Bank Regulators To Lean On Enforcement As Supreme Court Hits Rules

A pair of US Supreme Court decisions curtailing the rule-writing authority of federal regulators will likely force banking agencies to rely on their supervisory and enforcement powers to police Wall Street.

The high court on Monday ruled that any new entrant to a market has six years from the time they’re able to sue to challenge a regulation they oppose, exposing a broad universe of existing rules to new legal fights. That came just days after the justices overturned a long-standing doctrine deferring to regulators on interpreting ambiguous laws.

The decisions are set to crimp high-profile financial rules, including stricter capital requirements proposed by the Federal Reserve, the Federal Deposit Insurance Corp., and the Office of the Comptroller of the Currency.

But unlike other federal regulators, the prudential banking agencies have clear powers to directly supervise banks for unsafe and unsound banking practices. And those supervisors can force banks to hold more capital or change business practices behind closed doors.

With their authority curbed on the rulemaking front, banking regulators may end up leaning on their supervisory and enforcement tools, said Graham Steele, the former assistant Treasury secretary for financial institutions in the Biden administration.

“That is one irony of this whole effort,” he said. “This could actually lead to regulation by the agencies being more opaque, less transparent, and by an examiner-by-examiner basis.”

‘Wild West for Regulations’

Traditionally, banks, credit unions, and other financial institutions were wary of hauling their regulators, particularly the prudential banking agencies, into court to challenge regulations.

That’s changed in recent years, in part because courts were already moving away from deferring to regulators under the Supreme Court’s 1984 Chevron v. Natural Resources Defense Council ruling.

The high court hasn’t employed Chevron deference since 2016, Chief Justice John G. Roberts Jr. wrote for the 6-3 majority in the June 28 Loper Bright Enterprises v. Raimondo decision that tossed the decades-old doctrine.

Meanwhile, conservative judges skeptical of agency powers—especially those in the US Court of Appeals for the Fifth Circuit and federal district courts in Texas—have become far more open to financial industry challenges to federal regulations, even before the high court threw out Chevron.

The Fifth Circuit in recent years has blocked Securities and Exchange Commission rules on stock buybacks and hedge fund disclosures, among others. And federal district judges in Texas have slapped temporary holds on banking regulators’ rewrite of an anti-redlining law, as well as the Consumer Financial Protection Bureau’s $8 cap on credit card late fees.

With Chevron deference now officially eliminated, banks should have an even easier time challenging rules in the pipeline.

Banking trade groups are already threatening to sue over the enhanced capital rules, known as the Basel III endgame, that are under development. New CFPB interpretive rules that weren’t directly authorized by Congress, such as a June finding that “buy now, pay later” companies must comply with some credit card consumer protections, are likely also at higher risk now that Chevron is gone.

Groups that were on the fence about challenging new rules are now more likelyto do so, and on a broader range of regulations, said Carrie Hunt, the advocacy director for America’s Credit Unions, an industry group that was recently formed by the merger of two credit union trade associations.

“The Supreme Court has created a wild, wild west for regulations,” she said.

A more aggressive stance from banking groups could also slow down new rulemaking at the Fed, FDIC, and OCC, said Kathryn Judge, a professor at Columbia Law School focused on banking.

“There is a meaningful risk that if regulators don’t want to get hauled into court and lose in court, they may trim their own sails,” she said.

Old Rules, New Risks

Banking regulations long on the books, like baseline capital requirements, may be newly at risk thanks to the Supreme Court’s 6-3 Corner Post Inc. v. Board of Governors of the Federal Reserve System decision giving industry plaintiffs more time to sue, according to Todd Phillips, a professor at Georgia State University’s Robinson College of Business and a former FDIC attorney.

“The banking agencies have quite a few rules that have been written over the past few decades that have never been challenged,” he said. “Suddenly, all of those are potentially up for review.”

In a dissent in Corner Post, Justice Ketanji Brown Jackson raised concerns that established companies could set up new, independent units specifically tasked with challenging regulations.

That seems unlikely to Daryl Joseffer, the executive vice president and chief counsel at the US Chamber of Commerce’s Chamber Litigation Center.

The new Corner Post standard—making suits available to companies that have been operating for six years or less in some cases—means the daunting prospect of suing regulators will fall to newer firms, he said.

“That limited set of people or companies, how many of them are ready to take the very serious step of suing the federal government? Which is a big deal,” he said.

‘Very Broad’ Powers

Even with industrywide rulemaking efforts on shaky ground after the two decisions, bank supervisors and enforcers at the Fed, FDIC, and OCC still have the power to shape the industry by cracking down on individual companies, said Taylor Tipton, a shareholder at Baker, Donelson, Bearman, Caldwell & Berkowitz PC who represents banks.

“They have very, very broad authority as part of the examination process to bring enforcement actions for violations of those supervisory safety and soundness standards,” he said.

The CFPB also has supervisory authority over most of the companies it regulates, including megabanks such as JPMorgan Chase & Co. and Wells Fargo & Co., and can leverage those powers to review banks’ books and force changes in companies’ capital, liquidity, risk management, and other operations.

The potential for enforcement to take the place of formal notice-and-comment rulemaking is a “danger,” Joseffer said.

“More of that would take us farther away from how the government is supposed to work,” he said.

With their ability to write rules constrained at least temporarily, banking agencies’ enforcement and supervision are likely to come to the fore even more.

Bank regulators will likely be inclined to turn to enforcement “because they’ll have a harder time writing rules,” said David Zaring, professor of legal studies and business ethics at the University of Pennsylvania’s Wharton School of Business.

The cases are Loper Bright Enterprises v. Raimondo, U.S., No. 22-451, decision 6/28/24 and Corner Post v. Board of Governors, U.S., No. 22-1008, decision 7/1/24.