Exorcising McCulloch: The Conflict-Ridden History of American Banking Nationalism and Dodd-Frank Preemption

Conventional wisdom holds that federal law’s conferring banking powers on national banks presumptively preempts state laws seeking to control the exercise of those powers. This conventional wisdom springs from a long-standing legal tradition, originating with McCulloch v. Maryland, that nationally chartered banks are federal instrumentalities entitled to regulate themselves free from state law, even when national law fails to address the risks that state law seeks to regulate. Incorporated into National Bank Act of 1864 by 19th century precedents but then abandoned by the New Deal Court, McCulloch’s theory of preemption is being revived today by the Office of the Comptroller of the Currency (“OCC”) to preempt broad swathes of state law. This article maintains that it is time to exorcise McCulloch’s theory from our preemption jurisprudence. Far from being sanctioned by legal tradition, McCulloch’s theory that national banks are federal instrumentalities offends a deeply rooted tradition in American political culture and law that I call the “anti-banker non-delegation principle. This principle has been manifest in campaigns against national banks’ immunities from political oversight ranging from Andrew Jackson’s 1832 veto of the charter of the Second Bank of the United States message to Louis Brandeis’ 1912 campaign against the “House of Morgan” as a “financial oligarchy.” Rather than accept McCulloch’s view of banks as impartial instruments of the federal government, the American political system and, since the New Deal, the federal courts, have adopted the view that federal law should not delegate unsupervised power to private banks to determine the honesty, safety, and soundness of their own operations. Accordingly, if federal regulators set aside state laws regulating banking practices, then those federal regulators must explain how federal law addresses the risks the state law attempts to control. The most recent effort to eliminate McCulloch’s theory of preemption, according to this article, §1044(a) of the Dodd-Frank Act, which provides detailed standards governing the power of the OCC to preempt state law. This article argues that the OCC’s 2011 rules mistakenly revive McCulloch’s theory of preemption, contradicting not only §1044(a) but also the more general tradition of distrusting unsupervised delegations of immunity from state law to national banks. In particular, like McCulloch, the OCC’s rules draw irrational distinctions between states’ general common-law doctrines and states’ rules specifically directed towards banking practices, subjecting the latter to a sort of field preemption. Rather than accept such preemption, this article urges that courts ought to follow the ordinary principles of conflict preemption, barring preemption of state law unless the OCC has specifically approved the banking practice that state law forbids.