#11143 - Getting Started - Federal Banking Regulation

Getting Started

1. Entry into banking

   1. Forming a Bank

      1. Six Steps

         • (1) Having settled on the charter type, you form an organizing group of at least five individuals

           • "Each organizer must have a history of responsibility, personal honesty, and integrity."

           • The organizers must have "experience, competence, willingness, and ability" to direct the bank's affairs safely and soundly.

           • The group should "include diverse business and financial interests and [evince] community involvement." 12 C.F.R. § 5.20(g)(1).

         • (2) Have a prefiling meeting with the OCC's regional office

         • (3) File an application

           • The most important part of application package is the business plan

             • Must (1) identify the proposed bank's sources of capital, (2) set forth its business strategy, (3) analyze earning prospects, (4) include projected balance sheets and income statements, and (5) show how the bank will satisfy and soundly meet its community's banking needs. 12 C.F.R. § 5.20(h)(2), (5).

           • In addition to reviewing the business plan, the OCC considers whether the proposed bank has "organizers . . . familiar with national banking laws"; will have "competent management, including the board of directors, with ability and expertise relevant to the types of services" the bank plans to provide; will have capital "sufficient to support the projected volume and type of business"; is likely to remain profitable; and will operate safely and soundly. 12 C.F.R. § 5.20(f)(2).

           • The OCC also considers how the bank will meet "the credit needs of its entire community, including low- and moderate-income neighborhoods" as required by the Community Reinvestment Act.

         • (4) Receive preliminary conditional approval

         • (5) Follow up by filing with the OCC an organization certificate and articles of association, electing the initial board of directors and fulfilling any other conditions imposed by the OCC

         • (6) Receive final approval

   2. Judicial Review of Chartering Decisions

      1. An applicant may seek judicial review of chartering decision

      2. Camp v. Pitts

         • The appropriate standard of review is whether the Comptroller's determination was "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law" as provided by 5 U.S.C. § 706(2)(A). Camp v. Pitts

         • In applying this standard, the focal point for the review is the administrative already in existence. Camp v. Pitts

           • BUT If there was a failure to explain, the remedy is not to have a de novo hearing to create a whole new record but to obtain from the agency, either through affidavits or testimony, additional explanation of the reasons for the agency as may prove necessary. Camp v. Pitts

         • If the finding by the agency is not sustainable on the administrative record made, then the Comptroller's decision must be vacated and the matter remanded to him for further consideration. Camp v. Pitts

   3. Changes in Control

      1. If a corporation wants to acquire an existing FDIC insured bank, it must get approval for the acquisition from the Federal Reserve, under the Bank Holding Company Act

      2. If an individual wants to acquire a bank, he will need to comply with the Changes in Bank Control Act, 12 U.S.C. § 1817(j)

         • The Act defines "control" as "the power, directly or indirectly, to direct the [bank's] management or policies" or to vote 25% of more of any class of the bank's voting shares. 12 U.S.C. § 1817(j)(8)(B).

         • The individual must:

           • give the bank's primary federal regulator written notice of the proposed acquisition and a specified set of information. 12 U.S.C. § 1817(j)(1).

           • describe his or her "personal history, business background and experience," including his or her "material business activities and affiliations during the past five years" and any past or present legal troubles

           • provide financial statements for the past five years.

           • disclose the terms of the acquisition, the his or her source of funds, and any plans he or she may have to liquidate or merge the bank, sell its assets, or "make any other major change in its business or corporate structure or management. 12 U.S.C. § 1817(j)(6).

         • The agency:

           • must investigate the individual's "competence, experience, integrity," and financial strength and solicit public comment on the proposed acquisition." 12 U.S.C. § 1817(j)(2).

             • If the bank has a state charter, the agency notifies the appropriate state supervisor

           • may disapprove the acquisition if, inter alia, (1) the acquisition would be anticompetitive; (2) the individual's financial condition "might jeopardize the [bank's] financial stability" or prejudice the interests of depositors; (3) the individual or the individual's management team's "competence, experience, and integrity" are such that the acquisition would not be in the public interest or the interest of depositors; or (4) the acquisition would adversely affect the deposit insurance fund. 12 U.S.C. § 1817(j)(7).

             • If the agency disapproves the acquisition, you may obtain a formal hearing before the agency and, if rebuffed yet again, may seek judicial review. 12 U.S.C. § 1817(j)(4)-(5).

      3. Where someone attempts to acquire control of a bank by having multiple people each purchase a portion of the stock, the Changes in Bank Control Act will govern the situation as it covers anyone who acquires control "acting directly or indirectly or through or in concert with one or more other persons."

         • Thus, you must file notice and provide the required information about each acquirer

         • BUT, by your actions, you may have unwittingly formed a partnership by operation of law whereby you would need approval from the Federal Reserve. 12 U.S.C. §§ 1841(b), 1842(a)(1).

2. Dual Banking System

   1. National banks, state banks, and federal and state thrift institutions have largely the same powers, so the choice of charter is preeminently a choice of regulators

   2. Primary Regulators

      1. National Banks: OCC

      2. State Banks: State Regulators

      3. Federal Thrifts: The Federal Reserve

      4. State Thrifts: State Regulators

      5. State Chartered Banks that DO NOT join the Federal Reserve System: FDIC

   3. Back-Up Regulator

      1. FDIC (For all FDIC insured banks and thrifts)

3. Fundamental Changes

   1. Charter Conversion

      1. Banks can and do convert from one sort of charter to another

         • A bank may even switch from a state charter to a federal or vice-versa

      2. A new charter is very likely to be granted UNLESS it appears that the bank is seeking to convert for some improper purpose, such as to avoid regulatory action by the bank's current supervisor

   2. Merger and Consolidation

      1. The National Bank Act provides a framework for reorganization transactions, including (1) mergers or consolidations or of national banks into state banks, 12 U.S.C. § 214a; (2) consolidations of national or state banks under the charter of a national bank, 12 U.S.C. § 215; and (3) mergers of national or state banks into a national bank, 12 U.S.C. § 215a.

      2. Any such transaction must be (1) approved by the boards of directors od all institutions, (2) be ratified by a two-thirds vote of the shareholders of each institution (or a higher percentage in the case of a state bank if state law so requires), and (3) receive the approval of the Comptroller.

   3. Mutual and Cooperative Organization

      1. Some banking institutions have long been held in a "mutual" form of ownership

      2. A mutual institution operates without common stock; ownership rights inhere in the depositors

      3. Nearly all thrift institutions were held in mutual form at one point

   4. Dissolution

      1. In the case of a National Bank, if the dissolution is pursuant to a merger or consolidation and the board of directors determines that dissolution is in the best interests of the institution, 12 U.S.C. § 181 requires a two-thirds vote of the dissolving banks shareholders, and, if the result of the dissolution will be the purchase of its assets and assumption of deposit liabilities by another bank, the deal must also be approved by two-thirds of the acquiring bank's shareholders (unless the Comptroller determines that an emergency justifies dispensing with these votes)

4. Interaction Between Federal and State Law

   1. General Preemption Rules - Comes from Art. VI, clause 2

      1. ANALYSIS:

         • THRESHOLD QUESTION: Does the state law conflict with federal law?

         • Step 1: Validity of Federal Law

           • Question: Is the federal law constitutional?

             • [IF YES = Go to Step 2]

             • [IF NO = Federal Law in Invalid]

         • Step 2: Express Preemption or Nonpreemption

           • Question: Has...