Justices Bar Fed Control of ‘Non-Banks’

The Supreme Court, in an important ruling for the financial community, said today that the Federal Reserve Board is not authorized to regulate ever-increasing limited-service banks.

In an 8-0 decision, the court said the Fed lacks the power to check unrestricted growth of the financial institutions, which are also known as “non-bank banks.”

Congress may still have the final say in the dispute. A House Banking Committee bill to expand the Fed’s jurisdiction to include limited-service banks has been bottled up in the House Rules Committee.

Chief Justice Warren E. Burger, writing for the court, said the Fed had expanded the definition of a bank beyond what federal law intended.

‘No Power to Correct’

“Without doubt there is much to be said for regulating financial institutions that are the functional equivalent of banks,” he said.

But, he continued, “Congress defined with specificity certain transactions that constitute banking subject to regulation. The statute may be imperfect, but the (Federal Reserve) Board has no power to correct flaws that it perceives in the statute it is empowered to administer.”

Burger said that if the law “falls short of providing safeguards . . . to protect the public interest, that is a problem for Congress, and not the board or the courts, to address.”

The Fed had appealed to the Supreme Court for support in closing what the agency considers a loophole in federal banking law.

“Non-bank banks” provide, among other services, either checking accounts or commercial loans. But they do not provide both as do full-service banks.

Springing Up Across U.S.

The institutions therefore argued, and the Supreme Court today agreed, that they are exempt from the federal Bank Holding Company Act which bars interstate ownership of banks.

Limited-service banks are springing up around the nation as major brokerage firms, such as Merrill Lynch & Co., and leading corporations, such as J.C. Penney and Gulf & Western, enter the field.

The Office of the Comptroller of the Currency, a federal regulatory agency that, unlike the Federal Reserve Board, favors creation of non-bank banks, has approved preliminary applications for hundreds of them.

Today’s case stemmed from an application to open 31 limited-service banks in 25 states by Dimension Financial Corp., a unit of Valley Federal Savings & Loan Assn. of Hutchinson, Kan.

The Fed attempted to bring the limited-service banks under its control by widening its definition of a commercial loan to include some money-market transactions, purchases of certificates of deposit and interbank transactions.