Board of Governors of Frs v. First Lincolnwood, 439 U.S. 234 (1978)

MR. JUSTICE STEVENS, with whom MR. JUSTICE REHNQUIST joins, dissenting.

This case involves a proposal to restructure the ownership of a relatively small bank in order to reduce its income taxes. From the standpoint of the bank’s competitors, its creditors, its owners, and its customers, as well as the public at large, the proposed transaction is, at worst, completely harmless, and, at best, substantially beneficial.

The Federal Reserve Board nevertheless refused to approve the transaction, not because of any concern about adverse effects of the transaction itself, but rather to induce the owners of the bank to take action that the Board has no authority to require of bank owners generally. In the Board’s view, its approval power is a sort of lever that it may use to bend the will of independent bank owners and managers. I share the opinion expressed by Chief Judge Fairchild for the unanimous Court of Appeals for the Seventh Circuit, sitting en banc, that the application of this kind of leverage has not been authorized by Congress.{1}

The normal reason for subjecting any type of transaction to advance administrative approval is a concern about the possible consequences of the transaction itself. I can think of no judicial precedent or statutory analog authorizing an agency to use approvals as an all-purpose tool to accomplish objects entirely unrelated to the approved transaction. Before concluding that Congress intended to pass such an unprecedented approval statute therefore, I would insist upon a clear expression of that intent from Congress itself. Because the language, structure, and legislative history of § 3(c) of the Bank Holding Company Act of 1956, 12 U.S.C. § 1842(c), belie any such intent, I cannot accept the Board’s interpretation.

Read in its entirety, the language of § 3(c) confines the Board’s authority to the evaluation of the effects of proposed holding company transactions.{2} Specifically, the statute commands the Board to disapprove any acquisition "which would result in a monopoly," or "whose effect" may be substantially to lessen competition, unless it finds that the anticompetitive effects are outweighed "by the probable effect of the transaction in meeting the convenience and needs of the community." Although the last sentence in § 3(c) does not also explicitly limit the Board’s consideration to the financial and managerial "effects" of the proposed reorganization, when read in context its reference to "future prospects" surely reflects the same concern for the consequences of the transaction, rather than preexisting or unrelated conditions.{3}

The overall structure of the federal banking laws lends credence to this interpretation. It is not the Board, but instead the Comptroller of the Currency, that has day-to-day regulatory jurisdiction over existing financial and managerial conditions at national banks such as the one involved here.{4} If the Board can employ its holding company approval power as a lever for inducing banks to achieve more satisfactory financing, management, future prospects, and community service, it can indirectly exercise authority that Congress has denied it and given directly to another agency.{5}

The sparse legislative history cited by the Court on this point, ante at 250, is of no help to the Board’s position. It is true that Congress has been concerned with the "financial soundness" and "capital adequacy" of banks controlled by holding companies. But that concern is simply irrelevant to the issue whether Congress intended the Board to deny holding company approval that would not adversely affect, but rather would enhance, the bank’s financial soundness and capital adequacy.

The authority claimed by the Board is also illogical. If certain capital ratios are essential for sound banking operations, and if the Comptroller is unable to achieve them, then the Board should be given power to require them by a general rule or standard applicable to all banks. Haphazard enforcement against only those banks that seek approval of holding company status is a most unusual and disorderly way to administer any significant policy.

In the end, the Court’s decision rests entirely on "the principle that courts should defer" to the administrative agency’s own interpretation of its statutory authority. Ante at 251. The Court assumes that the Board’s asserted authority originated with the passage of the Bank Holding Company Act of 1956. Ante at 244. Not until eight years later, however, did the Board purport to exercise that authority, and it did so without explaining the statutory basis for its actions. Clayton Bancshares Corp., 50 Fed.Res.Bull. 121, 1264-1265 (1964); see opinion of the Court, ante at 248. Such a belated and casual assertion of power by the Board, no matter how long it has persisted, hardly qualifies as the type of administrative policy that may stand in place of an expression of legislative intent. See SEC v. Sloan, 436 U.S. 103 (overturning as beyond the authority of the SEC a policy followed by that agency for 34 years). See also AdamoWrecking Co. v. United States, 434 U.S. 275, 287-289, and n. 5. I would not allow this agency, no matter how well respected and how well motivated, to construe vague statutory language as conferring such wide-ranging power on itself. Like Chief Judge Fairchild and his colleagues, I "do not find this power or breadth of discretion in the statute." 560 F.2d 258, 262 (CA7 1977).{6}

I respectfully dissent.

1.

The Board assumes the stance that the tax advantage of bank holding company status is a reward which it may withhold until the applicant’s financial status fulfills the Board’s standard of desirability. We do not find this power or breadth of discretion in the statute.

560 F.2d 258, 262 (1977) (en banc).

2. Section 3(c) is quoted in the opinion of the Court, ante at 236-237, n. 2.

3. It is not disputed that the last sentence in § 3(c) serves in part to explain the Board’s duty to analyze a transaction’s "probable effect" on the "convenience and needs of the community" and then to weigh those effects against any anticompetitive "result[s]" of the transaction. Because the statute so clearly limits the Board’s consideration to effects in that endeavor, it makes little sense to read the same sentence to give the Board broader authority in analyzing the financial and managerial aspects of the transaction apart from its anticompetitive results.

The Board’s position is especially untenable in that the two principal concerns reflected in § 3(c) are concentration of commercial banking facilities under a single management and the combination under single control of banking and nonbanking enterprises. These concerns, neither of which is even remotely implicated by this transaction, were described in the testimony of Chairman Martin on behalf of the Board in 1955. He thought legislation was necessary because of:

(1) The unrestricted ability of a bank holding company group to add to the number of its banking units, making possible the concentration of commercial bank facilities in a particular area under a single control and management; and

(2) The combination under single control of both banking and nonbanking enterprises, permitting departure from the principle that banking institutions should not engage in business wholly unrelated to banking. Such a combination involves the lending of depositors’ money, whereas other types of business enterprise, not connected with banking, do not involve this element of trusteeship.

S.Rep. No. 1095, 84th Cong., 1st Sess., 2 (1955).

In the Board’s anomalous view, therefore, Congress has carefully confined the agency’s power to carry out the two primary purposes of the legislation, while leaving it with virtually unbounded authority to effectuate the statute’s secondary goal of assuring financial and managerial stability in bank holding companies.

4. Although the Board decides which banks qualify for membership in the Federal Reserve System, 12 U.S.C. § 329, its day-to-day regulatory authority extends only to state member banks that are insured by the Federal Deposit Insurance Corporation. National member banks, such as respondent, are subject to the daily control of the Comptroller of the Currency. 12 U.S.C. §§ 1813(b), (d), (h), 1818.

5. To use the Court’s example, ante at 250, if the Board is concerned with possible corruption in a national bank’s management, it may not address that problem directly by way of a cease-and-desist order or other remedies. That power resides exclusively in the Comptroller. Seen. 4, supra. The Board nonetheless claims the power to require a change in management before the bank can earn a reward in the form of tax savings available through holding company ownership -- even when it concludes that the change in ownership form would in no way enhance the dangers of corrupt management, and would only improve the bank’s overall situation. Having withheld the former power, I think it is illogical to assume without any proof at all that Congress intended to grant the latter.

6. In the text of its opinion, the Court states its intention to

decide whether the Board can only exercise [its approval] authority when the transaction would cause or exacerbate the financial unsoundness of the holding company or a subsidiary bank.

Ante at 237. Later. the Court purports to

hold that the Board may deny applications for holding company status solely on grounds of financial or managerial unsoundness, regardless of whether that unsoundness would be caused or exacerbated by the proposed transaction.

Ante at 252. What purports to be a broad holding, however, is significantly qualified by n. 18, which was added in response to this dissent. In that footnote, the Court limits its holding to a case in which the effect of the transaction is the formation of a financially unsound bank holding company. So limited, this case involves nothing more than a dispute over whether this particular holding company was financially unsound -- a dispute that hardly merits this Court’s attention. Even on this narrow ground of decision, however, I find the Court’s reasoning unpersuasive. The financial soundness of the bank is surely a matter of greater public interest than the financial soundness of its parent; yet neither the Board nor the Comptroller of the Currency has asserted any basis for requiring the bank to take any remedial action. Everyone agrees that the financial strength of the bank will be improved by the formation of a holding company, and that no adverse consequences will result.