Board of Governors of Federal Reserve System v. Dimension Financial Corporation
| Decision Date | 22 January 1986 |
| Docket Number | No. 84-1274,84-1274 |
| Citation | 88 L.Ed.2d 691,106 S.Ct. 681,474 U.S. 361 |
| Parties | BOARD OF GOVERNORS OF the FEDERAL RESERVE SYSTEM, Petitioner v. DIMENSION FINANCIAL CORPORATION et al |
| Court | U.S. Supreme Court |
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.
Held: The Board did not act within its statutory authority in defining "banks" as it did. Pp. 366-375.
(a) The Board's definition of "demand deposit" is not an accurate or reasonable interpretation of § 2(c) of the Act. An institution that offers NOW accounts—even if it engages in commercial lending—is not a "bank" for the purposes of the Act because the requirement of prior notice of withdrawal withholds from the depositor any "legal right" to withdraw on demand. No amount of agency expertise can make the words "legal right" contained in § 2(c) mean a right to do something "as a matter of practice." Pp. 367-368.
(b) Nor is the Board's definition of "commercial loan" a reasonable interpretation of § 2(c), under which an institution, even if it accepts deposits that the depositor has a legal right to withdraw on demand, is not a bank unless it "engages in the business of making 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. Money market transactions, which the Board characterizes as "commercial loan substitutes," do not fall within the commonly accepted definition of "commercial loans." Nothing in the statutory language or the legislative history indicates that the term "commercial loan" meant anything different from its accepted ordinary commercial usage. Pp. 368-373.
(c) The Board's new definition cannot be supported on the asserted basis that it falls within the Act's "plain purpose" of regulating institutions "functionally equivalent" to banks. The "plain purpose" of legislation is determined in the first instance with reference to the plain language of the statute itself. Here, rather than defining "bank" as an institution that offers the functional equivalent of banking services, 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 Congress' will as expressed in the statute. Pp. 373-375.
744 F.2d 1402 (1984), affirmed.
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, Washington, D.C., for the petitioner.
Jeffrey S. Davidson, Washington, D.C., for the respondents, Dimension Financial Corporation, et al.
John D. Hawke, Jr., Washington, D.C., for the respondents, American Financial Services, et al.
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 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 pur- poses 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, 105 S.Ct. 2137, 85 L.Ed.2d 495 (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), U.S.Code Cong. & Admin.News 1970, pp. 5519, 5541. 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 and H.R. 7371 before a Subcommittee of the Senate Committee on Banking and Currency, 89th Cong., 2d Sess., 447 (1966) (). 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...
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