Banking in the United States

Legal Materials

U.S. BANKING

Federal banking laws, regulations, etc. are compiled in the CCH Federal Banking Law Reporter. The Banking statutes for each state are published in Volume 7 of The Law of Financial Services, and in each state’s statutes set (see “State Statutes”). John K. Villa’s 2-volume Banking Crimes: Fraud, Money Laundering, and Embezzlement provides a good overview of the dark side of the field, complemented by Villa’s Bank Directors’, Officers’, and Lawyer’s Civil Liabilities.

The Federal Reserve posts statistics and other information about the U.S. banking system. The Office of the Comptroller of the Currency posts information on national banks.

Reports: The FDIC posts reports and surveys on the status of the U.S. banking industry (www.federalreserve.gov/publications.htm). The Federal Reserve also sells relatively inexpensive books on the financial status of banks, which you can look up through the Publications page of the Federal Reserve’s Web site.

Document Retrieval: Thomson Research Services (formerly FDR) has a database of banking-related public documents and has some experience getting them (from the Federal Reserve, etc.). You can reach them at 800-874-4337.

FOREIGN AND INTERNATIONAL BANKING

Volume 2 of Regulation of Foreign Banks summarizes the banking laws of Australia, Brazil, Canada, China, the European Union, France, Germany, Hong Kong, Italy, Japan, Korea, Mexico, the Netherlands, Singapore, Spain, Switzerland and the United Kingdom. The Bank for International Settlements publishes reports on international banking. The Banking Regulation and Anti-Money Laundering volumes in the Getting the Deal Through series summarize the laws of over two dozen foreign countries.

National Banking System

The creation of the national banking system was mainly the outcome of the financial necessities of the Federal government in the Civil War. It was found difficult to float government bonds at profitable rates, and Mr Chase, the secretary of the treasury, devised the scheme of creating a compulsory market for the bonds by offering special privileges to banks organized under Federal charters, which would issue circulating notes only when secured by the deposit of government bonds. But this plan, authorized by the act of 25th February 1863 (supplemented by the act of 3rd June 1864), was not sufficient to give predominance to the national banks.

The state banking systems in the older states were so firmly entrenched in the confidence of the commercial community that it became necessary to provide for imposing a tax of 10% upon the face-value of the notes of state banks in circulation after the 1st of July 1866. The state banks were thus driven out of the note-issuing business, some being converted into national banks, while others continued their commercial business under state laws without the privilege of note-issue. A remarkable growth in the national banking system took place; in 1864 there were 453 national banks with an aggregate capital of $79,366,950, and in 1865 there were 1014 banks with an aggregate capital of $242,542,982.

The national banking system was specially marked by the issue of circulating notes upon United States bonds. Any national bank desiring to issue notes might by law deposit with the United States treasurer bonds of the United States to an amount not exceeding its capital stock, and upon such bonds it might receive circulation equal to 90% of their par-value. No bank could be established which did not invest one-third of its capital in bonds. This was changed in 1874 so as to reduce the requirement to 25%, with a maximum mandatory requirement of $50,000. Notes were taxed at the rate of 1% per annum. The banks obtained from the provision for circulation the benefit of what was described by critics as “double interest,” being credited with the interest on bonds in the custody of the treasury department, and being also able to lend their notes to the public.

But several deductions had to be made: notes could not be issued to the full par-value of the bonds; the tax of 1% upon circulation reduced by that amount the profit which would otherwise be earned; and the banks had to set aside in gold or other lawful money what was needed for redemption purposes and for reserves. As the banks suspended specie payments at the close of 1861 and great masses of government paper-money were issued, gold ceased to be a medium of exchange except in California, and the new banks redeemed their notes in government paper. The gold-value of the bank-notes, therefore, rose and fell with that of government notes until the resumption of payments in specie by the national treasury on the 1st of January 1879.

The amount of bank-notes in circulation proved in practice to be influenced largely by the price of bonds. The maximum originally set for bank circulation was $300,000,000. This was increased in 1870 by $54,000,000, and in 1875 the limit was removed. The circulation reached $362,651,169 on the 1st of January 1883, but afterwards declined materially as bonds became scarce and the price rose. The fact that circulation could be issued to only 90% of the par-value of the bonds greatly reduced the net profits on circulation when the price of 4% bonds rose in 1889 above 129 and other classes of bonds rose in like ratio. The circulation of bank-notes fell as low as $167,927,574 on the 1st of July 1891, but afterwards increased somewhat as the supply of bonds was increased to meet the treasury deficiencies of 1894-1896 and the expenses of the war with Spain.

The national banks supported the government cordially in the measures taken to bring about resumption of gold payments on the 1st of January 1879 under the law of 1875. The banks held more than $125,000,000 in legal tender notes, of which sum nearly one-third was held in New York City. A run upon the treasury for the redemption of these notes would have exhausted the gold funds laboriously accumulated by secretary Sherman and compelled a new suspension. But the banks appointed a committee to co-operate with the treasury, declined to receive gold longer as a special deposit, and resolved to receive and pay balances without discrimination between gold and government notes. Thus resumption was accomplished without jar, and as early as the 17th of December 1878 gold sold at par in paper.

The silver legislation enacted by Congress in 1878 and 1890 caused uneasiness in banking circles, and the banks discriminated against silver dollars and silver certificates in their cash. When the treasury began to lose gold heavily, however, in 1893, a combination of leading bankers in New York, Boston, Philadelphia, Baltimore and Chicago turned over a large part of their holdings to replenish the government reserves. About 150 national banks suspended during the panic of 1893, but 84 of these afterwards resumed business. As in former periods of depression, the system suffered the greatest decline during the years of liquidation following the actual panic, the number of banks falling from 3856 on the 1st of June 1893 to 3585 on the 1st of June 1899, and aggregate capital falling during the same period from $698,454,665 to $610,028,895.

A new extension was given to the national banking system by the provisions of the gold standard law of 14th March 1900. Banks were authorized to issue circulation to the full par-value of bonds deposited, and the tax upon circulation was reduced from 1% to ½ of 1% in the case of circulation which was secured by the 2% refunding bonds, which were authorized by this law. By issuing 2% bonds in exchange for those paying a higher interest, at approximately the market-price, it became possible to obtain a given amount of notes upon a smaller investment in bonds, independent of other provisions of the law. Under these provisions the volume of notes outstanding, secured by bonds, which stood on the 31st of October 1899 at $207,920,774, reached on the same date in 1900, $298,829,064; in 1901, $328,198,613; in 1902, $335,783,189; in 1903, $380,650,821; in 1904, $424,530,581; in 1905, $490,037,806; in 1906, $536,933,169; and in 1907 $562,727,614.

The lowest denomination of national bank-notes authorized by law is $5, and not more than one-third of any bank’s issues can be of this denomination. The government issues notes for $1 and $2, as well as for higher denominations. The largest amount of bank-notes of one denomination is in bills for $10, which on the 31st of October 1907 constituted $249,946,530 in total outstanding issues of $609,905,441. Of this total circulation $562,727,614 was secured by bonds, and the remainder, $47,252,852, was covered by lawful money in the government treasury, deposited for the redemption and retirement of the notes as they might be received.

An important extension of the national system resulted from the authority given by the act of 1900 to incorporate national banks with a capital as low as $25,000, in places having a population not in excess of 3000. The previous minimum limit had been $50,000. Under this provision there were incorporated to the 31st of October 1907 2389 national banks with capitals of less than $50,000, with aggregate capital of $62,312,500, of which 272 banks were conversions of state and private institutions, 752 were reorganizations and 1365 were new institutions. (…)

The national banks possess most of the powers of commercial banks, but are not permitted to hold real estate other than their banking houses, unless taken for debt. Five reports are required each year to the comptroller of the currency at dates selected by him without notice, and each bank is subject to the visitation of bank examiners acting under the comptroller. No reserves against notes are required by existing law except 5%, which is [kept in Washington for current redemption purposes. The redemption system is defective in that redemptions are not authorized at other places, and the notes reach the treasury on an average only about once in two years. For many years the banks were prohibited from retiring more than $3,000,000 of notes monthly, but the limit was raised by an act of 4th March 1907 to $9,000,000 per month. (…)

The Clearing-House Committee of the New York Clearing-House exercises a powerful influence over the banking situation through its ability to refuse aid in emergencies to a bank which is unwisely conducted. This power was used in the panic of 1907 to eliminate several important, but speculative, financial interests from control of national banks. Only national and state banks and the sub-Treasury were members of the Clearing-House at this time.

Their weekly reports of condition were awaited every Saturday as an index of the state of the money-market and the exchanges; but this index was incomplete and sometimes misleading, because regular weekly reports were not made by trust companies. It was announced early in 1908 by the state superintendent of banking that he would exercise a power vested in him by law to require weekly reports in future from trust companies, so that the two classes of reports would present a substantially complete mirror of banking conditions in New York.

Source: Encyclopedia Britannica (1911)

Main Elements

Banking Defined

Banking law covers the many state and federal regulations governing financial institutions. Attorneys who practice in this area of the law handle everything from customer disputes and complaints against a bank, to complex litigation between domestic and foreign institutions, their investors, the government, and other parties.

Regulatory Compliance

In the current regulatory environment, banks have no choice but to make compliance a priority. This can involve an expensive and labor-intensive process that will affect everyone within the organization.

Defending Enforcement Actions

Of course, if a bank is already the subject of a regulatory investigation or enforcement action, the objective changes. Now the goal is to defend against inaccurate allegations and to protect individuals within the organization who have been singled out.

Assistance with Transactional Matters

Banking law also deals with the various transactions that arise as a financial institution goes about serving its customers and growing its business. Legal documents may need to be drafted to address individual accounts, such as a workout agreement for a customer who wants to avoid the repercussions of default.

Selecting a Banking Law Attorney

If their institution is looking to avoid regulatory action and the cost associated with it, the people affected or interested need experienced legal counsel. Many law firms have retired banking executives and government regulators on staff, providing valuable real-world experience.

Banking