The United States Supreme Court is considering overturning Chevron USA vs. Natural Resource Defense Council, a long-standing precedent that generally defers to an administrative agency’s interpretation of the law. What impact would overturning the Chevron Deference have on banking regulation and supervision?
The Chevron Deference
The 1984 Chevron case centered on the EPA’s definition of “source” under 1977 amendments to the Clean Air Act. The law required industrial projects that created new sources of air pollution to undergo a “new source review.” The EPA defined “source” as an entire factory rather than as an individual machine. Companies could avoid a new source review if they offset the overall pollution impact with other changes to the factory. An environmental advocacy group (National Resource Defense Council) challenged this interpretation, but the Supreme Court sided unanimously with the EPA.
The Chevron deference comes into play when Congress’s intent is unclear, and the agency’s interpretation is “based on a permissible construction of the statute.” The idea here is that a court “may not substitute its own construction of a statutory provision for a reasonable interpretation made by the administrator of an agency.” The agency’s interpretation need not be obvious. After all, the EPA changed its definition of “source” when agency leadership transitioned from Carter to the Reagan Administrations.
The latest challenge to Chevron revolves around an interpretation of the 1976 Magnuson-Stevens Act. The Act requires fisheries operating within 200 miles off the U.S. coast to allow federal observers to board its vessels and collect data on potential overfishing. The National Marine Fisheries Service (NMFS) interprets the law to also require fisheries to bear the cost of observers. The Supreme Court is currently reviewing two cases (Loper Bright Enterprises v. Raimondo and Relentless, Inc. v. Department of Commerce) that challenge the NMFS’s rule.
Chevron and Bank Supervision
While the Chevron deference applies across a wide range of regulatory agencies, each regulator regulates in its own way. Congressional action is the starting point for bank supervision, but only a starting point. Major banking legislation comes along perhaps once in a decade and usually alternates between tightening (FIRREA, FDICIA, Dodd-Frank)) and loosening up (GLBA, EGRRCPA). These legislative changes are implemented through regulation. However, day to day supervision, especially of safety and soundness and especially of large banks, also depends on two other elements. Guidance fleshes out regulatory requirements. While examiners shouldn’t cite “violations” of guidance, such guidance can inform supervisory criticism. Finally, we come to supervisory judgment, which considers law, regulation, guidance, the examiner’s own experience, and the range of industry practice.
Examiners don’t often cite specific regulatory violations in safety and soundness exams. During my 11+ years in Large Bank Supervision at OCC, I led about 20 exams and often had substantive findings in terms of matters requiring attention. However, we rarely cited specific regulatory violations and those were not necessarily the most serious findings. (Compliance examiners might have a different experience.)
“Unsafe and unsound” is the regulator’s elastic clause. Congress authorized federal regulators to establish operational and managerial standards for safety and soundness, including internal controls, credit underwriting, interest rate exposure, asset growth, compensation, and “such other operational and managerial standards as the agency determines to be appropriate” (12 USC 1831p-1). OCC codified these standards for national banks in 12 CFR 30. Congress explicitly gave regulators the authority to establish safety and soundness standards. That could make safety and soundness determinations less vulnerable to a post-Chevron challenge.
Less vulnerable, perhaps, but not invulnerable. The safety and soundness regulation and accompanying guidelines are quite extensive, running over 18,000 words. However, they also have very much of a “know it when you see it” quality. The word “appropriate” is used 73 times. Banking trade organizations maintain the “relevant legal standard” must relate to “specific, demonstrably unsafe and unsound practices” rather than “generic and conclusionary assertions about ‘safety and soundness.’” A federal judge might view “appropriate” practices differently from bank supervisors.
Challenges to regulatory interpretations need not succeed to have an impact. The prospect of a legal challenge could have a chilling effect to make bank regulators more reluctant to take supervisory action. Adding layers of legal review also slows down the process. Remember that the supervision of SVB was characterized less by failure to identify problems than by failure to take prompt action to address those problems. Opening regulatory decisions to more legal challenges is likely to make things worse.
One-Sided Legal Challenges
How about the flip side? During oral arguments for Loper and Relentless, Justice Gorsuch argued
Chevron tends to work against the “little guy,” such as immigrants, veterans seeking benefits, and Social Security claimants. In the Chevron case itself, the EPA[ sided with a giant corporation over an environmental advocacy group. Could this apply to banking regulation as well?
Regulators frequently make questionable but banker-friendly interpretations of federal law. As I noted in an earlier post, Section 305 of the FDIC Improvement Act required federal banking agencies to revise risk-based capital standards to account for interest rate risk. Federal banking regulators essentially blew off the requirement.
More dubious is the practice of interpreting a large range of otherwise unauthorized activities as “incidental to banking.” The OCC issued a series of Interpretive Letters that expanded national banking powers well beyond what’s specifically authorized by statute. Consider the case of equities trading. Although the National Bank Act generally prohibits national banks from purchasing equities, two key Interpretative Letters opened equities trading to national banks.[1] The OCC first ruled that banks could purchase equity derivatives to facilitate customer trades. The OCC then ruled that banks could purchase cash equities to hedge their derivatives exposure. Although the OCC couched the Interpretive Letters in a way to suggest that the scope of the activity was limited, that hasn’t been the case in practice. For example, the nation’s largest bank’s Equity Markets business generated $10.4 billion in revenue during 2022.[2]
The extensive use of Interpretive Letters raises procedural issues as well. Law professor Saule Omarova notes that regulation through Interpretive Letters allows agencies “to avoid complying with the mandatory rule-making procedures under the Administrative Procedures Act, including the requirement for public notice and comment.”
Congressman Jim Leach (the Leach of Gramm-Leach-Bliley) challenged the OCC’s interpretation and asked the GAO to review. GAO ultimately concurred with the OCC’s interpretation. Apparently, lawyers at the OCC understood the legislation’s intent better than its legislator. OCC also periodically reviews Interpretive Letters to determine whether they remain consistent with current agency policy.
Would overturning Chevron subject the permissive actions (or inaction) discussed above to closer judicial scrutiny? I doubt it. Judges don’t strike down laws or regulations in a vacuum. Someone needs to bring a case. The banking industry isn’t going to complain, much less litigate if the regulators are going too easy on them. Who else? I might be a concerned citizen, but I have neither the deep pockets nor the deep pocket backing to bring a case. And would I even have standing? Probably not, though legal experts are welcome to add their perspective in the comments. Ultimately, challenges to regulatory decisions are best left to the political rather than judicial process.
[1] Federal law generally subjects state charted banks to the same restrictions as national banks, so OCC Interpretative Letters have influence beyond those banks OCC directly supervises.
[2] JPMC 2022 10-K, page 68.