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Banking Law
St. Johns University School of Law
DiLorenzo, Vincent M.

Federal Reserve System
o   Federal reserve was created in a decentralized structure (12 member banks distributed geographically, but more exist in the east)
o   Quasi Governmental Organization QUANGO! (we wanted the Fed to be independent from politics)
o   Each member has 14 year revolving terms (not all leave at the same time)
o   Funding comes from banking industry
National Banks:
o   All national banks must be members (ie, they must buy stock in the Fed, and they must pay fees)
State Banks:
o   Membership is voluntary
o   Before 1980, there were advantages to being a fed member bank
o   Now, however, liquidity loans are available to all banks, as with check clearing (fed does all check clearing now)… Depository Institutions Deregulatory and something Act
(1) Discount Window Loans (liquidity loans)
o   After 1980, all banks have the right to take out a discount window loan
o   Rate called the Discount Rate
o   Three types of Liquidity Loans (12 CFR 201.4)
Primary Credit
ú  Short-term (usually overnight, no longer than a few weeks)
ú  Bank must be in a “generally sound financial condition”
ú  Only for liquidity (cannot be used for capital projects, like expansion or investment)
Example: Bank knows it’s about to pay out a bunch of depositors really quick, but they don’t have the liquid funds available (but they do have the assets to cover the transaction)
Secondary Credit
ú  No “generally sound financial condition” requirement
ú  Longer term (months, years even)
ú  For liquidity only
Example: bank is in trouble, needs some liquidity period.
Seasonal Credit
ú  Every year at the same time there is a large simultaneous outflow of money
ú  only important in rural areas
Example: eg, in farming communities, where everybody takes out money to buy seed, and then after harvest, deposits a huge amount of money
o   Collateral Requirements
§  12 CFR § 201.3: need “acceptable collateral”
Acceptable Collateral
ú  US Government Securities (treasury bills, treasury bonds);
ú  mortgage notes covering 1-4 family residences that are not past due;
ú  state and local bonds;
ú  business, consumer and other customer notes that are not past due
§  Any collateral put up is not available for liquidity! Fed is a secured creditor, and so the Fed gets money first when collateral is liquidated!
o   Available to depository institution
§  12 CFR § 201.2: any institution with funds on deposit with the FDIC
§  12 CFR § 201.5: undercapitalized institutions may go to the Fed window, but the term is strictly limited to 60 days
§  12 CFR § 201.4(d): in unusual exigent circumstances, the Fed can make available liquidity credit for non-member institutions, provided:
(1) $ unusual circumstances
(2) unable to get money elsewhere, AND
(3) failure of liquidity would adversely effect the economy
9  As of 2008, this was used to help securities firms
*no financial health or collateral requirements!!
(2) Reserve Requirements
o   Banks must deposit cash with the federal reserve, with no interest paid
§  Banks must still keep their own reserves (no withdrawal from Fed deposit)
o   Reserve requirement is a function of a bank’s…
(a) Transaction Accounts
§  Term of art meaning checking account
§  As low as 8%, as high as 14%
§  In recent years, this has stayed at 10%
(b) Nonpersonal Time Deposits
§  Time deposits à predetermined date of maturity (like a CD)
§  Reserve requirement can be imposed on up to 9% of all nonpersonal cds, by statute
9  so far, this has never been higher than 0%
o   These requirements are imposed on ALL depository institutions that are FDIC insured
 (3) Check Clearing
o   it’s available to everybody, and everybody is charged a fee
o   the branches do this
(4) Monetary Policy
o   Changing discount rate, changing reserve requirement
(1) Influences inflation, AND
(2) Stimulates the Economy (100% employment)
§  changing reserve requirement changes the amount of money available for lending
§  Fed has the option of substituting treasury bills for cash!
ú  Treasury Bills: accrue interest! they pump up the economy
ú  Using cash, which does not accrue interest, decelerates the economy
·         Controller of the Currency will NOT protect existing competitors (Federal)
o   Standard of Review: Arbitrary and Capricious
§  Arbitrary and Capricious: No basis in fact
·         Many State agencies will protect existing competitors
o   worry about lowering profitability of existing banks
*NOTE: the FDIC has minimum requirements, eve

nted, etc.
§  There is a judgment and then imposition of a fine
Standard on review
§  “Substantial Evidence Test” ß was the judgment from the hearing supported by substantial evidence?
o   Procedure on appeal to court:
Standard on review
§  “Arbitrary and Capricious”
ú  Regulator must give some reasonable explanation for its decision to deny an application
·         doesn’t have to be a detailed explanation (do not have to demonstrate, from the evidence, the validity of the reason)
§  Standard Worded Out àNo evidence in the record at all that can possibly lead to the administrator’s decision
·         Preemption
Express Preemption
o   the easy case; congress says literally “we set aside state law”
Implied Preemption
o   congress intended to set aside state law but it didn’t say so
o   Three possibilities:
(1) Pervasive Federal Regulation
ú  “Occupying the Field”: Federal government never intended states to participate in this field of regulation; intended their own regulation to be the only regulation in this area (eg securities)
(2) Conflict
ú  physical impossibility of compliance between state law and federal law [perhaps this very situation…?], federal law trumps
(3) Obstacle to Full Purposes and Objectives
ú  State law cannot “stand as an obstacle” to the full purposes and objectives of the federal law
ú  States cannot “impair significantly” or “significantly interfere” with nat’l bank’s exercise of power, they are preempted
ú  States cannot “condition” the exercise of federal power on prior State authorization
 9  Any time any of these three exist, there is preemption
Agency Interpretation of Preemption
o   MAJORITY of circuits defer to agency determinations of federal intent in determining whether $ preemption (minority of courts say there always has to be de novo review of the issue)