Judicial Gymnastics Open the Door for Branch Banking

JurisdictionUnited States,Federal
CitationVol. 16 No. 11 Pg. 1959
Publication year1987
16 Colo.Law. 1959
Colorado Lawyer

1987, November, Pg. 1959. Judicial Gymnastics Open the Door for Branch Banking


Vol. 16, No. 11, Pg. 1959

Judicial Gymnastics Open the Door for Branch Banking

by Judith D. Judd and Floyd Youngblood

From a historical perspective, two concepts have been paramount in shaping the structure of the American banking system: a commitment to a dual state and national banking system based on competitive equality(fn1) and antipathy to branch banking.(fn2)

In banking terminology, Colorado is a "unit banking" state as opposed to a "branch banking" state.(fn3) The network of suburban banks bearing the names "Colorado National," "First Interstate," "Intrawest," "United Bank" and "Omnibank" are not branches; in most cases they are subsidiaries of bank holding companies. Each bank is a separately chartered bank with its own board of directors and officers, and each bank must be individually capitalized.

The unit banking system reflects a fear of large concentrations of power. The theory is that branch banking will destroy competition by fostering the development of big banks at the expense of small banks. As one commentator noted, in the past, branch banking was viewed as "subversive or un-American."(fn4) In recent years, however, most states have adopted branch banking in one form or another.(fn5)

A state's right to permit or prohibit branch banking has been axiomatic since 1927. As one court stated in 1976, "properly construed, the National Bank Act and the policy of competitive equality leave to the states the question of branching and its inherent advantages or disadvantages."(fn6)

In light of this background, shock waves went through the banking bar in February 1987 when the U.S. Court of Appeals for the Fifth Circuit held that the Comptroller of the Currency ("Comptroller") has the authority to permit national banks in Mississippi to branch in contravention of state banking law. This decision, Department of Banking and Consumer Finance of the State of Mississippi v. Clark ("Deposit Guaranty"),(fn7) may signal a reversal of the long-standing view that branch banking is a matter of state law. It may also signal the demise of the dual state and national banking system.

This column discusses Deposit Guaranty, including the legal and judicial background of the case, and analyzes the implications for Colorado specifically and the American banking system generally.

Deposit Guaranty

Deposit Guaranty ("the Bank") is a national bank with its principal office in Jackson, Mississippi. The Bank applied to the Comptroller for permission to open a branch in Gulfport, Mississippi, approximately 170 miles from its principal office. During the public comment period, the Department of Banking and Consumer Finance of the State of Mississippi and several state-chartered commercial banks objected to the branching application on the grounds that the proposed branch would violate state law and the Comptroller lacked jurisdiction to grant branching approval in violation of state law.

The comptroller subsequently approved the Bank's application.(fn8) The Department of Banking filed a suit in the U.S. District Court for the Southern District of Mississippi seeking to enjoin the Bank from opening the Gulfport branch. The district court granted injunctive relief.(fn9) The Comptroller and the Bank appealed and the Fifth Circuit Court vacated the injunction. The court's decision on appeal turned on the "proper" construction of 12 U.S.C. § 36(h), the branching provision of the National Bank Act(fn10) which defines the term


"state bank," and § 36(c), the provision pertaining to competitive equality.

The Comptroller's Case:

The Comptroller argued for a functional reading of 12 U.S.C. § 36(h) and (c). The Comptroller's first task was to convince the court that the subsection (h) definition of "state bank" is not restricted to entities chartered by states as commercial banks. In making this argument, the Comptroller focused on the portion which states that the term "state bank" shall be defined "to include trust companies, savings companies, or other such corporations or institutions carrying on the banking business under the authority of state law."(fn11) The Comptroller argued:

The plain meaning of § 36(h). . . evidences its purpose to ensure that state institutions, not necessarily defined by state law as "banks" but nevertheless carrying on the business of banking under the authority of state laws, be included within the term "State banks."(fn12)

The Comptroller's second task was to convince the court he had properly determined that Mississippi savings and loan associations conduct "banking business." In order to determine what is meant by banking business in § 36(h), the Comptroller looked to 12 U.S.C. § 24 which enumerates the powers of national banks. The Comptroller determined that three powers listed in § 24 constitute the business of banking: accepting deposits, making loans and paying checks.

Under Mississippi statutes, state-chartered savings and loan associations are empowered to accept savings accounts; pay interest on deposits and other accounts; act in a fiduciary capacity for customers; offer NOW accounts; service loans and investments for others; pay earnings on savings accounts; sell money orders, traveler's checks or similar instruments; lend and invest funds; allow withdrawal of all or any part of savings accounts; and purchase, sell, lease or mortgage personal or real property.(fn13) Additionally, Mississippi savings and loan associations are granted all powers of federal savings and loan associations...

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