The nonbank bank is a contradiction in terms whose time probably has passed -- almost before it arrived.
A Federal Appeals Court decision last week may have put a permanent halt to the proliferation of nonbank banks -- the controversial institutions that used a loophole in a banking law to evade federal restrictions on interstate banking and bank ownership.
Earlier this year, in a different case, a federal judge in Florida issued an order stopping the Office of the Comptroller from giving final approval to any more nonbank bank applications. Last week, the 11th Circuit Court of Appeals overturned a Federal Reserve approval of a nonbank bank.
The combination of the two rulings -- assuming they are not reversed -- will prevent nearly all approvals of nonbank banks.
On June 5, a House Banking Committee subcommittee will take up a bill to close the loophole in the Bank Holding Committee Act.
The loophole, which related to the definition of a bank, allowed companies that own commercial banks to open up limited-purpose banks in states other than their home state. It also permitted companies that would not be allowed to own a full-service bank to open up nonbank banks. The Senate is expected to act on the issue too.
"It is an understatement to say the nonbank bank movement is on the run," according to Kenneth Guenther, head of the Independent Bankers Association of America, a trade association of mainly small banks that is adamantly opposed to the nonbank bank concept.
Only a handful of nonbank banks are in operation. The comptroller's office said 14 are operating under its jurisdiction and about 10 others have received approval from other regulators.
But the nonbank banks have been a major source of controversy in banking and regulatory circles for several years -- ever since sharp-eyed lawyers noticed several years ago that the Bank Holding Company Act defined a bank as an institution that both made commercial loans and accepted checking deposits.
The 29-year-old Bank Holding Company Act placed severe restrictions on what type of company can own a bank and prohibited a company that owns a bank (a bank holding company) from opening up a commercial bank in a state other than the one in which it is headquartered.
The way around those restrictions, some bank companies reasoned, is to set up a bank that either does not offer checking accounts or does not make commercial loans. Most nonbank bank applications have come from big banks that want to set up facilities in other states, although some have come from companies like brokerage firms that normally would be prohibited from owning a bank.
However, a nonbank bank is a bank in every other sense. It needs a banking charter -- from either the Office of the Comptroller of the Currency or a state. A nonbank bank is supervised and examined by federal regulators and insured by the Federal Deposit Insurance Corp. Most nonbank bank applications have been filed with the comptroller's office -- which regulates federally chartered institutions -- because the agency has been receptive to their applications.
In recent months, the Office of the Comptroller of the currency has been handing out preliminary approvals for nonbank bank charters almost as if they were sample packages of cigarettes.
Because the Federal Reserve Board has not been receptive -- and bank holding companies also need Federal Reserve approval to set up new activities -- most nonbank bank applications have not gotten beyond "preliminary approval." Once the Fed approves an application, it still must go back to the comptroller for final approval.
In recent months, the comptroller's office has handed out 279 "preliminary" approvals. It has rejected just 24.
When the Florida Court issued the ban on final approvals last February, the Federal Reserve immediately sent back to the bank holding companies all the pending nonbank applications that had received preliminary approval from the comptroller. It has been a reluctant participant in the nonbank bank process and was relieved by the Florida injunction.
Curiously, the Fed, not the comptroller, was the defendant in last week's appeals court case. The agency reluctantly decided last year that it could not block an application by the New York's U.S. Trust Co. to set up a nonbank bank in Florida. The action was challenged by the Florida Bankers Association.
The three-judge appeals panel in Atlanta agreed with the bankers group that the U.S. Trust operation violated the Bank Holding Company Act, despite the fact that the nonbank bank did not offer commercial loans.
The judges said they could not use "literalism" and hang on the technical definition of a bank in the 1956 act to permit institutions to be established that clearly were not intended by Congress. Nonbank banks are banks and should be subject to the Bank Holding Act restrictions, the federal appeals court said.
Federal Reserve officials said the appeals court decision was "constructive" and that the agency has no intention of appealing it to the Supreme Court.
U.S. Trust, however, has said it will ask all sitting judges in the 11th Circuit Court of Appeals to hear an appeal and, if that fails, it will petition the Supreme Court.
The Supreme Court already has agreed to decide whether the Federal Reserve overstepped its bounds in early 1984 when it tried to stem the growth of nonbank banks. The Fed broadened the definition of "commercial loan" and "checking account" hoping that nonbank banks would have to give up so many services by abandoning either checking accounts or commercial loans that the operation would not be attractive. A federal appeals court in Denver overruled the Fed's new interpretation of the terms. The central bank has appealed to the Supreme Court on that ruling.
Even comptroller's office seems less ardent in its support of nonbank banks since Comptroller C. T. Conover resigned May 4.
Conover had become the central character in the nonbank bank controversy. Although he stopped short of advocating them, he said they were clearly legal and in effect invited banks and others to apply.
Conover used the threat of a wave of nonbank banks to try to force Congress to pass legislation to allow banks to expand into new activities such as insurance and real estate. Conover said banks needed new earnings powers in the increasingly de-regulated environment.
Twice, in 1983 and again last year, the comptroller imposed moratoriums on nonbank bank applications but warned legislators that if they did not pass laws -- even if it was merely to close the loophole -- he would begin to process nonbank bank applications.
Congress failed to act and Conover, true to his word, began giving preliminary approval to nonbank banks with alacrity.
Now, however, officials in the comptroller's office said they are considering accepting no new applications for nonbank banks. "Can we, in good conscience, accept the fees banks must pay when they apply if we know the application process will go nowhere?" one official said.
The comptroller's office has said it plans to ask the Florida U.S. District Court to lift its temporary injunction that prohibits the comptroller's office from giving final approval to a nonbank bank application. The agency can still give preliminary approvals.
Three months after the injunction, however, the Justice Department still has not filed an appeal on the comptroller's behalf.