WASHINGTON -- The Federal Reserve Board is exceeding its statutory authority by requiring bank holding companies to pump up ailing bank subsidiaries, a lawyer for MCorp Financial Inc. told the Supreme Court yesterday.
Arguing in the second case formally reviewed by the justices on opening day of the court's 1991-1992 term, Alan B. Miller, a partner in Weil, Gotshal & Manges of New York City, said there is no federal law that allows the Fed to impose the requirement, known informally as the agency's "source of strength" regulation.
But Jeffrey P. Minear, assistant to the solicitor general in the Justice Department, told the court the Fed has general authority to ensure the safety and soundness of banks under its jurisdiction.
In response to questioning from Justice Sandra Day O'Connor, Mr. Minear said there are limits to the Fed's authority but that the central bank's interpretation of those limitations are entitled to judicial deference.
The regulation in question in the case, Board of Governors of the Federal Reserve System v. MCorp, requires holding companies "to use available resources to provide adequate capital to subsidiary banks during periods of financial stress or adversity." It was formally adopted in 1984 and clarified in 1987.
The rule has been controversial from the outset and has spawned criticism from the banking industry and the Federal Deposit Insurance Corp., which has argued the regulation could unintentionally limit the flow of new capital into the banking industry.
The case arose in 1988, when the Fed ordered MCorp to transfer about $400 million of its assets to subsidiary banks. Twenty of the holding company's 25 subsidiary banks eventually failed and were seized by the FDIC. Of the remaining five banks, four have been sold.
MCorp filed for bankruptcy and sought an injunction barring the Fed from taking further enforcement actions against the firm. The U.S. District Court for the Southern District of Texas ruled the Fed no longer had authority over MCorp because the firm had been "entrusted to the authority of the bankruptcy court."
The U.S. Court of Appeals for the Fifth Circuit, in a rare rebuff to the Fed, went further, ruling the agency exceeded its authority when it tried to make MCorp funnel money into its troubled banks.
Though the Supreme Court apparently agreed to review the case to determine the scope of the Fed's supervisory and enforcement powers, it may get tangled in jurisdictional issues and postpone a definitive ruling on the regulation until all the jurisdictional kinks are worked out.
But if the court reaches the merits of the dispute, the justices will be faced with a choice between their general practice of deferring to agencies to interpret statutes governing their actions adnd the lack of clear-cut guidance from Congress.
Lawmakers in the 1930s repealed a policy for national banks under which shareholders could be assessed to pay off creditors of failed institutions. Since then, Congress has never indicated that shareholders could be assessed to support troubled banks.
Congress in the 1989 thrift bailout legislation, however, adopted cross-guarantee requirements under which affiliated banks in a holding company are responsible for the debts of other banks in the same organization. If the court strikes down the Fed's source-of-strength rule, the Fed likely will be forced to resort to those provisions.
"The court should defer to Congress on this issue," Mr. Miller said. "If it believes such a requirement is appropriate, it should so state."