How the Major Questions Doctrine Could Reshape Banking Law

In early February, several state and national banking trade associations filed suit in U.S. district court in Texas challenging the federal banking agencies’ first comprehensive updates to the regulations implementing the Community Reinvestment Act (CRA) in nearly three decades. Among other claims, the complaint argues that the CRA rule violates the U.S. Supreme Court’s newly formulated “major questions doctrine” because it addresses an issue of political or economic significance. This was not the first time that financial institutions have used the major questions doctrine to challenge a regulator’s authority. Business groups have used the doctrine to challenge the Consumer Financial Protection Bureau’s (CFPB) fair lending lending policies and the private fund industry has challenged a Securities and Exchange Commission (SEC) rule that applies to such funds.

Leaving aside the merits of the banks’ claim against the CRA – like other laws discussed below, the CRA delegates broad authority to the banking agencies – it is a noteworthy escalation by powerful banking trade associations using a novel legal theory to challenge one of the banking agencies’ core regulatory functions. Today, the CRA could be weakened, but foundational laws like safety and soundness authorities or the National Bank Act’s “bank powers clause” could be next.  In a recent article, I argue that the banking industry and other major questions doctrine proponents should be careful what they wish for when pursuing these claims, because they might not like some of the results that they get.

The Supreme Court explicitly adopted the major questions doctrine in West Virginia v. EPA, which overturned the EPA’s Clean Power Plan rule. While the role and contours of the doctrine are the subject of debate, the basic idea is that Congress must speak clearly and expressly when delegating authority to agencies regarding matters of either political or economic significance or where the issue arguably lies outside the agency’s core expertise. The major questions doctrine is of a piece with a broader effort to curtail administrative authority, including the pending Supreme Court cases CFPB v. Community Financial Services Association seeking to declare the CFPB’s structure unconstitutional and Loper Bright Enterprises v. Raimondo seeking to overturn the standard for agency deference established in Chevron v. NRDC.

While the doctrine presents obstacles for many areas of regulation, it is a particular problem for financial regulation. Congress has delegated broad powers to banking and consumer protection agencies to determine such basic issues as when financial activities are considered “unsafe and unsound” or “unfair and deceptive,” threaten “financial stability,” or are encompassed in the “business of banking.” Courts have traditionally deferred to banking regulators’ reasonable interpretations of the meaning of these terms based upon their specialized expertise – even well before Chevrondeference came into being.

There are good reasons for Congress and the courts to want expert agencies to take the lead in financial regulation. Banking is a highly technical area. National banks are instrumentalities of the government – publicly chartered entities that act as fiscal agents and intermediaries of money and credit between the central bank and the public. Fractional reserve banking is also inherently unstable, requiring close regulation and supervision to safeguard the public’s trust in the banking system and prevent banking panics. Unlike judges, agency leadership is well positioned to make difficult policy decisions because they are accountable to the political branches for their actions.

The major questions doctrine’s sweeping test conflicts with the nature of the banks and bank regulation. It’s difficult to envision a policy decision that wouldn’t be considered “politically or economically significant” for an agency dealing with multi-billion or trillion-dollar financial institutions – especially ones identified as “systemically important – or a banking sector that is “indispensable to a healthy national economy” as an essential “source of money and credit.”Coherently delineating what constitutes a financial agency’s core expertise when its supervised entities touch almost every corner of the economy poses similar challenges because banks, and by extension their supervisors, have to understand all of their customers’ businesses. Finally, the major questions doctrine casts doubt on novel or evolving interpretations and uses of statutory provisions, but the scope of bank activities is constantly evolving, requiring regulators to anticipate novel sources of financial risk. The major questions doctrine makes regulation harder by allowing courts to narrow the scope of statutes that agencies administer and by chilling agencies from acting out of fear of litigation risk.

The mismatch between the doctrine and the nature of banking and consumer protection regulation could harm the public and regulated firms alike. Hampering banking agencies’ ability to prevent or respond to crises, like the Global Financial Crisis of 2007-09 or the 2023 failures of Silicon Valley Bank (SVB) and other regional banks, would make such crises both more frequent and more severe. Indeed, the banking industry and sympathetic members of Congress are already employing the major questions doctrine to challenge post-SVB banking reforms. The doctrine would also introduce uncertainty and inconsistency in the meaning of regulations, guidance, and interpretive letters that could make engaging in the banking business more difficult. It would call into question industry-favored interpretations like the banking agencies’ expansion of banks’ powers and effectively delegate the authority to interpret the banking laws to hundreds of federal judges who lack financial expertise and often possess idiosyncratic beliefs.

To be sure, our structure of bank regulation, congressional delegation, and judicial review is not perfect. But it exists in its current form because Congress and the courts have recognized the wisdom of allowing agencies to take the lead in establishing financial policy. That is why some other regulated industries are beginning to advocate for the preservation of  some of the regulatory system.

The implications of imposing the major questions doctrine on are complicated and rife with unintended consequences. We do not yet know whether financial institutions are prepared to throw the baby of the trust, stability, and certainty provided by our banking laws out with the bathwater of specific banking regulations that they find inconvenient or overly burdensome. Likewise, courts contemplating extending the major questions doctrine to banking regulation must consider whether they really want to be responsible for potentially facilitating the next financial crisis.

This post comes to us from Graham Steele, the former Assistant Secretary for Financial Institutions at the U.S. Department of the Treasury and a fellow at the Roosevelt Institute. It is based on his recent article, “Major Questions’ Quiet Crisis,” available here.

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