A recent district court decision stating that nonbank banks are not engaged in the business of banking may turn some ideas about ''commerce and banking'' upside down, along with concepts about interstate dealings, says Peter J. Wallison. Mr. Wallison is a partner of Gibson, Dunn & Crutcher, Washington, D.C., and a former general counsel of the Treasury Department.
IN AN IMPORTANT recent court decision (Independent Bankers Association of America, et al., v. Conover, Civ. Action No. 84-1403, Feb. 15, 1985), the United States District Court for the Middle District of Florida issued a preliminary injunction against the final approval of nonbank banks by the Comptroller of the Currency.
The case has attracted a lot of attention because of its implications for the continued interstate expansion of bank holding companies through the use of so-called nonbank banks. But the case is equally interesting, and may have even more significant long-term implications, because of the legal theory adopted by the court in concluding that the IBAA and its associated plaintiffs had a reasonable chance of succeeding on the merits and thus winning a permanent injunction against the Comptroller. The association argued that the Comptroller was authorized under the National Bank Act (12 USC, Section 21 et seq.) only to charter banks that are to engage in the ''business of banking''; that nonbank banks - because they do not both accept demand deposits and make commercial loans - would not be so engaged; and that the comptroller was aware of this fact when he issued their preliminary charters.
If this theory is correct, the Comptroller could be permanently enjoined from chartering nonbank banks.
The court devoted much of its substantive analysis of the merits to the question of whether a bank is engaged in the ''business of banking'' if it does not both make commercial loans and take demand deposits. The comptroller argued that the nonbank banks he charters have all the powers of banks enumerated under 12 USC, Section 24, and specifically that they are in the business of banking because they accept deposits (but not demand deposits) and make loans (but not commercial loans).
The court, however, adopted the theory advanced by the Independent Bankers Association. Quoting from textbooks and decisions of the Supreme Court in Mercantile National Bank v. Mayor, 121 U.S. 139 (1887), and in U.S. v. Philadelphia National Bank, 374 U.S. 321 (1963), the court concluded: ''Courts have long recognized that the power to accept demand deposits and make commercial loans is at the core of the 'business of banking.' '' The court went on to note that ''nonbank banks are clearly an anomaly. They constitute a new kind of financial institution which is really a consumer bank.''
If the theory is upheld on appeal - a matter about which lawyers may speculate - the case has important implications for current controversies.
First, if nonbank banks are not in fact engaged in the business of banking, what are we to say about the provisions of the Bank Holding Company Act, which many cite as reflecting a desire upon the part of Congress to separate banking and commerce?
IF THE COURT is correct, and nonbank banks are not engaged in the core business normally associated with banking, it can hardly be contended that the policy behind the Bank Holding Company Act - if not its words - would support the divestiture of nonbank banks by nonbanking ''commercial'' firms such as American Express, Sears, or Merrill Lynch. These institutions will argue, as some have in the past without the weight of judicial authority, that the Bank Holding Company Act was intended only to keep them out of the business of commercial banking, not ''consumer'' banking.
Second, if nonbank banks are not engaged in the business of banking, how can it be contended that the acquisition of nonbank banks by bank holding companies across state lines is in fact interstate banking? Again, while the policy behind the Douglas Amendment to the Bank Holding Company Act would appear to be the protection of state restrictions on entry into the banking business by out-of-state bank holding companies, this policy would not apply where the institution acquired by the out-of-state bank holding company is not engaged in the business of banking.
In this connection, it is worth noting that although the court's decision in IBAA v. Conover would prevent the Comptroller from chartering federal banks as nonbank banks, it deals only with the Comptroller's chartering power and does nothing in theory or in practice to prevent bank holding companies from acquiring federal or state chartered institutions that have been turned into nonbank banks by divestiture of their commercial loan portfolios or the termination of their demand deposit activities.
Once chartered, a nonbank bank would still be a bank for purposes of the Change in Bank Control Act and would continue to be eligible for deposit insurance under the court's theory. The Federal Deposit Insurance Act, of which the Change in Bank Control Act is a part, defines as banks all federal banks and all institutions chartered by the states ''to receive deposits.'' (12 USC, Sections 1813 and 1814)
Essentially, what the court has done in IBAA v. Conover - at the urging, ironically, of the Independent Bankers Association - is to develop a policy rationale for the definition of ''bank'' chosen by Congress in the Bank Holding Company Act. The court concluded that Congress chose the definition very deliberately, and not without a recognition of its consequences.
Thus, in responding to the Comptroller's argument that the definition of bank in the Bank Holding Company Act was not intended by Congress to be applied in construing the Comptroller's chartering power under the National Bank Act, the court stated that the way Congress defined the term ''bank'' in the Bank Holding Company Act ''represents a recognition by Congress that the acceptance of demand deposits and the making of commercial loans constitute the historic core activities of banks and the essence of the business of banking.''
In other words, Congress meant to apply the Bank Holding Company Act only to banks that are engaged in the ''core'' business of accepting demand deposits and making commercial loans, and not to ''consumer'' banking that is generally the focus of nonbank bank activities.
If this holding is ultimately affirmed on appeal, it will be difficult for anyone to argue - as the IBAA and others have contended in the past - that nonbank banks operate through a loophole in the Bank Holding Company Act. At least one court has now suggested that this ''loophole '' was deliberately created by Congress and not by imaginative lawyers.
Peter J. Wallison is a resident fellow at AEI.