1. Banking Law for the General Practitioner
National Academy of Continuing Legal Education
Kathleen A. Scott, Esq.
Senior Counsel
Norton Rose Fulbright US LLP

2. Introduction
• Banks are not ordinary business corporations organized under the
general business corporation laws of the various states; there are
specialized state and federal banking statutes
• A bank may be chartered by either the U.S. Government or a state
banking department, and is subject to the banking laws of the
chartering authority, oftentimes with a federal overlay of regulation
and supervision
• Liquidation of a bank is done according to federal or state bank
liquidation laws, not federal bankruptcy laws
• Banks vs. “investment banks”
• Dodd-Frank Wall Street Reform and Consumer Protection Act
(Dodd-Frank) made major changes to the federal banking laws
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3. Bank regulators – Federal
Board of Governors of the Federal Reserve System (“Federal
Reserve Board”)
• Monetary policy and bank supervisory responsibilities
• In the bank supervisory area, has jurisdiction over:
• Bank holding companies and savings and loan holding companies
• State-chartered banks that are member banks of the Federal Reserve System
• Non-U.S. banks with operations in the United States
Office of the Comptroller of the Currency (“OCC”)
• Charters and supervises national banks and federal thrifts
• Licenses and supervises offices of non-U.S. banks that choose
the OCC as licensing authority
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4. Primary federal bank regulatory agencies (cont’d)
Federal Deposit Insurance Corporation (“FDIC”)
• Provides federal deposit insurance for state and national banks,
and state and federal thrifts
• If a bank has deposits subject to federal deposit insurance, federal
deposit insurance is required
• During the economic crisis, deposit insurance temporarily was
raised to $250,000 per ownership category; Dodd-Frank made it
permanent
• Primary federal regulator of state non-member banks and state-
chartered thrifts
Office of Thrift Supervision (“OTS”) previously had chartered and
supervised federal thrifts and holding companies and some state-
chartered thrifts, but was abolished by Dodd-Frank and jurisdiction
divided among Federal Reserve Board, OCC and FDIC
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5. Consumer Financial Protection Bureau
Bureau of Consumer Financial Protection (“CFPB”)
• Established as part of Dodd-Frank reform bill
• Most consumer laws and regulations transferred to CFPB, such as:
• Mortgage regulations
• Remittance regulations
• Equal credit opportunity
• Privacy
• SEC, CFTC and FTC also have jurisdiction in certain areas
• Adds federal level of supervision over large banks and certain
nonbank financial institutions
• “Larger participants” in the automobile financing market, consumer debt
collection, international money transfers, and student loan servicing
market
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6. Banking Statutes and Regulations - Federal
Bank Holding Company Act (12 USC 1841 et seq.)
• Regulates the activities of bank holding companies and financial
holding companies
• What makes a company a “bank holding company”
• Bank holding companies can engage in banking and activities
closely related to banking (limited insurance and securities
underwriting authority, and restricted ability to engage in, or invest
in companies that engage in, non-banking-related activities)
• In 1999, the Gramm Leach Bliley Act authorized bank holding
companies to become “financial holding companies” (FHCs)
• FHCs can engage in activities considered financial in nature or
incidental or complementary to a financial activity (insurance and
securities underwriting authority, merchant banking)
• 12 CFR Part 225, Regulation Y
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7. Principal federal statutes and regulations (cont’d)
National Bank Act (12 USC 21 et seq.)
• Provides for the chartering of national banks
• Regulates activities of national banks
• 12 CFR Chapter 1, starting with Part 1 and following
Federal Reserve Act (12 USC 221 et seq.)
• Provides for membership of state banks in the Federal Reserve
System (national banks must become member banks)
• Regulates certain activities of member banks
• Establishes the Federal Reserve Bank system
• 12 CFR Part 208, Regulation H
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8. Principal federal statutes and regulations (cont’d)
Federal Deposit Insurance Act (12 USC 1811 et seq.)
• Establishes a system of federal deposit insurance
• Regulates at the Federal level the activities of state-chartered
insured banks that are not member banks of the Federal Reserve
system
• Establishes the procedures for conservatorship, receivership and
liquidation of insured banks
• 12 CFR Parts 303-369
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9. Principal federal statutes and regulations (cont’d)
International Banking Act (12 USC 3101 et seq.)
• Provides authority for the Federal Reserve Board to approve or
revoke the ability of a non-U.S. bank to establish a branch,
agency, representative office or commercial lending company in
the United States
• Provides that the non-banking activities in the United States of
non-U.S. banks that have banking operations in the United States
must conform to the activities in which a U.S. bank holding
company (or FHC, if the non-U.S. bank qualifies to be treated as
such) may engage
• 12 CFR Part 211, Regulation K
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10. Principal federal statutes and regulations (cont’d)
Home Owners Loan Act (12 USC 1461 et seq.)
• Provides for the chartering of federal savings banks and federal
savings and loan associations (“federal thrifts”)
• Regulates the activities of insured thrifts
• Regulates the activities of holding companies for insured thrifts
• 12 CFR Parts 100-197 (principally)
CFPB (12 USC 5481 et seq.)
• Establishes jurisdiction of agency under certain federal consumer
financial laws; must consult with federal banking regulators in
proposing and finalizing regulations
• Supervision limitations
• No authority over commercial transactions or sale of nonfinancial
goods or services
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11. State banking laws and agencies
• Banks can be chartered by the OCC or by a state; each state
allows banking organizations to be formed
• The state code will authorize the categories of banking institutions
permitted to be organized in the state, set forth the authorized
activities and requirements for each category and prescribe the
supervisory oversight of the state regulator
• The types of banking organizations authorized are similar to those
chartered at the federal level, although there are some differences
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12. Corporate Requirements
• Some states and the OCC allow banks to be formed as LLCs or
Subchapter S corporations
• A national bank in its charter must elect a corporate governance
law: law of the state in which the main office of the bank is
located, the law of the state in which the holding company of the
bank is incorporated, the Delaware General Corporation Law, or
the Model Business Corporation Act
• Usually Delaware law or law of the state in which its head office
is located is chosen
• Usually there is a separate banking code, although corporate
governance may be the same as for regular business
corporations in that state; in some states the proposed bank
forms under the corporations law but then receives a banking
license or charter
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13. State vs. federal charter?
• Why choose a state or a federal charter?
• Ultimately it is a business choice in line with business plan
• Pre-emption of state law for national banks and federal thrifts
• History at OCC and OTS of aggressive pre-emption determinations
• Controversial pre-emption decisions included pre-emption of state laws dealing
with “predatory” lending and bank sales of insurance to customers
• Dodd-Frank Act restricted use of preemption, including eliminating it for
operating subsidiaries of national banks and federal thrifts
• Laws generally not preempted: contracts; torts; criminal law; rights to collect
debts; acquisition and transfer of property; taxation; zoning; and any other laws
as determined by the OCC
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14. Capital requirements
Banks must abide by certain capital and liquidity requirements
Risk-based capital requirements
• The more risky the asset, the more capital that needs to be
reserved
International standards developed by the Basel Committee of the
Bank for International Settlements – international group of
regulators
Basel I: assigned risk weights
Basel II: more reliance on internal models
• Standard option similar to Basel I
• Models need to be approved by regulators
• Needed to be adopted by each country, but implementation in the
United States was delayed
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15. Capital requirements: post-economic crisis
Basel III: Changes made after the recent economic crisis
• Capital standards strengthened
• Leverage ratio
• Strengthened liquidity requirements
• Capital surcharge on large systemically significant banks
• Supplementary leverage ratio
• New proposal Total Loss-Absorbing Capacity (TLAC)
Additional Dodd-Frank Act changes to capital rules
• Collins Amendment directed federal banking agencies to
establish, on a consolidated basis, minimum leverage capital and
risk-based capital requirements not be less than what would be
applicable to insured depository institutions
• Applicable to insured depository institutions and their holding
companies and SIFIs
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16. Basic bank powers
• Take deposits
• Extend credit, and buy or sell loans
• Act as fiduciaries
• Buying and selling coin, bullion and foreign exchange
• Funds transfers
• Safe deposit boxes
• “All such incidental powers as shall be necessary to carry on the
business of banking”
• Authority to branch
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17. Restrictions on bank transactions with affiliate
Sections 23A and 23B of the Federal Reserve Act and Federal
Reserve Board Regulation W (12 CFR Part 223)
• Statutory quantitative and qualitative restrictions on a bank’s ability to do
business with its affiliates; Regulation W focuses on insured bank’s transactions
• Legislative intent was to try to ensure that a transaction by a bank with its
affiliate would not drag the bank down
• Transactions with affiliates generally have to be on an arm’s-length basis
• Extensions of credit to affiliates also must collateralized at least at 100%
collateralization,
• Only certain types of collateral are acceptable
• “Affiliate” is broadly defined and includes mutual funds advised by banks
• Transactions by a bank with a non-affiliate for the benefit of an affiliate of the
bank also are covered
• There are some exemptions from requirements, but narrowly drawn
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18. Transaction-related issues
Equity investments by banks
• Limited authority to invest in equity of companies
• May take equity as part of restructuring debt owed to the bank
• Note BHC/FHC restrictions
• Preemption of state law
Equity investments in banks
• Restrictions under federal law on owning banks and bank holding
companies (and federal thrifts and savings and loan holding
companies)
• Private equity investments in bank post-crisis
• “Acting in concert” theory
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19. Transaction-related issues (cont’d)
Margin Lending Regulations
• “Margin stock” defined
• Banks are restricted in the amount they may lend for the purpose
of buying or carrying margin stock if the credit is secured by
margin stock
• When any loan is collateralized by margin stock, a form must be
signed by the borrower and placed in the loan file
• Secured by margin stock also includes indirectly secured, such as
a negative pledge
• Special rules when margin stock is part of a larger group of
collateral
• Nonbank lenders must register with local Federal Reserve Bank
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20. Transaction-related issues (cont’d)
Tying Restrictions and Exceptions
• Bank prohibited from extending credit, leasing or selling property
of any kind, or furnishing any service, or fixing or varying the
consideration for any of the foregoing, on the condition or
requirement that the customer obtain or provide some additional
credit, property, or service from such bank (or its holding
company or nonbank subsidiary of the bank holding company)
other than a traditional banking service (loan, discount, deposit,
or trust service) or that the customer not obtain some other
credit, property, or service from a competitor of the bank, its bank
holding company or nonbank subsidiary of the bank holding
company, other than a condition or requirement that such bank
shall reasonably impose in a credit transaction to assure the
soundness of the credit
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21. Transaction-related issues (cont’d)
Flood Insurance
• Applies to loans secured by buildings or mobile homes located or
to be located in areas determined by the Federal Emergency
Management Agency to have special flood hazards
• Requires that the building, mobile home or personal property
securing the loan be covered by flood insurance for the term of the
loan; extremely limited exceptions
• Coverage is limited to the overall value of the property securing
the designated loan minus the value of the land on which the
property is located
• If borrower fails to maintain the required amount of coverage,
bank must obtain the insurance for the borrower and can charge
the borrower for the premiums and fees incurred in purchasing the
insurance
• Civil penalties for violations
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22. Transaction-related issues (cont’d)
FIRREA appraisal requirements
• Appraisals by licensed or certified appraisers are required when a
bank makes a loan taking real estate as collateral
• There are several exceptions, including:
• Lien on real estate is taken as collateral in an abundance of caution
• Lien on real estate has been taken for purposes other than the real estate’s
value
• Bank is acting in a fiduciary capacity and is not required to obtain an appraisal
under other law
• Bank staff may do appraisal but staff appraiser must be
independent of the lending, investment, and collection functions
and not otherwise involved with the transaction
• Outside appraisers must be engaged directly by the bank or the
bank’s agent, not the borrower
• Bank regulators periodically issue guidance
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23. Representations and warranties
• Capital
• Dodd-Frank
• Anti-money laundering laws and regulations
• Economic sanctions laws and regulations
• Awareness of anti-money laundering and economic sanctions
laws increased post 9/11, and you now see related reps and
warranties in credit documents
• Since the passage of Dodd-Frank, you are starting to see reps
and warranties related to regulatory changes
Transaction-related issues (cont’d)
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24. Other regulatory issues
Anti-Money Laundering (“AML”) (Financial Crimes Enforcement
Network, “FinCEN’)
• Cash reporting and recordkeeping requirements
• AML Compliance Program
• Customer Identification Program
• Suspicious Transaction Reporting
• Applicable to a broad array of businesses classified as “financial
institutions”
• New proposal to cover investment advisers
• Identification requirement of “beneficial owner” of entity pending
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25. Other regulatory issues (cont’d)
Economic Sanctions (Office of Foreign Assets Control, “OFAC”)
• U.S. persons are prohibited from doing business with “Specially
Designated Nationals”
• Separate economic sanctions imposed against countries or
certain property
• Each of these programs is covered by its own set of regulations
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26. Other regulatory issues (cont’d)
Consumer Lending: Community Reinvestment Act
Consumer Protection Regulations and Disclosure
• Truth in Lending (Regulation Z) – credit cards, consumer lending
• Regulation B (Equal Credit Opportunity) – nondiscriminatory
access to credit
• Regulation E (Electronic Funds Transfer Act) – debit cards, gift
cards, fund transfers
• Regulation CC (Funds Availability) - checks
• Regulation DD (Truth in Savings) – disclosures
• Fair Credit Reporting Act – credit reports, “adverse action”
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27. Other regulatory issues (cont’d)
Privacy of Non-Public Personal Information
• Protection of confidential customer information
• Customers protected are individuals
• Privacy Policy provided at beginning of customer relationship and annually
thereafter
• Banks must ensure its service providers also protect confidentiality of customer
information
• Affiliate marketing issues
• Requirements in event of breach
• Model Forms
• “Interagency Guidelines Establishing Information Security Standards”
• Recent changes allow annual notices to be posted to a bank’s website
• ID Theft
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28. Other regulatory issues (cont’d)
Outsourcing
• Banks often outsource services to affiliated and unaffiliated
service providers
• Oftentimes used for back-office activities such as data input,
clearing of transactions, back office processing, Internet-related
activities
• Certain outsourcings require notice to regulators
• Contracts should include provisions for regulatory access
• Outsourcings to non-U.S. service providers can be of special
concern
• Regulatory Guidance
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29. Other regulatory issues (cont’d)
Cybersecurity
• Increasing concern by regulators
• Banks subject to attacks
• Safety and soundness issues
• Interagency guidance
• States also taking a stand
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30. Dodd-Frank – in general
“Dodd-Frank Wall Street Reform and Consumer Protection Act” was
signed into law on July 21, 2010 (Public Law 111-203)
• Major changes made to financial regulation in the United States
• Implemented through numerous regulatory rulemakings
Systemic risk a key provision in the law
• Large bank holding companies
• Nonbank financial institutions deemed to be of systemic risk
OTS eliminated
• Jurisdiction divided up among OCC, FDIC and Federal Reserve
Board
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31. Dodd-Frank – in general (cont’d)
Major themes of Dodd-Frank include:
• Systemic risk issues
• Consumer Financial Protection Bureau
• Volcker Rule
• Swaps and derivatives
• Credit risk retention
• Mortgage reforms
• Investor protections
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32. Dodd-Frank - systemic risk regulation
Title I of the Act: Financial Stability Oversight Council (FSOC) to
identify and respond to systemic risk
• Chaired by Treasury Secretary, FSOC consists of either federal or
state government agencies except for an independent appointee
with insurance expertise
• Responsibilities include designation of individual nonbank financial
companies that are considered to pose a risk to US financial
stability to be supervised and regulated by the Federal Reserve
Board (SIFI – systemically important financial institution)
“Nonbank financial companies” are companies that derive:
• 85% or more of annual gross revenues from financial activities; or
• 85% or more of consolidated assets relate to financial activities
• “Financial activities” as defined in Bank Holding Company Act
• To date, four designated: AIG, Prudential, GE Capital (scaling
back), Metlife (challenging definition in court)
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33. Dodd-Frank - systemic risk regulation (cont’d)
Systemic Risk Test: Would company pose a risk to the US financial
stability in the event of its material financial distress or failure, or
because of nature, scope, size, scale, concentration,
interconnectedness, and mix of company’s activities
• Large bank holding companies (US-based BHCs/FHCs and non-
US banks that are treated as US BHCs or FHCs under the
International Banking Act) with total consolidated assets of $50
billion or more are in effect deemed to be of systemic risk
• Large bank holding companies and nonbank financial companies
deemed to be of systemic risk are subject to enhanced prudential
standards on their operations
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34. Dodd-Frank - systemic risk regulation (cont’d)
Comprehensive final prudential standards regulations adopted and
effective June 1, 2014, but compliance dates generally move to
2015 and 2016; added to certain others adopted previously
• Prudential Standards now include:
• Enhanced risk-based capital and leverage capital
requirements, resolution planning, capital planning and
stress testing
• Risk Management and Risk Committee requirements
• Enhanced liquidity requirements
• Debt-to-Equity Limits
• Similar requirements for non-U.S. banks, and more
• Prudential standards on SIFIs imposed a case-by-case basis:
e.g., prudential standards for GE Capital
• Federal Reserve Board also may impose stricter regulation on
certain financial activities or products because the activities may
pose systemic risk
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35. Orderly Liquidation Authority – Title II of Dodd-Frank
• Intended to address “too big to fail” concept
• Systemic risk determination (different from Title I)
• Orderly liquidation of covered financial companies by FDIC
similar to how FDIC resolves insured banks now
• Authority would be invoked if the Treasury Secretary, upon FDIC
and Federal Reserve Board recommendation and in consultation
with the President, determines that a failed financial company
cannot be resolve under traditional means (US Bankruptcy
Code) without posing a systemic risk
Dodd-Frank - systemic risk regulation (cont’d)
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36. “Volcker Rule”
“Volcker Rule” imposes prohibitions and restrictions on the ability of
banking entities and SIFIs to engage in proprietary trading or
investing in or sponsoring a private equity fund
“Banking entities” -- insured banks and their holding companies,
non-US banks that maintain branches and agencies in the US and
their subsidiaries and affiliates
Final rules issued December 2013 by US federal banking agencies,
SEC and CFTC
General Rule prohibits banking entities from:
• Engaging in proprietary trading: engaging as principal for the
trading account of the banking entity in any purchase or sale
of one or more financial instruments (securities, derivatives,
commodity sale contract)
• As principal, directly or indirectly acquiring or retaining any
ownership interest in or sponsoring a “covered fund” as
defined (a fund exempt from certain provisions of the
Investment Company Act)
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37. “Volcker Rule” (cont’d)
Exemptions from the proprietary trading ban:
• Underwriting
• Market-making
• Risk-mitigating hedging
• Trading in certain domestic government obligations
• Trading as fiduciary
• Riskless principal transactions
• “Solely outside the United States”
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38. “Volcker Rule” (cont’d)
Exemptions from the investing or sponsoring covered funds ban:
• Exemptions for certain funds (e.g., foreign public funds,
acquisition vehicles, insurance company separate
accounts, loan securitizations, asset-backed commercial
paper conduits)
• Organizing, offering, underwriting and market-making
• De mimimis investments
• Risk-mitigating hedging
• Solely outside the United States
Rule includes reporting and recordkeeping requirements and
compliance programs
Effective July 21, 2015 (Extra time to conform CLOs and certain
legacy covered funds)
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39. International banking
U.S. banks can branch abroad or form subsidiaries in accordance
with applicable U.S. federal and state law and law of the other
country
Non-U.S. banks can establish a presence in the United States
through:
• Direct Offices:
• Branches (banking office)
• Agencies (banking office)
• Representative Offices (nonbanking solicitation/marketing activities)
• Subsidiaries:
• Bank
• Other functionally regulated subsidiary
• Other business organization
Restrictions on banking and nonbanking activities
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40. International Banking (cont’d)
Approval from the home country regulator
Board of Governors of the Federal Reserve System
(Federal Reserve Board) – gatekeeper
• Comprehensive supervision on a consolidated basis (“CCS”)
• New Dodd-Frank systemic risk consideration requirement for entry
and termination
License needed to open an office is needed from either OCC or a
state
Most international bank offices are state-licensed
• New York has the most international bank offices in the United
States
• Other states that also have a substantial international bank
presence: FL, CA, TX, IL
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41. Questions:
Kathleen A. Scott, Esq.
Senior Counsel
Norton Rose Fulbright US LLP
666 Fifth Avenue
New York, NY 10103
Telephone: (212) 318-3084
Fax: (212) 318-3400
E-mail: kathleen.scott@nortonrosefulbright.com
Website: www.nortonrosefulbright.com
Blog: www.regulationtomorrow.com
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