Perspective on Risk - July 5, 2024 (Chevron Decision)

Jul 05, 2024

A short piece.

A colleague and I have been exchanging thoughts on how the Supreme Court’s recent Chevron decision will change bank regulation. That spurred me to do some searching and thinking.

I will piece together my initial thoughts from these articles. I’ve linked the papers I read in the footnote.1

Commonality Of Responses

Most articles agree that the Supreme Court's decision to overturn the Chevron doctrine introduces uncertainty in financial regulation.
They all agree that there will be less deference to regulators.
When it comes to its expansive regulatory work, “the Fed is used to enjoying an incredible amount of deference based in large part on its technical expertise. Those days are behind it,” said Michael Held, of law firm WilmerHale, who was until 2022 the head lawyer at the Federal Reserve Bank of New York.
Many articles suggest that banks and financial institutions stand to benefit from the ruling. Without Chevron deference, regulatory agencies like the Consumer Financial Protection Bureau (CFPB) and others might face more hurdles in enforcing rules, as their interpretations will be more frequently contested in court.
Perhaps most importantly, the decision affects not just financial regulation but how statutes are interpreted by the agencies.
Most agree that, with rulemaking becoming more difficult and uncertain, financial regulators are expected to rely more heavily on their enforcement and supervisory powers to achieve their objectives. This should affect some agencies, like the SEC, CFTC and CFPB, more than the core banking agencies. Matt Levine goes the furthest arguing a cynical view, suggesting that the Supreme Court's decisions make rulemaking so difficult that regulation by enforcement may become the norm.

By the way, the proper answer to all of this is that Congress has to make detailed explicit rules for … anything … you want regulated. The point of the current Supreme Court’s restrictions on rulemaking is that it wants elected lawmakers in Congress, not bureaucrats at the regulatory agencies, to make the rules.

The Venable piece provides a more detailed legal analysis, noting that Auer deference (for agency interpretations of their own regulations) still stands for now. According to the Venable piece, Auer deference is a separate legal doctrine from Chevron deference, and it remains in effect despite the Supreme Court's recent ruling. Auer deference (also known as Seminole Rock deference) refers to the principle that courts should defer to an agency's interpretation of its own ambiguous regulations, rather than just statutes. Venable points out that the Supreme Court narrowed, but did not eliminate, Auer deference in a 2019 decision called Kisor v. Wilkie.

Yeah, good luck with that.

Degree Of Impact On Financial Sector

Here there is some disagreement.

The BAI, as do many other commenters, acknowledges that there will be a significant increase in litigation as banks. But the argument is typically framed around “secondary” issues like the level of swipe fees and consumer protection statutes like those of the CFPB.

The American Banker notes that the impact on financial regulators might be less severe compared to other agencies. It notes that prudential regulators have detailed and explicit statutory authority that grant significant statutory powers to regulators.

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.

“Core” safety and soundness is less likely to be litigated than “secondary” consumer protection rules.

No Effect On Emergency Powers

The Reuters article uniquely highlights that while the ruling may complicate bank regulation, it should not impact the Fed's ability to provide emergency market support.

A Thoughtful Critique From Graham Steele (Columbia)

Graham Steele, the former Assistant Secretary for Financial Institutions at the U.S. Department of the Treasury, offered a very interesting perspective on the Columbia Law blog with How the Major Questions Doctrine Could Reshape Banking Law. He suggests that the Major Questions Doctrine (which was reinforced by the Supreme Court's decision to overturn Chevron deference) could potentially backfire on banks.

The mismatch between the doctrine and the nature of banking and consumer protection regulation could harm the public and regulated firms alike.

Steele argues that the ruling could introduce significant uncertainty into the regulatory landscape, which could make it harder for banks to plan and operate effectively. He also notes that with the potential for more court challenges, there's a risk of inconsistent interpretations of banking laws across different jurisdictions, leading to a patchwork of regulations that vary by region, increased compliance costs. The ruling also creates an incentive for overregulation in some areas, as agencies might try to be more explicit and comprehensive in their rulemaking to avoid court challenges.

He further notes that Chevron:

would call into question industry-favored interpretations like the banking agencies’ expansion of banks’ powers and effectively delegate the authority to interpret the banking laws …

Concluding Thoughts

So these are my initial thoughts:

Chevron doesn’t seem to greatly affect “micro prudential” supervision; the supervision of individual institutions.
But it could make “macro prudential” regulation harder, as this often needs to extend into new areas where there is less settled law.
To the extent that this increases the incentives towards supervision over regulation, that is probably a good thing (in banking) but problematic in the regulated non-bank sectors.
From first-hand experience, I have concerns about having less-sophisticated judges oversee an increasing share of banking. Following the Bankers Trust leverage derivatives scandal, the Fed attempted unsuccessfully to ban several individuals for their conduct. The problem was the judge’s lack of sophistication in understanding the complex nature of the “fraud.”
I have ZERO confidence in Congress writing legislation.