ANALYSIS: Bank Regulators Lose Shield if Chevron Falls Next Term

The Supreme Court, following a frenzied term, will return to work from its summer recess poised to abandon its Chevron deference standard.

If the standard is discarded—or even diminished—federal bank regulators, specifically the Office of the Comptroller of the Currency and the Board of Governors for the Federal Reserve, will be left weakened and exposed. We can, in turn, expect more litigation challenging the regulatory and enforcement activities of the OCC and FRB—and, possibly, those of the Federal Deposit Insurance Corporation as well.

Forty Years of Deference

In Chevron U.S.A. Inc. v. Natural Res. Def. Council, Inc., the Supreme Court created a test for courts to determine whether they should defer to an agency’s regulatory interpretations of its organic or other empowering statute. The test has two parts: (1) Is congressional intent ambiguous? (2) If so, is the agency’s interpretation reasonable? When the answer to both of these questions is yes, courts must defer to the agency’s view.

For nearly 40 years, this highly deferential standard has allowed agencies—including those that regulate banks—to be dynamic in how they address emerging and evolving issues.

Numerous federal agencies regulate banks. Historically, the OCC, FRB, and FDIC have taken the lead. Courts are currently bound by Chevron to defer to the OCC’s reasonable interpretations of ambiguous provisions of the National Bank Act, the OCC’s organic statute. Similarly, the FRB, as sole administrator of the Durbin Amendment to the Dodd-Frank Act, receives Chevron deference when interpreting the amendment’s ambiguous language. The FDIC, however, does not receive deference when interpreting the Federal Deposit Insurance Act, because it is not the only agency that administers that statute.

Conservatives have been pushing to limit Chevron’s effect since shortly after the court’s 1984 decision. And in recent years, the court appears to have moved away from the standard. For example, the court in 2019 nodded toward possibly overruling Chevron outright in Kisor v. Wilkie. And it conspicuously avoided citing Chevron when presented with the issue in a 2021 case, American Hospital Association, et al. v. Becerra.

Loper Bright Enterprises Looms

Some experts predict that, with a chance to once again weigh in on Chevron, the justices will only limit the doctrine, rather than completely dispose of it. But others consider it an opportunity for the court to give Chevron, in the words of Justice Gorsuch, “a tombstone no one can miss.”

On May 1, the Supreme Court gave itself just such a chance when it agreed to hear Loper Bright Enterprises, et al. v. Raimondo in the 2023-2024 term. In the case, the petitioners seek to undo a regulation requiring commercial fishing vessels to pay for on-board observers to monitor federal conservation efforts. In addition to arguing for reversal of an adverse D.C. Circuit decision, the petitioners asked the court to invalidate the regulation by overruling or “clarifying” Chevron. The Supreme Court agreed to hear only the second issue—the request to roll back Chevron.

Bank Regulators Will Be Exposed

If a weakened deference standard is indeed set by Loper Bright Enterprises, either by overruling or “clarifying” Chevron, it would hit hardest the bank regulators currently receiving deference. In response, potential challengers to OCC and FRB rules will be emboldened to seek judicial review of enforcement actions and regulations promulgated under ambiguous statutory provisions. In other words, we’ll see more lawsuits challenging agency authority—lawsuits where agencies are more likely to lose. This extent will correlate directly to whatever new standard the court sets. Less agency deference means more litigation agency authority, and vice versa.

It is unclear how agencies not receiving Chevron deference, like the FDIC, will be affected, but it’s easy to suspect that there will be spillover effects. Lower courts might consider any rollback a go-ahead to raise scrutiny against all agencies that come into court, even those that never received deference in the first place.

Direct involvement from Congress could address the regulatory uncertainty that will come when interpretive power shifts from agencies to the judiciary. But congressional action takes time. Losing an element of speed, bank regulators will be less nimble to address emergencies, such as pandemics, or technological developments, like new fintech business models and cryptocurrencies. Such a shift will create instability and open opportunities for regulatory arbitrage. It’s easy to imagine a chaotic world where lone district judges alter banking laws that affect financial institutions nationwide.

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