Is a National Bank’s Subsidiary Regulated as a National Bank?

Watters v. Wachovia Bank, N. A.

The business of national banks is controlled by the National Bank Act (NBA) and the Office of the Comptroller of Currency (OCC) which has the largely exclusive power to audit the banks’ records, to the exclusion of local or state regulation. National banks retain incidental banking powers including opening subsidiaries. This case presents the question of whether Wachovia’s wholly owned state subsidiary is governed by the OCC’s exclusive audit power – really, whether a subsidiary is still a national bank.

National banks are still governed by state laws of general application where they do not interfere with the letter or purpose of federal law but remain free from “any visitorial powers,” defined as “a superior or superintending officer, who visits a corporation to examine into its manner of conducting business , and enforce an observance of its laws and regulations,” except as provided by Federal law. Subsidiaries are distinguished in Federal law from mere affiliates (over which states may exert control) as those entities that can only do business subject to the same terms and conditions as the national bank.

The Court has focused on the operations, rather than the corporate structure, of national banks in defining the scope of the NBA. Waters, the state regulator for Michigan who wishes to assert oversight powers over Wachovia’s subsidiary there, argues that if Congress intended to exempt subsidiaries it would have extended the ban on state inspection to affiliates. However, operating subsidiaries were not authorized until after that law was passed, and operating subsidiaries are a special subset of affiliates (termed “financial subsidiaries”) and retain a more limited set of powers.

Justice Stevens, dissenting, argues that only where laws of general application “forbid” or “impair significantly” the activities of the national bank are they unconstitutional. Stevens recounts an expanding national banking system alongside a shrinking and more heavily regulated state system. The legislation explicitly allowing national banks to own subsidiaries that can engage in activities that the national banks may not, while subjecting them to heightened regulation implied that operating subsidiaries could not. Basically, Justice Stevens points out that whereas the majority draws the line at significant impairment, he and the dissent would draw the line at explicit Federal preemption. Additionally, the Michigan acts, by their terms, exempt “depository financial institutions.” Since operating subsidiaries are created as the negative of what the statute defines (financial subsidiaries) Congress has not demonstrated a “clear and manifest purpose” to preempt state laws, except as it did so explicitly and meticulously.

That being the case, Stevens then addresses whether the OCC can assume the power to displace state law. Congress can do so explicitly, and has not. Even so, OCC has not exerted such control, and even if it did, that interpretation of the law granting it the power to do so is not due Chevron deference, without which it fails on analysis. First it fails statutory construction (above), and second it fails the purpose of the statute, because the value of a subsidiary has nothing to do with federal preemption – it is about operating liabilities.