Dive Brief:
- The Acting Comptroller of the Currency Michael Hsu said Wednesday state laws that target banks have created “a worrisome trend of fragmentation” for the national banking system. A number of states have implemented anti-ESG laws restricting state contracts with financial institutions since 2021.
- The acting comptroller said banks are increasingly being asked by states to “pick a side in service of performative politics rather than deliberative policy,” in a speech to the economic and financial policy-focused Exchequer Club.
- Currently, anti-ESG laws that require states to divest from or restrict work with financial firms based on their stances on ESG or certain industries are on the books in more than 10 states, according to Pleiades Strategy. “Allowing polarization to grow unchecked risks fragmenting the banking system to the detriment of communities, consumers, and the economy,” Hsu told the group.
Dive Insight:
Hsu told the group — consisting of senior professionals in trade associations, regulatory agencies, law firms, Congressional committees and the press — that the Office of the Comptroller of the Currency is a “bulwark” against the growing fragmentation and must “fortify and vigorously defend” the preemption of the National Banking Act over state laws.
States like Texas, West Virginia, Alabama, Utah, Idaho, Montana, Arkansas, Louisiana, Tennessee, Florida and Oklahoma currently have laws on the books that look to restrict states from working with financial institutions for their ESG stances or perceived boycotts of firearms, fossil fuel or tobacco industries. An anti-ESG law in Oklahoma was recently placed on hold by a state court. Oklahoma’s law and others in Florida and Texas have been found to be economically costly and unpopular with voters.
Additionally, anti-ESG laws make it more difficult for fiduciaries to meet their obligations and add a significant reporting burden, according to a recent study by the United Nations-backed Principles for Responsible Investment.
“This trend [of policy fragmentation] seems to reflect the rise of polarization writ large,” Hsu said Wednesday. “To varying degrees the culture wars, identity politics, and weaponization of finance are pushing toward greater and greater fragmentation of the U.S. financial system.”
The acting comptroller compared the rising fragmentation of state policies to the advent of the Office of the Comptroller of Currency in 1863 during the Civil War. The invention of the independent Department of Treasury bureau gave rise to uniform national currency, established national banks and put the OCC in charge of regulating the newly-established system, according to Hsu.
Hsu said the origin of the OCC belies its core purpose “to help unify the country’s monetary and banking system and promote the nation’s prosperity.” The office is now tasked with helping ensure that “parochial overreach” by states “does not splinter our banking system.”
In addition to defending the preemption of OCC regulations over state policies, Hsu said the office is also working to develop a more nuanced analysis to address and embrace the standard set in Barnett Bank of Marion County., N.A. v. Nelson. This standard is used to determine whether the National Bank Act preempts a state law.
A recent U.S. Supreme Court ruling clarified the standard, requiring lower courts to conduct an analysis to determine the nature and extent of a state law’s interference with the National Bank Act. The court ultimately ruled in Cantero v. Bank of America that state laws are preempted by the NBA if they are found to prevent or “significantly” interfere with the “national bank’s exercise of its powers.”
Hsu said continuing to defend the core preemption principle and being more precise in its application of the Barnett standard “will sharpen OCC’s preemption powers” and allow the agency to “meet the challenges of increasing polarization.”
