Banks, OCC Face Uphill Fight Over Preemption

Large banks have repeatedly prevailed in battles to preserve federal preemption in Congress and the courts, but that victory string is likely to be broken by the regulatory reform bill being debated in the Senate this week. With so many other provisions requiring the large banks' attention, such as a crackdown on derivatives and a ban on proprietary trading, most of them will lack the time or attention to fight curbs on federal preemption. Without their help, the Office of the Comptroller of the Currency, which has been quietly pushing for changes in the bill, is not expected to prevail. "The large banks are playing more defense than they thought they would," said Raj Date, the chairman and executive director of the Cambridge Winter Center for Financial Institutions Policy. "That means the OCC won't have as much help from its national-bank allies." Though the Senate bill would not eliminate preemption, it would force the OCC to jump through several legal hoops before declaring that national banks need not comply with a state law. These include proving that an existing federal regulation sufficiently addresses the issue a state was trying to rectify. Under other circumstances, this would probably be a top priority of the industry's trade groups and the largest banks. But they are focused on other parts of the bill they view as more important, including the so-called Volcker Rule, which would ban proprietary trading, and provisions to regulate derivatives.