The U.S. Office of the Comptroller of the Currency (“OCC”) is the federal agency responsible for chartering national banks. See 12 U.S.C. § 1. This past March, after a year-long public dialogue with various sectors of the financial services industry regarding “Responsible Innovation in the Federal Banking System,” the OCC “determined that it is in the public interest to consider applications for a special purpose national bank . . . charter from financial technology companies that engage in banking activities.” This innovation is intended to create “a national bank that engages in a limited range of banking activities, including one of the core banking functions, but does not take deposits and is not insured by the Federal Deposit Insurance Corporation.” The agency therefore “anticipates that [chartered fintech firms] likely will elect to demonstrate that they are engaged in paying checks or lending money.”
According to the OCC, such fintech charters would: (1) provide “a framework of uniform standards and supervision” to “technology company companies already . . . delivering financial services to millions of Americans;” (2) give “fintech companies the option of offering banking products and services under a federal charter and operating under federal law;” and (3) thereby “make the financial system stronger by promoting growth, modernization, and competition.” Not everyone agrees. The OCC’s announcement was quickly met by two separate federal lawsuits vigorously challenging the agency’s authority to grant these charters. In both actions, state banking regulators questioned the OCC’s institutional competence to supervise fintech firms adequately, and strenuously objected to the agency’s asserted power to preempt the application of state consumer protection laws to holders of OCC fintech charters.
Although these cases are steeped in complex political and policy differences, the crux of the legal question is straightforward. Does the OCC have the statutory authority to create a non-depository institution under its general power to charter organizations engaged in the “business of banking?” Invoking basic tenets of statutory construction, the challengers have mounted several arguments against the OCC’s proposed regulatory scheme. But perhaps the most persuasive objection to a modern fintech charter can be found in a rather arcane yet critical New York State statute from the first half of the 19th century.
The historical investigation strongly suggests that the “business of banking” – a definitive concept that demarks much of the OCC’s jurisdictional reach – necessarily includes deposit taking. Accordingly, the OCC’s proposed fintech charter – which expressly precludes deposit taking by its recipients – seems to rest on dubious authority.
The National Bank Act’s New York Roots
Section 24 (Seventh) of the National Bank Act (“NBA”) (“§ 24 (Seventh)”) empowers nationally chartered banks to exercise
all such incidental powers as shall be necessary to carry on the business of banking; by discounting and negotiation promissory notes, drafts, bills of exchange, and other evidence of debt, by receiving deposits, by buying and selling exchange, coin and bullion; by loaning money on personal security; and by obtaining issuing and circulating notes.
12 U.S.C. § 24 (Seventh) (emphasis added) (this specific provision was originally enacted as section 11 of the National Currency Act of 1863. See Act of Feb. 25, 1863, ch. 58, § 11, 12 Stat. 665, 668).
The Supreme Court has held that the “‘business of banking’ is not limited to the enumerated powers in § 24 Seventh and that the [OCC] therefore has discretion to authorize activities beyond those specifically enumerated,” provided that the agency’s discretion is exercised “within reasonable bounds.” NationsBank of North Carolina, N.A. v. Variable Annuity Life Ins. Co., 513 U.S. 251, 258 n.2 (1995) (emphasis added). But the Supreme Court has never addressed whether the “business of banking” includes certain essential functions, such as deposit taking, the performance of which is fundamental to the statute’s purpose. In other words, although the NBA places only a discretionary ceiling on the limits of federal banking powers, does it establish a set of mandatory minimum activities that defines a national banking institution?
History is illuminating. In first enacting the NBA, “Congress had modeled [the federal chartering] authority on the bank charter authorized by the New York Free Banking Act” of 1838. See also J. Williams & M. Jacobsen, The Business of Banking: Looking to the Future, 50 Bus. Law. 783, 793-94 (1995) (“the powers clause in [the NBA] was copied almost word for word from the New York Act . . . and was patterned on the New York Act”); E. Symons, The ‘Business of Banking’ in Historical Perspective, 51 Geo. Wash. L. Rev. 676, 689 (1983) (“The New York Free Banking Act of 1838 was a principal model for the provisions of the National bank Act in 1863.”).
The New York template provided that state-chartered institutions shall have the power to carry on the business of banking, by discounting bills, notes, and other evidences of debt; by receiving deposits; by selling gold and silver bullion, foreign coins and bills of exchange . . . ; by loaning money on real and personal security; and by exercising such incidental powers as shall be necessary to carry on such business . . . .
Ch. 260, § 18, 1838 N.Y. Laws 245, 249 (emphasis added). As the text of the two statutes made plain, the “enumeration of banking powers contained in the [federal] act of 1864 was . . . almost identical with that contained in the [New York] general banking law of 1838,” and, upon comparison, the New York courts soon concluded that the “meaning of the two provisions [was] the same.” Pattison v. Syracuse National Bank, 80 N.Y. 82, 90 (1882). As one scholar stated over 80 years ago, the “principles embodied in the  act and the language in which it was expressed [was] taken over by . . . the federal government.” B. Hammond, Free Banks and Corporations: The New York Free Banking Act of 1838, 44 Journal of Political Economy 184, 184 (1936).
That early determination embodied an important interpretive rule that remains relevant today: “if a word is obviously transplanted from another legal source, whether the common law or other legislation, it brings the old soil with it.” Sekhar v. United States, 570 U.S. __, 133 S. Ct. 2720, 2724 (2013) (internal quotation marks omitted). Congress incorporated the phrase “business of banking” into the NBA from the New York law as a term of art, and thus arguably “adopt[ed] the cluster of ideas that were attached to each borrowed word in the body of learning from which it was taken.” Id. (emphasis added). Because “the most relevant time for determining a statutory term’s meaning” is the date of its enactment, MCI Telecommunications Corp. v. American Telegraph & Telephone Co., 512 U.S. 218, 228 (1994), it makes best sense to focus on the meaning historically associated in New York with the “business of banking” prior to 1863.
The old soil is rich with judicial precedent. Early 19th century cases in New York consistently report the centrality of deposit taking to the business of banking. As early as 1818, the “principal attributes of a bank” were enumerated as “the right to issue negotiable notes, discount notes, and receive deposits.” People ex rel. Attorney General v. Utica Insurance Co., 15 Johns. 358, 390 (Sup. Ct. 1818) (emphasis added); see also People v. Manhattan Co., 9 Wend. 351, 383 (Sup. Ct. 1832) (“Banking powers have been defined by this court to consist in the right of issuing negotiable notes, discounting notes, ad receiving deposits.”). This description of the banking business was considered by the New York courts of the time as self-evident, and was confidently asserted “cannot be controverted.” New York Firemen Insurance Co. v. Ely & Parsons, 2 Cow. 678, 711 (Sup. Ct. 1824) (Savage, Ch..J .).
Passage of the Free Banking Act of 1838 did not alter this view. Professor Edward Symons has observed that the “Free Banking Act was not intended to restrict or expand banking powers but rather to articulate the consensus that what banks were already doing was permissible and should be continued.” Symons, 51 Geo. Wash. L. Rev. at 687. Having closely examined the leading New York cases that followed the law’s enactment, Symons concluded that the courts “viewed the meaning of the ‘business of banking’ as an expression of corporate powers heavily dependent on the custom and usage of banking over centuries, thereby limiting the business of banking to a coherent and principled group of activities.” Id. According to Symons, the decisions by New York’s highest court prior to 1863 interpreting the Free Banking Act “support[ed] a consistent theme of historical development of the business of banking as defined by the indefinite forms of deposit taking, credit granting, and credit exchange.” Id. (emphasis added). Deposit taking had become one leg of a transactional trinity codified by statute.
Almost fifty years after the banking law’s adoption, the New York Court of Appeals reflected on the statute’s purpose:
[t]he legislature intended by the act . . . to provide for the establishment of moneyed corporations which should furnish to the public a safe and reliable circulating medium for the transaction of business, and secure and solvent depositories for the custody of such moneys as were needed for current use by the business public.
Nassau Bank v. Jones, 95 N.Y. 115, 121 (1884) (emphasis added). Assuming it is accurate, the court’s explanation for the law’s objective marks a subtle yet significant shift. Under the Free Banking Act of 1838, deposit taking was apparently no longer viewed simply as an essential incident of the “business of banking,” but also as a trusted public service upon which a charter grant would be conditioned.
This hypothesis bears out. In 1848, New York amended its Free Banking Act (the “1848 Amendment”). Little noticed in the historical literature, the 1848 Amendment made clear that receiving deposits was an essential undertaking required by New York statute. In relevant part, the amendment provided:
All banking associations, or individual bankers, organized under the provisions of the act passed April 18th, 1838, entitled “An act authorizing the business of banking,” and the several acts subsequently passed amendatory thereof, or shall hereafter be organized, shall be banks of discount and deposit as well as of circulation . . . .
Ch. 340, § 1, 1848 N.Y. Laws 462, 462 (emphasis added).
By its plain language, the 1848 Amendment made deposit taking an obligatory function. The rationale for this clarification is well documented.
The evil this statute was designed to remedy, was not that banks of discount and deposit were established, which were not banks of circulation; but the contrary, viz: that banks of circulation only were in existence which had no banking house, and transacted no business of discount or deposit.
People v. Metropolitan Bank, 7 How. Pr. 144, 152 (Sup. Ct. 1852). Evidently, some New York banks had assumed “the practice of issuing circulation merely for the purpose of redeeming at a discount that afforded a profit,” id. at 152-53, and had thereby eschewed their historic and customary role as depositories. The 1848 Amendment halted that practice.
The Historical “Business of Banking” Under Federal Law
The 1848 Amendment – and its insistence upon deposit taking – should be a starting place to analyze the NBA’s use of the phrase “business of banking.” Along with the rest of New York’s Free Banking Act, the 1848 Amendment was an important component of the “old soil” that Congress, in 1863, transplanted into federal law. Certainly, no federal doctrine existed at the time that would have undermined Congress’s insistence upon a general depository requirement for national banks. To the contrary, the elemental nature of deposit taking to the federal common law concept of banking is plain from the contemporaneous judicial decisions. That deposit taking was inherent in the definition of banking was also widely accepted at the time by other states. See, e.g., Wiley v. First National Bank of Brattleboro, 47 Vt. 546, 554 (1875) (“The receiving of such general deposits is a part of ordinary banking business, and power to receive them is necessary to carrying on that part, and useful to carrying on others . . . .”); Hoagland v. Segur, 38 N.J.L. 230, 234 (1876) (“Taking money on deposit is not an incidental and occasional operation connected with banking. It is one of the main features and principal departments in the business.”); McGough v. Jamison, 107 Pa. 336, 339 (1884) (“The very nature of the business of banking is to invite the deposits.”); Commonwealth v. Bilotta, 61 Pa. Super. 264, 267 (1915) (“receiving deposits is . . . manifestly germane to and . . . universally associated with the business of banking”).
As early as 1865, the Supreme Court held that institutions solely engaged in deposit taking were nevertheless “engaged in the business of banking.” Bank of Savings v. Field, 70 U.S. 495, 512-13 (1865) (construing tax statute). The Court soon thereafter acknowledged that receiving deposits “is an important part of the business of banking,” National Bank of the Republic v. Millard, 77 U.S. 152, 155 (1869), and later recounted that, “[o]riginally the business of banking consisted only in receiving deposits, . . . but the business, in the progress of events, was extended,” Oulton v. German Savings & Loan Society, 84 U.S. 109, 118 (1872); accord Auten v. U.S. National Bank of New York, 174 U.S. 125, 142 (1899) (“The first business of banking is not to lend money to others, but to collect money from others.”) (internal quotation marks omitted).
Shortly following, the Court articulated a traditional definition of banking that was wholly consistent with the New York view: “Having a place of business where deposits are received and paid out on checks, and where money is loaned upon security,” the Court discerned, “is the substance of the business of a banker.” Warren v. Shook, 91 U.S. 704, 710 (1875); see also Smith v. Kansas City Title & Trust Co., 255 U.S. 180, 210 (1921) (“Speaking generally, a bank is a moneyed institution to facilitate the borrowing, lending, and caring for money.”).
Years later, the Court emphasized that the “National Bank Act authorizes national banks to receive deposits without qualification or limitation.” Franklin National Bank of Franklin Square v. New York, 347 U.S. 373, 376 (1954) (emphasis added). But the central question remains – does the NBA require institutions to accept deposits in order to receive a national charter? Like the New York Court of Appeals before it, see Nassau Bank, 95 N.Y. at 121, the Supreme Court has suggested an answer in the affirmative by embracing a broad public-service view of national banks that is largely staked on their core deposit-taking function. As to the purpose of the NBA, the Court observed that the “United States has set up a system of national banks as federal instrumentalities to perform various functions such as providing circulating medium and government credit, as well as financing commerce and acting as private depositories.” Franklin National Bank, 347 U.S. at 375 (emphasis added).
By proposing to issue fintech charters to non-depository institutions under § 24 (Seventh) of the NBA, the OCC is breaking with the statute’s origins. The historical record reveals an extraordinarily clear directive – the 1848 Amendment, which forcefully indicates that Congress intended national banks “shall be banks of . . . deposit.” Ch. 340, § 1, 1848 N.Y. Laws 462, 462 (emphasis added). To many, any such archaic obstacle to regulatory innovation in a rapidly evolving world of financial services may smack of stymying, dead-hand control. But the Supreme Court has long maintained “that national banks possess only the powers conferred by Congress,” Colorado National Bank of Denver v. Bedford, 310 U.S. 41, 48 (1940) (footnote omitted), and that “powers not conferred by Congress are denied,” Texas & Pacific Ry. Co. v. Pottorff, 291 U.S. 245, 253 (1934) (footnote omitted). If advancing technology and the competitive challenges that come along with it urgently require new national banking structures, then it may now be time for Congress to revisit the basic operations of national banks.
Daniel S. Alter is an adjunct professor and senior fellow at the New York University Law School Program on Corporate Compliance and Enforcement, and former general counsel for the New York State Department of Financial Services (2012-2015).