The Treasury Department's recent proposal to incorporate a federal preemption rule in the interstate branching bill is long overdue.
Speaking as a former state banking regulator, this is an about-face by Treasury. What is most significant is the indication that Treasury is willing to support the establishment in law of a formal preemption process.
This process would include as its chief ingredient a requirement that notice of every pending preemption issue be published in the Federal Register and reasonable opportunity be afforded to interested people and states to comment.
I would encourage all state banking regulators to comment on preemption determinations, even if their particular state is not directly involved.
In 1991 New Jersey enacted a basic banking law that applied to both state and federally chartered depositories.
The New Jersey Department of Banking and its commissioner at the time, Jeff Connor, proposed regulations to implement the act.
Comments were solicited from the public, the industry, and federal regulators, in particular, the Office of the Comptroller of the Currency.
The OCC responded with a 14-page determination that the New Jersey law was preempted for national banks.
Not many would characterize the New Jersey law as particularly burdensome to banks and thrifts.
While it required all New Jersey depository institutions to offer to their customers a basic, low-cost checking accounts, it also specified that no institution would be. required to offer the account at a cost that was below its actual cost.
The law permitted institutions to apply for permission to offer a low-cost alternative more to their liking. However, no national bank to my knowledge elected to ignore our state law.
Without waiting to receive a formal preemption request from one of its banks or to see what effect the law might have on national banks in practice, the Comptroller ruled that national banks did not have to comply with the law.
In doing so, the Comptroller relied upon its own Interpretive Rule 7.8000 and a provision in the Bank Enterprise Act enacted in 1991 as part of the FDIC Improvement Act.
The Comptroller's Interpretive Rule said that state laws prohibiting, limiting, or restricting a deposit account service charge are preempted by the comprehensive federal statutory scheme governing the deposit-taking function of national banks.
The Bank Enterprise Act sought to encourage all depositories to offer basic banking accounts to their customers by promising an incentive of lower insurance premiums on deposits in those accounts.
Despite finding that Congress in enacting the Bank Enterprise Act and the New Jersey Legislature in adopting its basic banking law shared the view that "more widespread use of lifeline accounts" was desirable, the Comptroller concluded that the methods chosen by each to accomplish the same goal were "directly contrary" so that the "state's treatment must yield."
The New Jersey Department of Banking immediately responded with a letter of its own, maintaining that application of traditional preemption principles to New Jersey's basic banking law did not require this result.
The Comptroller never responded to the department's letter. However, judging by the result, it appears someone at Treasury at least did read it.
Treasury now seems to agree that the Comptroller's expansive view of national banks' deposit-taking authority is overbroad, and Treasury is willing to withdraw or revise the interpretive rule.
Treasury also seems now to agree that the Bank Enterprise Act was not intended to override basic state banking laws, or occupy the area of basic banking services to such an extent as to displace state law.
While it is certainly important to those who want to see lifeline checking, the critical issue here is not whether the Comptroller was fight in 1992 when it said that the New Jersey law was preempted, or today when Treasury seems to be saying otherwise.
Indeed, virtually all national banks in New Jersey chose to disregard the Comptroller's 1992 preemption determination and comply with the law. And the department's response today, I'm quite sure, would be something along the lines of, "All's well that ends well."
But it is the existence of a formal process for preempting state laws, complete with an opportunity to comment, that is critical.
This is necessary to engender healthy federal-state debate and interaction that is the prime attribute of our dual banking system.
Mr. Jaworksi is a former New Jersey assistant commissioner of banking.
