- Key insight: Multiple states are testing the ability of federal banking regulations to preempt state laws. If they succeed, a core pillar of the U.S. economy — the dual banking system — could begin to crumble, warn two former comptrollers of the currency.
- What's at stake: When states seek to regulate activities that Congress entrusted to federally chartered institutions operating under federal law, they risk undermining the very framework that makes a national banking system possible.
- Forward look: The national bank charter has been one of the great institutional successes of the American economy. Preserving its integrity is not merely a legal question but an economic imperative.
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In reviewing Illinois' Interchange Fee Prohibition Act, or IFPA — a law restricting certain interchange fees on card transactions — the court expressed skepticism about the Office of the Comptroller of the Currency's latest efforts to defend federal preemption.
Yet it ultimately concluded the OCC's revised framework changed the legal landscape. According to the court, the OCC's revised regulation now supports federal preemption of the IFPA's interchange fee restrictions as applied to national banks, federal savings associations, out-of-state banks covered by federal law, and payment card networks. In effect, the court enjoined Illinois from enforcing key portions of the statute against these entities.
The significance of that ruling extends far beyond interchange fees.
Why? Because the dispute is ultimately about whether a national economy can continue to rely on a national banking system governed by national rules.
That question has confronted the United States since Abraham Lincoln's presidency.
When Lincoln and Congress created the national banking system during the Civil War, they were responding to a fragmented financial landscape marked by inconsistent state laws and recurring instability. Their solution was straightforward: Banks that chose a national charter would operate under a uniform federal framework rather than a maze of conflicting state requirements.
That framework has helped support American economic growth for more than 160 years. Today, it faces a growing challenge.
The court's opinion notes that since Illinois enacted the IFPA, 11 other states have begun pursuing similar swipe-fee legislation of their own. The issue is no longer one state's policy preference. It is whether nationally chartered institutions will increasingly be subjected to a growing patchwork of state-by-state mandates governing core banking and payments activities.
Nor is the challenge limited to interchange fees.
Across the country, states are
Swiss banking giant UBS Group received federal approval from the Office of the Comptroller of the Currency to convert its $1.6 trillion-asset UBS Bank USA from a Utah-chartered industrial bank to a national charter.
State and local laws have also attempted to dictate how banks manage credit risk, communicate with borrowers and collect debts. Many of these efforts are motivated by legitimate policy concerns. But when states seek to regulate activities that Congress entrusted to federally chartered institutions operating under federal law, they risk undermining the very framework that makes a national banking system possible.
Federal preemption exists to prevent precisely that outcome.
When Congress created the national banking system, it did not eliminate state banking. Instead, it established a dual banking system built on choice. Banks could operate under state charters and state supervision, or they could choose a national charter governed by federal law and supervised by the OCC. That bargain has endured because it works.
Strong federal preemption does not weaken the dual banking system. It preserves it. State-chartered institutions retain the benefits and responsibilities of state regulation. National banks retain the benefits and responsibilities of a federal charter. Each system can compete and innovate within a framework that provides clarity regarding who sets the rules. The alternative is not healthy competition. It is fragmentation.
America's payments, credit and banking systems operate much like an interstate highway system. Businesses and consumers benefit because they can move seamlessly across state lines under common rules. If every state begins erecting its own tollbooths, detours and traffic signals, the system becomes slower, more expensive and less efficient for everyone who relies upon it. That is what is at stake in the debate over preemption.
Recent events suggest these concerns are no longer confined to courtrooms. In Colorado, Governor Jared Polis vetoed legislation modeled on Illinois' interchange-fee restrictions, citing legal risks and pointing to actions by federal banking regulators defending federal preemption. Whether through litigation, regulation, or legislation, policymakers are increasingly confronting the same underlying question: Can a national economy continue to rely on a national banking and payments system if individual states are permitted to impose conflicting rules on federally chartered institutions?
The IFPA litigation will continue in the U.S. Court of Appeals for the 7th Circuit. Courts will remain important arbiters of the boundary between federal and state authority. But litigation is slow, expensive and inherently reactive. By the time a dispute is resolved, uncertainty may already have spread through markets and institutions.
That is why the OCC must continue providing clear guidance regarding the scope of federally granted banking powers. Regulatory clarity benefits banks, consumers, businesses and state regulators alike.
The court's ruling should be viewed not as the end of a dispute but as a warning flare. Even a court that expressed skepticism about the OCC's methods ultimately concluded that federal law preempts Illinois' effort to regulate federally protected banking activities.
The controversy surrounding Illinois is not really about interchange fees. It is about whether America will continue to enjoy the benefits of a truly national banking system or gradually drift back toward the fragmented model that Lincoln and Congress sought to overcome more than 160 years ago.
The national bank charter has been one of the great institutional successes of the American economy. Preserving its integrity is not merely a legal question but an economic imperative.
