BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM v. DIMENSION FINANCIAL
CORP. ET AL.
CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE TENTH CIRCUIT
Argued November 4, 1985
Decided January 22, 1986
Section 2(c) of the Bank Holding Company Act of 1956 defines "bank" as any institution "which (1) accepts deposits that the depositor has a legal right to withdraw on demand, and (2) engages in the business of making commercial loans." In response to the increase in the number of arguably uncovered "nonbank banks" - such as institutions offering customers "NOW" (negotiable order of withdrawal) accounts, which function like traditional checking accounts but are subject to a seldom exercised right of the bank to require prior notice of withdrawal, and institutions offering "commercial loans substitutes" such as certificates of deposit and commercial paper - the Federal Reserve Board amended its "Regulation Y" to redefine a "bank" as any institution that (1) accepts deposits that "as a matter of practice" are payable on demand and (2) engages in the business of making "any loan other than a loan to an individual for personal, family, household, or charitable purposes," including "the purchase of retail installment loans or commercial paper, certificates of deposit, bankers' acceptances, and similar money market instruments." In consolidated cases challenging the amended Regulation Y, the Court of Appeals set aside the regulation.
The Board did not act within its statutory authority in defining "banks" as it did. Pp. 366-375.
BURGER, C. J., delivered the opinion of the Court, in which all other Members joined, except WHITE, J., who took no part in the consideration or decision of the case.
Michael Bradfield argued the cause for petitioner. With him on the briefs was James V. Mattingly, Jr.
Jeffrey S. Davidson argued the cause for respondents Dimension Financial Corp. et al. With him on the brief were David G. Norrell, Glenn Summers, and William L. Mitchell. John D. Hawke, Jr., argued the cause for respondents American Financial Services Association et al. With him on the brief were Leonard H. Becker, Douglas L. Wald, and Louis A. Hellerstein. *
[ Footnote * ] Briefs of amici curiae urging reversal were filed for the Conference of State Bank Supervisors et al. by Erwin N. Griswold, J. Thomas Cardwell, Laura N. Pringle, and James F. Bell; and for the Independent Bankers Association of America by Leonard J. Rubin.
Briefs of amici curiae urging affirmance were filed for the United States by Acting Solicitor General Fried, Acting Assistant Attorney General Willard, Deputy Solicitor General Claiborne, John F. Cordes, Freddi [474 U.S. 361, 363] Lipstein, and Mary Ann Gadziala; and for Sears, Roebuck and Co. et al. by Theodore B. Olson, Philip M. Knox, Jr., David Shute, and Peter J. Wallison. [474 U.S. 361, 363]
CHIEF JUSTICE BURGER delivered the opinion of the Court.
We granted certiorari to decide whether the Federal Reserve Board acted within its statutory authority in defining "banks" under 2(c) of the Bank Holding Company Act of 1956, 12 U.S.C. 1841 et seq., as any institution that (1) accepts deposits that "as a matter of practice" are payable on demand and (2) engages in the business of making "any loan other than a loan to an individual for personal, family, household, or charitable purposes" including "the purchase of retail installment loans or commercial paper, certificates of deposit, bankers' acceptances, and similar money market instruments." 12 CFR 225.2(a)(1) (1985).
Section 2(c) of the Bank Holding Company Act defines "bank" as any institution "which (1) accepts deposits that the depositor has a legal right to withdraw on demand, and (2) engages in the business of making commercial loans." 70 Stat. 133, as amended, 12 U.S.C. 1841(c).
This case is about so-called "nonbank banks" - institutions that offer services similar to those of banks but which until recently were not under Board regulation because they conducted their business so as to place themselves arguably outside the narrow definition of "bank" found in 2(c) of the Act. Many nonbank banks, for example, offer customers NOW (negotiable order of withdrawal) accounts which function like conventional checking accounts but because of prior notice provisions do not technically give the depositor a "legal right to withdraw on demand." 12 U.S.C. 1841(c)(1). Others offer conventional checking accounts, but avoid classification as "banks" by limiting their extension of commercial credit to [474 U.S. 361, 364] the purchase of money market instruments such as certificates of deposit and commercial paper.
In 1984, the Board promulgated rules providing that nonbank banks offering the functional equivalent of traditional banking services would thereafter be regulated as banks. 49 Fed. Reg. 794. The Board accomplished this by amending its definition of a bank, found in "Regulation Y," in two significant respects. First, the Board defined "demand deposit" to include deposits, like NOW accounts, which are "as a matter of practice" payable on demand. 12 CFR 225.2 (a)(1)(A) (1985). Second, the Board defined the "making of a commercial loan" as "any loan other than a loan to an individual for personal, family, household, or charitable purposes," including "the purchase of retail installment loans or commercial paper, certificates of deposit, bankers' acceptances, and similar money market instruments." 12 CFR 225.2(a)(1)(B) (1985).
Cases challenging the amended Regulation Y were commenced in three Circuits and were consolidated in the United States Court of Appeals for the Tenth Circuit. 1 The Court of Appeals set aside both the demand deposit and commercial loan aspects of the Board's regulation. 744 F.2d 1402 (1984). The court did not discuss the demand deposit regulation in detail, relying instead on the holding of an earlier Tenth Circuit case, First Bancorporation v. Board of Governors, 728 F.2d 434 (1984). In First Bancorporation, the court noted that the statutory definition of demand deposit is a deposit giving the depositor "a legal right to withdraw on demand." The court recognized that "withdrawals from NOW accounts are in actual practice permitted on demand." Id., at 436. But, since the depository institution retains a technical prior notice requirement it does not, for the purposes [474 U.S. 361, 365] of Congress' definition of "bank," accept "deposits that the depositor has a legal right to withdraw on demand."
The Court of Appeals also concluded that the Board's new definition of "commercial loan" was at odds with the Act. The legislative history revealed that in passing 2(c) Congress intended to exempt from Board regulation institutions whose only commercial credit activity was the purchase of money market instruments. Although agencies must be "able to change to meet new conditions arising within their sphere of authority," any expansion of agency jurisdiction must come from Congress and not the agency itself. 744 F.2d, at 1409. Accordingly, the Court of Appeals invalidated the amended regulations.
We granted certiorari. 471 U.S. 1064 (1985). We affirm.
The Bank Holding Company Act of 1956, 12 U.S.C. 1841 et seq., vests broad regulatory authority in the Board over bank holding companies "to restrain the undue concentration of commercial banking resources and to prevent possible abuses related to the control of commercial credit." S. Rep. No. 91-1084, p. 24 (1970). The Act authorizes the Board to regulate "any company which has control over any bank." 12 U.S.C. 1841(a)(1).
The breadth of that regulatory power rests on the Act's definition of the word "bank." The 1956 Act gave a simple and broad definition of bank: "any national banking association or any State bank, savings bank, or trust company." 12 U.S.C. 1841(c) (1964 ed.). Experience soon proved that literal application of the statute had the unintended consequence of including within regulation industrial banks offering limited checking account services to their customers. These institutions accepted "`funds from the public that are, in actual practice, repaid on demand.'" Amend the Bank Holding Company Act of 1956: Hearings on S. 2253, S. 2418, [474 U.S. 361, 366] and H. R. 7371 before a Subcommittee of the Senate Committee on Banking and Currency, 89th Cong., 2d Sess., 447 (1966) (letter to the Committee from J. L. Robertson, Member, Federal Reserve Board). Although including these institutions within the bank definition was the "correct legal interpretation" of the 1956 statute, the Board saw "no reason in policy to cover such institutions under this act." Ibid. Congress agreed, and accordingly amended the statutory definition of a bank in 1966, limiting its application to institutions that accept "deposits that the depositor has a legal right to withdraw on demand." 2
The 1966 definition proved unsatisfactory because it too included within the definition of "bank" institutions that did not pose significant dangers to the banking system. Because one of the primary purposes of the Act was to "restrain undue concentration of . . . commercial credit," it made little sense to regulate institutions that did not, in fact, engage in the business of making commercial loans. S. Rep. No. 91-1084, p. 24 (1970). Congress accordingly amended the definition, excluding all institutions that did not "engag[e] in the business of making commercial loans." Since 1970 the statute has provided that a bank is any institution that
In 1984, the Board initiated rulemaking to respond to the increase in the number of nonbank banks. 3 After hearing [474 U.S. 361, 367] views of interested parties, the Board found that nonbank banks pose three dangers to the national banking system. First, by remaining outside the reach of banking regulations, nonbank banks have a significant competitive advantage over regulated banks despite the functional equivalence of the services offered. Second, the proliferation of nonbank banks threatens the structure established by Congress for limiting the association of banking and commercial enterprises. See 12 U.S.C. 1843(c)(8) (bank holding company can purchase nonbanking affiliate only if entity "closely related to banking"). Third, the interstate acquisition of nonbank banks undermines the statutory proscription on interstate banking without prior state approval. 49 Fed. Reg. 794, 835-836 (1984). Since the narrowed statutory definition required that both the demand deposit and the commercial loan elements be present to constitute the institution as a bank, the Board proceeded to amend Regulation Y redefining both elements of the test. We turn now to the two elements of this definition.
The Board amended its definition of "demand deposit" primarily to include within its regulatory authority institutions offering NOW accounts. A NOW account functions like a traditional checking account - the depositor can write checks that are payable on demand at the depository institution. The depository institution, however, retains a seldom exercised but nevertheless absolute right to require prior notice of withdrawal. Under a literal reading of the statute, the institution - even if it engages in full-scale commercial lending - is not a "bank" for the purposes of the Holding Company Act because the prior notice provision withholds from the depositor any "legal right" to withdraw on demand. The [474 U.S. 361, 368] Board in its amended definition closes this loophole by defining demand deposits as a deposit, not that the depositor has a "legal right to withdraw on demand," but a deposit that "as a matter of practice is payable on demand."
In determining whether the Board was empowered to make such a change, we begin, of course, with the language of the statute. If the statute is clear and unambiguous "that is the end of the matter, for the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress." Chevron U.S. A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 842 -843 (1984). The traditional deference courts pay to agency interpretation is not to be applied to alter the clearly expressed intent of Congress.
Application of this standard to the Board's interpretation of the "demand deposit" element of 2(c) does not require extended analysis. By the 1966 amendments to 2(c), Congress expressly limited the Act to regulation of institutions that accept deposits that "the depositor has a legal right to withdraw on demand." 12 U.S.C. 1841(c). The Board would now define "legal right" as meaning the same as "a matter of practice." But no amount of agency expertise - however sound may be the result - can make the words "legal right" mean a right to do something "as a matter of practice." A legal right to withdraw on demand means just that: a right to withdraw deposits without prior notice or limitation. Institutions offering NOW accounts do not give the depositor a legal right to withdraw on demand; rather, the institution itself retains the ultimate legal right to require advance notice of withdrawal. The Board's definition of "demand deposit," therefore, is not an accurate or reasonable interpretation of 2(c).
Section 2(c) of the Act provides that, even if an institution accepts deposits that the depositor has a legal right to withdraw on demand, the institution is not a bank unless it "engages [474 U.S. 361, 369] in the business of making commercial loans." Under Regulation Y, "commercial loan" means "any loan other than a loan to an individual for personal, family, household, or charitable purposes," including "the purchase of retail installment loans or commercial paper, certificates of deposit, bankers' acceptances, and similar money market instruments."
The purpose of the amended regulation is to regulate as banks institutions offering "commercial loan substitutes," that is, extensions of credit to commercial enterprises through transactions other than the conventional commercial loan. In its implementing order, the Board explained that "it is proper to include these instruments within the scope of the term commercial loan as used in the Act in order to carry out the Act's basic purposes: to maintain the impartiality of banks in providing credit to business, to prevent conflicts of interest, and to avoid concentration of control of credit." 49 Fed. Reg., at 841.
As the Board's characterization of these transactions as "commercial loan substitutes" suggests, 4 however, money market transactions do not fall within the commonly accepted definition of "commercial loans." The term "commercial loan" is used in the financial community to describe the direct loan from a bank to a business customer for the purpose of providing funds needed by the customer in its business. The term does not apply to, indeed is used to distinguish, extensions of credit in the open market that do not involve close borrower-lender relationships. Cf. G. Munn & F. Garcia, Encyclopedia of Banking and Finance 607 (1983). These latter money market transactions undoubtedly involve the indirect [474 U.S. 361, 370] extension of credit to commercial entities but, because they do not entail the face-to-face negotiation of credit between borrower and lender, are not "commercial loans."
This common understanding of the term "commercial loan" is reflected in the Board's own decisions. Throughout the 1970's the Board applied the term "commercial loan" to exclude from regulation institutions engaging in money market transactions. For example, in D. H. Baldwin Co., 63 Fed. Res. Bull. 280 (1977), the Board noted that although savings and loans participated in the federal funds market and issued certificates of deposit, they were not "technically `banks' for the purposes of the Act" because they did not make commercial loans. Id., at 286. The Board recognized that savings and loans resembled banks but concluded that "the decision should be left to Congress whether, in light of the policies underlying the Bank Holding Company Act, such `near-banks' should be treated as `banks' or `nonbanks.'" Id., at 287. See also American Fletcher Corp., 60 Fed. Res. Bull. 868, 869, and n. 8 (1974) (savings and loans participate in the federal funds market and offer certificates of deposit but may not be deemed "banks" within the meaning of the Act). In 1976, the Board's Legal Division found that broker call loans "do not appear to have the close lender-borrower relationship that is one of the characteristics of commercial loans." Letter to Michael A. Greenspan from Baldwin P. Tuttle, Deputy General Counsel, pp. 2-3 (Jan. 26, 1976) (App. 100A-101A). A 1981 internal memorandum summarized the Board's longstanding interpretation of the commercial loan definition:
The statute by its terms, however, exempts from regulation all institutions that do not engage in the business of making commercial loans. The choice of this general language demonstrates that, although the legislation may have been prompted by the needs of one institution, Congress intended to exempt the class of institutions not making commercial loans. Furthermore, the legislative history supports this plain reading of the statute. The Senate Report explained:
Unable to support its new definitions on the plain language of 2(c), the Board contends that its new definitions fall within the "plain purpose" of the Bank Holding Company Act. Nonbank banks must be subject to regulation, the Board insists, because "a statute must be read with a view to the `policy of the legislation as a whole' and cannot be read to negate the plain purpose of the legislation." The plain purpose of the legislation, the Board contends, is to regulate institutions "functionally equivalent" to banks. Since NOW accounts are the functional equivalent of a deposit in which the depositor has a legal right to withdraw on demand and money market transactions involve the extension of credit to commercial entities, institutions offering such services should be regulated as banks. 6
The "plain purpose" of legislation, however, is determined in the first instance with reference to the plain language of the statute itself. Richards v. United States, 369 U.S. 1, 9 (1962). Application of "broad purposes" of legislation at the expense of specific provisions ignores the complexity of the [474 U.S. 361, 374] problems Congress is called upon to address and the dynamics of legislative action. Congress may be unanimous in its intent to stamp out some vague social or economic evil; however, because its Members may differ sharply on the means for effectuating that intent, the final language of the legislation may reflect hard-fought compromises. Invocation of the "plain purpose" of legislation at the expense of the terms of the statute itself takes no account of the processes of compromise and, in the end, prevents the effectuation of congressional intent.
Without doubt there is much to be said for regulating financial institutions that are the functional equivalent of banks. NOW accounts have much in common with traditional payment-on-demand checking accounts; indeed we recognize that they generally serve the same purpose. Rather than defining "bank" as an institution that offers the functional equivalent of banking services, however, Congress defined with specificity certain transactions that constitute banking subject to regulation. The statute may be imperfect, but the Board has no power to correct flaws that it perceives in the statute it is empowered to administer. Its rulemaking power is limited to adopting regulations to carry into effect the will of Congress as expressed in the statute. 7
If the Bank Holding Company Act falls short of providing safeguards desirable or necessary to protect the public interest, that is a problem for Congress, and not the Board or the courts, to address. Numerous proposals for legislative reform have been advanced to streamline the tremendously complex area of financial institution regulation. See, e. g., [474 U.S. 361, 375] Blueprint for Reform: Report of the Task Group on Regulation of Financial Services (July 1984). Our present inquiry, however, must come to rest with the conclusion that the action of the Board in this case is inconsistent with the language of the statute for here, as in TVA v. Hill, 437 U.S. 153, 194 (1978), "[o]nce the meaning of an enactment is discerned . . . the judicial process comes to an end."
[ Footnote 2 ] The Senate Report explained, "the bill redefines `bank' as an institution that accepts deposits payable on demand (checking accounts), the commonly accepted test of whether an institution is a commercial bank so as to exclude institutions like industrial banks and nondeposit trust companies." S. Rep. No. 1179, 89th Cong., 2d Sess., 7 (1966).
[ Footnote 3 ] The Board explained that since 1980 a large number of insurance, securities, industrial, and commercial organizations have acquired Federal Deposit Insurance Corporation insured financial institutions that are the [474 U.S. 361, 367] functional equivalent of banks. The Board also noted that the powers of previously unregulated industrial banks "have substantially expanded . . . making them for all intents and purposes banks" for the purposes of the Bank Holding Company Act. 49 Fed. Reg., at 834.
[ Footnote 4 ] The Board stated in its implementing order that "commercial paper is an important substitute for commercial loans." 49 Fed. Reg., at 840, n. 34. See also Citicorp, 69 Fed. Res. Bull. 921, 922 (1983) ("[C]ommercial loans include such commercial loan substitutes as the purchase of commercial paper, bankers acceptances and certificates of deposit, and the sale of federal funds"); Hurley, The Commercial Paper Market, 63 Fed. Res. Bull. 525 (1977) ("[C]ommercial paper is an important substitute for bank credit").
[ Footnote 5 ] The Board contends that these decisions "represented a willingness by the Board to refrain from applying the full scope of the Act in conditions that did not appear to generate the potential for its evasion." 49 Fed. Reg., at 842. But the decisions themselves make no mention of such self-imposed restraint. Rather, the decisions represented the Board's interpretation of the meaning of the statute based on the language of the Act and the legislative history of its passage.
[ Footnote 6 ] In a related argument, the Board contends that it has the power to regulate these institutions under 5(b), which provides that the Board may issue regulations "necessary to enable it to administer and carry out the purposes of this chapter and prevent evasions thereof." 12 U.S.C. 1844(b). But 5 only permits the Board to police within the boundaries of the Act; it does not permit the Board to expand its jurisdiction beyond the boundaries established by Congress in 2(c).
[ Footnote 7 ] The process of effectuating congressional intent at times may yield anomalies. In TVA v. Hill, 437 U.S. 153 (1978), for example, we were confronted with the explicit language of a statute that in application produced a curious result. Noting that nothing prohibited Congress from passing unwise legislation, we upheld the enforcement of the statute as Congress had written it. Congress swiftly granted relief to the petitioner in Hill; but it did so in a fashion that could not have been tailored by the courts. See Pub. L. 95-632, 5, 92 Stat. 3760. [474 U.S. 361, 376]