through positive grants of
powers and privileges and, if possible, through limits on the powers and
privileges of their national competitors.

The courts quickly decided that there [were]{.underline} limits to the
immunity from state law conferred by the national bank charter. For
instance, in [McClellan v. Chipman,]{.underline} an 1896 case, the
Supreme Court upheld the right of the states to regulate contracts
involving a national bank. It also affirmed the state\'s authority to
regulate the transfer of real property. In [Anderson National Bank v.
Luckett]{.underline} of 1943, it rejected a bank\'s claim that it was
not subject to state escheat laws.

In later years Congress in some cases adopted state law as the reference
point for some national bank powers, as it did in the 1927 McFadden Act,
setting out the branching authority of national banks.

On the other hand, in an overwhelming body of case law built up since
the enactment of the National Bank Act, the courts, echoing [McCulloch
v. Maryland]{.underline}, have been emphatic about where the states may
[not]{.underline} go. State laws may not \"stand as an obstacle\" to the
accomplishment of the purposes for which Congress [created]{.underline}
the national bank charter.

The states may not \"prevent or significantly interfere with\" the
activities lawfully engaged in by national banks. They may not
\"impair\" or \"prevent\" national banks from exercising congressionally
granted powers. They may not regulate at all in areas in which the
federal interest predominates or where Congress has \"occupied the
field\" to the exclusion of the states.

Decisions of the Supreme Court have overwhelmingly endorsed the
preemption doctrine as it applies to national banks \-- a record of
consistency that transcends changes in the political or philosophical
makeup of the Court.

In [Davis v. Elmira Savings Bank]{.underline}, an 1896 case, the Court
rejected an attempt to give preference to a state institution\'s claim
on an insolvent national bank, while in 1954, in [Franklin National Bank
v. New York]{.underline}, the Court ruled that a state could not
regulate a national bank\'s advertising campaign.

In [Barnett v. Nelson]{.underline}, the Court in 1996 once again
enjoined the states from erecting obstacles to \"the accomplishment and
execution of the full purposes and objectives of Congress.\" In that
case, the Court found that a Florida state law barring national banks
from selling insurance in small towns was in \"irreconcilable conflict\"
with the National Bank Act, and was thus preempted.

While the OCC has no self-executing power to preempt state law, it has
on many occasions expressed opinions about the preemptive effect of
federal law. In recent years, for example, we have opined that state
laws that impose restrictions on such financial activities as ATM fees,
auctions, and trust services cannot lawfully apply to national banks.

The consequences of these decisions has been to preserve and protect a
national banking system operating under unified federal supervision. The
rationale for such a system is as compelling today as it was in 1863.

That\'s certainly true for the ever-growing number of business and
retail customers who benefit from access to nationwide banking services.
It is doubly true for the multistate and nationwide banking
organizations who serve them.

In 1863, as I\'ve already mentioned, state supervision, with few
exceptions, was nonexistent or worse. Today each of the fifty states and
the District of Columbia have active supervisory schemes in place, based
on impressive foundations of laws and regulations singularly theirs. In
addition, the Federal Reserve and the FDIC, as major players on the
supervisory scene, devote thousands of examiners to the supervision of
state chartered banks.

To be sure, state supervisors have responded admirably to the needs of a
multistate environment, through a master agreement allocating primary
supervisory authority for state banks with interstate branches.
Nonetheless, the national bank charter remains the most efficient means
of conducting broad interstate banking activities.

It\'s important to note that, for better or worse, the preemption
doctrine is value-blind and agnostic with respect to the desirability of
the state law involved. In preemption situations, the only relevant
issue is whether the state law would impair or significantly interfere
with a national bank\'s exercise of powers granted to it under federal
law. If such an impact is found to exist, federal law must prevail. Any
opinions we might have about the desirability or merit of the laws in
question are not relevant.

Let me give you a hypothetical example. I have long been convinced,
going back to my days as Under Secretary of the Treasury for Domestic
Finance, that many of our concerns about the \"unbanked\" could be well
addressed through effective use of technology. I have repeatedly urged
banks to offer low-cost electronic, direct-deposit, debit card-based
banking accounts to low- and moderate-income Americans, hoping to help
break their dependence on check-cashers, payday lenders, and other
higher-cost financial providers.

Now let\'s say that a state chose to pass a law [requiring]{.underline}
all banks to offer such electronic accounts, defining the nature of the
account and imposing a fee cap. I would applaud that action by the
states. I would encourage Congress to follow suit. But until it did, I
would also have no choice but to hold national banks immune from such a
law. Under prevailing rules of preemption, the states simply do not have
the authority to order national banks to offer specific types of
accounts or to regulate what they charge for services.

While some might view such a position in this hypothetical case as
\"anti-consumer,\" I would caution against such simplistic
characterizations. Take the case of those local laws that have sought to
bar banks from imposing charges for the use of ATMs by persons who do
not maintain an account with them \-- the so-called ATM surcharge laws.
Such laws have an undoubted political appeal \-- given a choice, most
people would naturally prefer not to pay a charge for using an ATM,
regardless of who owns it.

But a major incentive for banks to deploy ATMs is the expectation of
profit from the use of their terminals by noncustomers. Thus, terminal
deployers seek out new locations for their ATMs in the hope that many
people will find it convenient to use their terminals \--either paying a
fee for the privilege or becoming a customer to enjoy free use of the
ATM.

Noncustomers clearly benefit from the increased deployment of ATMs by
banks seeking fees, and would clearly be less well off it anti-surcharge
laws diminished the incentives of such banks to seek out new users.

Not only are such laws preempted by federal law, as the courts have
consistently held, but they are fundamentally wrong-headed, pretending
to help consumers when in fact they do quite the opposite. There is no
clearer evidence of this than the dramatic increase in ATM deployment
that occurred after the ATM networks abandoned their own rules barring
such surcharges.

Let me raise one other caution about preemption. The benefit that
national banks enjoy by reason of this important constitutional doctrine
cannot be treated as a piece of disposable property that a bank may rent
out to a third party that is not a national bank. Preemption is not like
excess space in a bank-owned office building. It is an inalienable right
of the bank itself.

We have recently seen several instances in which nonbank lenders who
would otherwise have been fully subject to various state regulatory laws
have sought to rent out the preemption privileges of a national bank to
evade such laws. Indeed, the payday lending industry has expressly
promoted such a \"national bank strategy\" as a way of evading state and
local laws. Typically, these arrangements are originated by the payday
lender, which attempts to clothe itself with the status of an \"agent\"
of the national bank. Yet the predominant economic interest in the
typical arrangement belongs to the payday lender, not the bank.

Not only do these arrangements constitute an abuse of the national
charter, but they are highly conducive to the creation of safety and
soundness problems at the bank, which may not have the capacity to
manage effectively a multistate loan origination operation that is in
reality the business of the payday lender. As you probably saw, we
recently took supervisory action against a small national bank that
dramatically demonstrated its inability to manage such a relationship in
a safe and sound manner.

Finally, let me say a few more words about the role that the OCC plays
in consumer protection. Even if one were to view all state enactments in
this area as \"pro-consumer,\" and all OCC support for preemption as
\"anti-consumer,\" that simplistic view of life ignores the fact that
the overwhelming volume of consumer protections for bank customers have
come from federal laws that are clearly applicable to national banks. We
conscientiously enforce all of those laws. In fact, we have more than
300 examiners who spend all or part of their time on consumer protection
compliance.

And I think we have played a real leadership role in this regard. Not
long ago we required one large credit card bank to make restitution
payments of at least \$ 300 million for overreaching against consumers.
We have asserted the authority to use our cease-and-desist powers to
remedy unfair and deceptive practices that violate the Federal Trade
Commission Act, and that authority has been recognized in court. And, as
I have already mentioned, we recently forced a national bank to take
steps to exit the payday lending business. We take tremendous pride in
delivering a high level of protection to consumers without subjecting
national banks to excessive \-- and costly \-- regulatory burden.

One can hardly think of two subjects that have aroused more intense
feeling in our history than banking and the relationship between the
federal government and the states. It is a matter of historical fact
that emotions ran almost as high in the war against the two Banks of the
United States \-- and war is the metaphor that was almost always used in
describing those events \-- as they did in the all too literal war
Americans fought against each other some years later It seems fitting
that the national banking system was one of the byproducts of that
conflict.

These two epic issues \-- banking and federalism \-- converge in the
preemption question. In that sense, it\'s not surprising that preemption
\-- on one level, an abstruse legal concept \-- is still capable of
generating passionate controversy. But we cannot allow our emotions to
rule when it comes to public policy. Balance, sober judgment, and
perspective are all crucial. And for that we rely not only on those who
govern, but also on an informed, responsible \-- and
historically-literate \-- citizenry.