Banking Law and Regulation.

• Author: Hawke, Jr., John D.

The U.S. banking industry has come through one of the most turbulent periods in its history. The 1980s saw the significant deregulation of the thrift industry at the federal and state levels, followed by the industry's virtual collapse at a staggering cost to the federal government and U.S. taxpayers. Bank failures also occurred on a scale unprecedented since the Great Depression, largely due to the collapse in real estate values in certain areas of the country.

Profound as these events were, however, even more significant for the future of banking were the dramatic legal and structural changes of the past decade that redefined the business of banking and the role of banks in the economy. The breakdown of geographic and product barriers, the globalization of the financial markets, and technological innovations in banking created a strikingly new competitive and regulatory environment for banks by the early 1990s.

One element of this new environment has been the wave of consolidation within the banking industry as banks have merged into larger institutions and expanded into new geographic and product markets. At the beginning of the 1980s, interstate banking was virtually nonexistent - an entity such as NationsBank would have been regarded as a futuristic fantasy, and a merger of institutions like BankAmerica and Security Pacific unthinkable. Bank involvement in selling products such as annuities and mutual funds and underwriting securities would have been shocking. But the industry has evolved to the point where such activities are now common.(1)

What is striking about this evolution is that it occurred with relatively few or no changes in the principal federal statutes that have governed the banking industry since the 1930s.(2) But the lack of statutory changes did not mean that the law remained static. To the contrary, the law changed dramatically.

Banking industry lawyers and other professionals opened new paths for the industry's evolution through a succession of innovative readings of outdated statutes vulnerable to new interpretation. To be sure, the banking industry was forced to litigate virtually every step of the way against competing industry opponents, resulting in a slew of interesting and sometimes novel court decisions.(3) Banking regulators spent much of the decade trying to keep pace with the industry's market-driven evolution by imposing new regulatory restrictions and supervisory requirements. In order to stem the tide of bank failures and contain bank troubles in the future, Congress enacted the Federal Deposit Insurance Corporation Improvement Act of 1991,(4) which established a comprehensive new system of supervision,(5) audit requirements,(6) prompt corrective actions,(7) and other reforms that required the bank regulatory agencies to commence dozens of rulemaking procedures." The end result was an astounding complexity in the law of banking.

The banking system now is at a watershed when depository institution failures are tapering off and we can take stock of the changes that have occurred and begin to focus on the long-term future of the industry. Although the process of consolidation and expansion undoubtedly will continue, what direction and structure the industry ultimately will take is uncertain at this point. The industry's expansion into new product markets raises nettlesome legal and policy questions affecting the interests of various competitors. Its geographic expansion also raises the difficult issues of supervisory coordination and states' rights. These issues have been debated for years without any definitive resolution by Congress. The industry itself is divided on what direction it will go.

Given the policy decisions that must be made and implemented concerning...