Source: https://m.openjurist.org/474/us/361
Timestamp: 2019-12-15 06:07:46
Document Index: 682063239

Matched Legal Cases: ['§ 1841', '§ 1841', '§ 1841', '§ 1843', '§ 2', '§ 2', '§ 1841', '§ 2', '§ 2', '§ 2112']

474 U.S. 361 - Board of Governors of Federal Reserve System v. Dimension Financial Corporation
474 US 361 Board of Governors of Federal Reserve System v. Dimension Financial Corporation
BOARD OF GOVERNORS OF the FEDERAL RESERVE SYSTEM, Petitioner
DIMENSION FINANCIAL CORPORATION et al.
Cases challenging the amended Regulation Y were commenced in three Circuits and were consolidated in the United States Court of Appeals for the Tenth Circuit.1 The Court of Appeals set aside both the demand deposit and commercial loan aspects of the Board's regulation. 744 F.2d 1402 (1984). The court did not discuss the demand deposit regulation in detail, relying instead on the holding of an earlier Tenth Circuit case, First Bancorporation v. Board of Governors, 728 F.2d 434 (1984). In First Bancorporation, the court noted that the statutory definition of demand deposit is a deposit giving the depositor "a legal right to withdraw on demand." The court recognized that "withdrawals from NOW accounts are in actual practice permitted on demand." Id., at 436. But, since the depository institution retains a technical prior notice requirement it does not, for the purposes of Congress' definition of "bank," accept "deposits that the depositor has a legal right to withdraw on demand."
The Bank Holding Company Act of 1956, 12 U.S.C. § 1841 et seq., vests broad regulatory authority in the Board over bank holding companies "to restrain the undue concentration of commercial banking resources and to prevent possible abuses related to the control of commercial credit." S.Rep. No. 91-1084, p. 24 (1970), U.S.Code Cong. & Admin.News 1970, pp. 5519, 5541. The Act authorizes the Board to regulate "any company which has control over any bank." 12 U.S.C. § 1841(a)(1).
The breadth of that regulatory power rests on the Act's definition of the word "bank." The 1956 Act gave a simple and broad definition of bank: "any national banking association or any State bank, savings bank, or trust company." 12 U.S.C. § 1841(c) (1964 ed.). Experience soon proved that literal application of the statute had the unintended consequence of including within regulation industrial banks offering limited checking account services to their customers. These institutions accepted " 'funds from the public that are, in actual practice, repaid on demand.' " Amend the Bank Holding Company Act of 1956: Hearings on S. 2253, S. 2418, and H.R. 7371 before a Subcommittee of the Senate Committee on Banking and Currency, 89th Cong., 2d Sess., 447 (1966) (letter to the Committee from J.L. Robertson, Member, Federal Reserve Board). Although including these institutions within the bank definition was the "correct legal interpretation" of the 1956 statute, the Board saw "no reason in policy to cover such institutions under this act." Ibid. Congress agreed, and accordingly amended the statutory definition of a bank in 1966, limiting its application to institutions that accept "deposits that the depositor has a legal right to withdraw on demand."2
The 1966 definition proved unsatisfactory because it too included within the definition of "bank" institutions that did not pose significant dangers to the banking system. Because one of the primary purposes of the Act was to "restrain undue concentration of . . . commercial credit," it made little sense to regulate institutions that did not, in fact, engage in the business of making commercial loans. S.Rep. No. 91-1084, p. 24 (1970), U.S.Code Cong. & Admin.News 1970, p. 5541. Congress accordingly amended the definition, excluding all institutions that did not "engag[e] in the business of making commercial loans." Since 1970 the statute has provided that a bank is any institution that
In 1984, the Board initiated rulemaking to respond to the increase in the number of nonbank banks.3 After hearing views of interested parties, the Board found that nonbank banks pose three dangers to the national banking system. First, by remaining outside the reach of banking regulations, nonbank banks have a significant competitive advantage over regulated banks despite the functional equivalence of the services offered. Second, the proliferation of nonbank banks threatens the structure established by Congress for limiting the association of banking and commercial enterprises. See 12 U.S.C. § 1843(c)(8) (bank holding company can purchase nonbanking affiliate only if entity "closely related to banking"). Third, the interstate acquisition of nonbank banks undermines the statutory proscription on interstate banking without prior state approval. 49 Fed.Reg. 794, 835-836 (1984). Since the narrowed statutory definition required that both the demand deposit and the commercial loan elements be present to constitute the institution as a bank, the Board proceeded to amend Regulation Y redefining both elements of the test. We turn now to the two elements of this definition.
The Board amended its definition of "demand deposit" primarily to include within its regulatory authority institutions offering NOW accounts. A NOW account functions like a traditional checking account—the depositor can write checks that are payable on demand at the depository institution. The depository institution, however, retains a seldom exercised but nevertheless absolute right to require prior notice of withdrawal. Under a literal reading of the statute, the institution—even if it engages in full-scale commercial lending—is not a "bank" for the purposes of the Holding Company Act because the prior notice provision withholds from the depositor any "legal right" to withdraw on demand. The Board in its amended definition closes this loophole by defining demand deposits as a deposit, not that the depositor has a "legal right to withdraw on demand," but a deposit that "as a matter of practice is payable on demand."
Application of this standard to the Board's interpretation of the "demand deposit" element of § 2(c) does not require extended analysis. By the 1966 amendments to § 2(c), Congress expressly limited the Act to regulation of institutions that accept deposits that "the depositor has a legal right to withdraw on demand." 12 U.S.C. § 1841(c). The Board would now define "legal right" as meaning the same as "a matter of practice." But no amount of agency expertise—however sound may be the result—can make the words "legal right" mean a right to do something "as a matter of practice." A legal right to withdraw on demand means just that: a right to withdraw deposits without prior notice or limitation. Institutions offering NOW accounts do not give the depositor a legal right to withdraw on demand; rather, the institution itself retains the ultimate legal right to require advance notice of withdrawal. The Board's definition of "demand deposit," therefore, is not an accurate or reasonable interpretation of § 2(c).
As the Board's characterization of these transactions as "commercial loan substitutes" suggests,4 however, money market transactions do not fall within the commonly accepted definition of "commercial loans." The term "commercial loan" is used in the financial community to describe the direct loan from a bank to a business customer for the purpose of providing funds needed by the customer in its business. The term does not apply to, indeed is used to distinguish, extensions of credit in the open market that do not involve close borrower-lender relationships. Cf. G. Munn & F. Garcia, Encyclopedia of Banking and Finance 607 (1983). These latter money market transactions undoubtedly involve the indirect extension of credit to commercial entities but, because they do not entail the face-to-face negotiation of credit between borrower and lender, are not "commercial loans."
"The Board also has concluded that, although commercial in nature, the purchase of federal funds, money market instruments (certificates of deposit, commercial paper, and bankers acceptances) are not considered commercial loans for the purposes of section 2(c) of the Act, despite the fact that for other statutory and regulatory purposes these instruments may be considered commercial loans." Federal Reserve System, Office Correspondence (Feb. 10, 1981) (App. 97A) (emphasis in original).5
The only reference to Boston Safe is in a lengthy banking journal article that Representative Gonzalez entered into the Congressional Record. See 116 Cong.Rec. 25846, 25848 (1970) (indicating that Boston Safe was "[v]irtually the only bank that does no commercial lending"). Such a passage is not "legislative history" in any meaningful sense of the term and cannot defeat the plain application of the words actually chosen by Congress to effectuate its will. Finally, even if the legislative history evidenced a congressional intent to exclude only Boston Safe, which it does not, the Board's expansive definition of "commercial loan" would be an unreasonable interpretation of the statute. At the time the commercial loan provision was enacted, Boston Safe did not "make commercial loans," but did purchase money market instruments such as certificates of deposit and commercial paper. Recognizing the common usage of the term "commercial loan" and the purpose of the 1970 amendment, the Board in 1972 advised Boston Safe that it was not, in fact, a bank for the purposes of the Bank Holding Company Act:
Unable to support its new definitions on the plain language of § 2(c), the Board contends that its new definitions fall within the "plain purpose" of the Bank Holding Company Act. Nonbank banks must be subject to regulation, the Board insists, because "a statute must be read with a view to the 'policy of the legislation as a whole' and cannot be read to negate the plain purpose of the legislation." The plain purpose of the legislation, the Board contends, is to regulate institutions "functionally equivalent" to banks. Since NOW accounts are the functional equivalent of a deposit in which the depositor has a legal right to withdraw on demand and money market transactions involve the extension of credit to commercial entities, institutions offering such services should be regulated as banks.6
Without doubt there is much to be said for regulating financial institutions that are the functional equivalent of banks. NOW accounts have much in common with traditional payment-on-demand checking accounts; indeed we recognize that they generally serve the same purpose. Rather than defining "bank" as an institution that offers the functional equivalent of banking services, however, Congress defined with specificity certain transactions that constitute banking subject to regulation. The statute may be imperfect, but the Board has no power to correct flaws that it perceives in the statute it is empowered to administer. Its rulemaking power is limited to adopting regulations to carry into effect the will of Congress as expressed in the statute.7
If the Bank Holding Company Act falls short of providing safeguards desirable or necessary to protect the public interest, that is a problem for Congress, and not the Board or the courts, to address. Numerous proposals for legislative reform have been advanced to streamline the tremendously complex area of financial institution regulation. See, e.g., Blueprint for Reform: Report of the Task Group on Regulation of Financial Services (July 1984). Our present inquiry, however, must come to rest with the conclusion that the action of the Board in this case is inconsistent with the language of the statute for here, as in TVA v. Hill, 437 U.S. 153, 194, 98 S.Ct. 2279, 2301, 57 L.Ed.2d 117 (1978), "[o]nce the meaning of an enactment is discerned . . . the judicial process comes to an end."
Cases filed in the United States Court of Appeal for the Fourth and Sixth Circuits were transferred to the Tenth Circuit pursuant to 28 U.S.C. § 2112(a).