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 others company.  

By the same token, it is a genuine pleasure to be in your 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. 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 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 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.  

Marylands 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 Congresss creation 
of a national bank and declared unconstitutional Marylands 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 Marylands 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 dollars 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 nations 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 
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 countrys 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 limits to the immunity from state law 
conferred by the national bank charter. For instance, in McClellan v. Chipman, 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 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, have been emphatic about 
where the states may not go. State laws may not "stand as an obstacle" to the 
accomplishment of the purposes for which Congress created 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, 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, the Court ruled that a state could not regulate a 
national bank's advertising campaign.  

In Barnett v. Nelson, 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 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.