What Banks Need to Know Post-Chevron

8 min

As we covered in our first alert, the U.S. Supreme Court in Loper Bright Enterprises v. Raimondo overruled Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc. and abandoned the Chevron doctrine, which previously required courts to defer to agency interpretations of ambiguous provisions of federal statutes. However, the upshot of this significant ruling is more nuanced for financial institutions than for other regulated industries, primarily because of the robust supervisory powers of the federal banking agencies, issues of safety and soundness, and the way federal banking statutes often look to the federal banking agencies to implement various provisions in regulation.

This alert summarizes key considerations banking organizations and related entities should consider in a post-Chevron world.

Key Takeaways

  • The Court’s abandonment of the Chevron doctrine is significant and is expected to change how Congress writes statutes, how agencies interpret them, and whether banks challenge federal banking agency interpretations and actions based on those statutes in court.
  • Banks and banking organizations are subject to supervision and safety and soundness requirements that are markedly different from those of other regulated industries. These powers give federal banking agencies more intrusive authority and, perhaps, discretion. In addition, federal banking statutes often look to the federal regulators to implement provisions and concepts in federal regulation.
  • The increased enforcement context may cause banks, nevertheless, to seek judicial review of federal banking agency actions if banks conclude that the federal banking agencies have taken an overly aggressive or a loose interpretation of federal financial law.
  • The supervisory context, however, has its own intra-agency appeals process (required by federal statute), and those determinations are not subject to formal judicial review/procedures. The elimination of the Chevron doctrine does not affect these frameworks.

Do courts still need to defer to the federal banking agencies when a federal statute is ambiguous?

No. Previously, under the Chevron doctrine, if a court identified ambiguity in a statute, the agency enforcing the statute was permitted to “fill in the gaps,” so long as the agency’s interpretation was “permissible.” Now, a court must engage in an independent analysis to determine how best to interpret the statute.  

It remains to be seen how courts, litigants, and Congress will adjust to this new reality. Theoretically, Congress should be incentivized to make statutes more precise, either by including more granular detail in legislation or by expressly delegating certain decisions to agencies, a practice that is still allowed under Loper Bright, but these types of changes will take time.

In the interim, we may see continued interest in the major questions doctrine, which the Supreme Court recently endorsed in West Virginia v. EPA. Under the major questions doctrine, Congress must use clear, unequivocal language to delegate expansive power to an agency. However, even Congress’s express delegation can go too far, potentially violating the separation of powers enshrined in the Constitution. As a result, we may see courts (and litigants attempt to) revive the long-dormant nondelegation doctrine, which prohibits Congress from delegating its legislative power to agencies.

What happens now when a term is ambiguous in an agency’s regulation or other action?

Chevron deference does not govern the power of agencies to write or interpret regulations. Instead, another doctrine known as Auer deference does. The Supreme Court narrowed this deference in a 2019 decision, Kisor v. Wilkie.

In Kisor, the Supreme Court declined to overrule Auer v. Robbins and Bowles v. Seminole Rock & Sand Co., two cases that established the principle of judicial review known as Auer deference. Auer deference requires federal courts to defer to an agency’s interpretation of an ambiguous regulation that the agency has promulgated. Kisor narrowed the circumstances under which courts should defer to agencies’ interpretation of their own regulations under Auer deference by outlining a number of steps that courts must follow before providing Auer deference to an agency’s interpretation. After Kisor, Auer deference does not apply unless a regulation is “genuinely ambiguous,” the agency’s interpretation is reasonable, and deference to an agency’s interpretation is appropriate based on the interpretation’s “character and context.”

The Supreme Court is skeptical of deferring too much to agencies. Perhaps we will see Kisor refined or narrowed following Loper Bright. Alternatively, we may see litigants challenge agency regulations by challenging the agency’s interpretation of the statute being invoked in promulgating the regulation, which would fit squarely under Loper Bright.

Will Loper Bright change challenges to agency actions under the Administrative Procedure Act (APA)?

Likely, yes. Although procedurally nothing has changed under the APA, we are likely to see the number of successful APA challenges to agency actions increase now that the agency does not get the benefit of Chevron deference. Because of the likelihood of success has increased, more litigants may mount challenges to agency actions.

What happens to agency actions that were previously upheld under Chevron?

Nothing. Loper Bright did not overrule decisions applying the Chevron doctrine. Holdings of cases finding that specific agency actions are lawful are still considered precedent, despite the Court’s change in “interpretive methodology.” Nevertheless, banks and other parties may now seek to challenge what they perceive to be agency overreach or error, without having to overcome deference to the agency’s interpretation of its statute.

What are some unique considerations for supervised financial institutions?

Supervision. While financial regulation may not be any more technical than other disciplines, financial institutions are subject to the robust and invasive visitorial powers of the federal and state banking agencies through supervision and examination—a reality markedly different from that of other regulated industries.

In exercising their supervisory roles, the federal banking agencies have broad powers to protect the safety and soundness of financial institutions, which often involves making institution-specific criticisms, suggestions, and determinations. For instance, the federal banking agencies can decide whether a bank may distribute dividends or must increase capital levels; they can also order the divestiture of bank business lines.

The recent ruling overturning Chevron would not affect the agencies’ broad authority and discretion in these domains. At a more granular level, agency interpretations of federal statutes, either in regulation or otherwise, will likely need to be based on legislation, and, to the extent that agencies pursue more aggressive or looser interpretations of these statutory requirements or prohibitions, banks may feel more inclined to challenge the agencies. However, the supervisory appeals processes at each agency still apply, and the matters appealable under those frameworks are distinct from agency decisions and actions that are subject to judicial review, such as formal enforcement actions.

How might the ruling impact some major financial regulatory initiatives and authorities?

1. Basel III Endgame (interagency proposed rule)

The 2023 proposed rule on regulatory capital that followed the 2023 spring bank failures has been the subject of intense and sustained pushback and criticism by the banking industry as well as others. While some officials have previewed possible material changes to the proposed rule, those seeking to challenge any final rule could do so on various grounds, including under (1) the APA, (2) the major questions doctrine (discussed above), or (3) the nondelegation doctrine (also discussed above). The recent ruling now further makes their opposition stronger, since the federal banking agencies lack Chevron deference—in addition to the many other criticisms concerning the proposed rule.

2. Anti-money laundering and counter-terrorist financing (AML/CFT)

AML/CFT programs and requirements to which banking organizations are subject have been developed through FinCEN regulations and guidance from FinCEN and the federal banking agencies. These programs are not only expensive to run and demanding in terms of both time and resources, they are subject to supervisory scrutiny with regard to agencies’ views on what is appropriate, effective, or too risky for a financial institution under the Bank Secrecy Act and other federal laws.

To the extent that agencies allege AML/CFT violations, the Court’s decision may cause financial institutions to challenge them in court, particularly because violations of AML/CFT requirements commonly result in public enforcement actions and civil money penalties. For instance, if agencies are relying on questionable or overly aggressive interpretations of unclear statutory requirements, banking organizations may be more inclined to push back under the new ruling.

3. Fed master accounts for new applicants

Some institutions with novel charters—state charters that fall short of a full bank charter but authorize specific banking or financial activities—have argued that Congress, in the Federal Reserve Act, has authorized them to open master accounts and that they may not be denied these accounts. They principally rely on the fact that they may apply for FDIC deposit insurance, even if they have not applied for it—for whatever reason. Whether the Federal Reserve Act’s language concerning master accounts is ambiguous and, if so, how a court should construe it may be revisited in litigation or on appeal.

4. National bank corporate powers

The corporate powers of national banks are enumerated in 12 USC 24(Seventh). In its 1995 VALIC decision, the Supreme Court construed this section of the National Bank Act broadly and explained that national banks are not limited to the specific enumerated powers. The Court relied on Chevron and deferred to the OCC’s reasonable interpretation in reaching its decision.

As explained above, the Court’s recent decision does not invalidate a decision that relied on Chevron. Presumably, the court could have reached the same conclusion without Chevron deference and through statutory interpretation, finding the National Bank Act to be expansive and, therefore, upholding the OCC’s interpretation of it.

5. Digital assets

Whether cryptocurrency or other digital assets are “investment contracts” under the Securities Act of 1933 and therefore subject to SEC jurisdiction is another example of a possible challenge in a post-Chevron world.

In addition, the federal banking agencies have issued guidance that effectively requires pre-clearance for certain activities involving digital assets that nevertheless have been determined to be permissible activities for banks. The federal banking agencies could be challenged in court on the grounds that these activities are permissible. Nevertheless, as discussed above, the supervisory powers that the federal banking agencies enjoy may temper any such challenges, since federal banking agencies still must ensure that permissible activities are carried out in a safe and sound manner.

There are many other examples of industry issues or agency actions that may need to be revisited in light of this ruling.