The opinion of the court was delivered by: GESELL
Cross-motions for summary judgment in these consolidated cases present the questions whether regulations adopted by the Federal Deposit Insurance Corporation (FDIC) and the Federal Home Loan Bank Board (Bank Board) are authorized by the statutes which govern those agencies and whether the regulations were promulgated in accord with the requirements of the Administrative Procedure Act. Plaintiffs, an individual deposit brokerage firm and a trade association whose members engage in the deposit broker business, seek to set aside regulations intended to virtually eliminate federal deposit insurance for funds place in insured financial institutions through deposit brokers.
The issues have been exhaustively briefed and the Court has had the benefit of full oral argument. For the reasons given below, the Court concludes that the challenged regulations are inconsistent with governing statutory law and must therefore be struck down.
Federal deposit insurance was developed during the Great Depression for the purpose of restoring confidence in the nation's banks and stimulating economic growth. In 1933 the FDIC was created, and a year later the Federal Savings and Loan Insurance Corporation (FSLIC) was established under the control of the Bank Board.
Banking practices were relatively simple in that era. Depositors dealt largely with traditional banks and savings and loan associations (S&L's) located near their homes or offices. Regulation of institutions was a manageable task, and with the tools provided by their enabling statutes the FDIC and FSLIC were successful in returning the banking system to a sound footing.
Today these New Deal statutes must be applied to an entirely different world. Banking is no longer a simple neighborhood affair. Depositors are more sophisticated, and as a result of advances in technology they are able to shop nationwide in search of the highest return on their money and can transfer their funds electronically from one institution to another virtually instantaneously. Recent legislation easing restrictions on financial institutions has also increased competitive pressure in the banking business, with brokerage concerns and S&L's nudging more and more into traditional banking endeavors. As a result of these changes banks and S&L's have adopted new techniques in an effort to attract capital, and the FDIC and the Bank Board have been faced with problems heretofore unknown.
The deposit brokerage business provides advantages to banks as well. Smaller banks can, through deposit brokers, solicit relatively large amounts of capital to help them finance local growth and development. The FDIC and the Bank Board, however, argue that this process is also subject to considerable abuse. Banks or S&L's bordering on insolvency can, by offering high interest rates, attract large sums in a very short period in an effort to stave off failure of the institution. Because the brokered accounts are federally insured, these agencies contend, neither the brokers nor their customers adequately investigate the institution's financial condition before depositing their funds. The result, when the bank or S&L is unable to stave off failure, is that the potential cost to the insuring agencies of making payment on the insured accounts is significantly increased due to the last-minute influx of brokered deposits.
The past several years has seen an alarming increase in failures by banks and S&L's, placing considerable strain on the insurance funds. In at least several of these instances the FDIC and the Bank Board have concluded that the presence of brokered deposits in failed financial institutions has unduly exacerbated demands on the insurance funds. In order to deal with this perceived threat to the integrity of the insurance funds, the FDIC and the Bank Board have promulgated regulations which would, in essence, virtually eliminate federal insurance for funds placed by or through deposit brokers. The new regulations read, in pertinent part:
Notwithstanding any other provision of this part [12 C.F.R. Part 330 (FDIC); 12 C.F.R. Part 564 (Bank Board)], funds deposited by or through a deposit broker shall be added to any other deposits placed by or through that deposit broker and insured up to $100,000 in the aggregate. This subsection shall apply to all accounts opened, added to, or renewed on or after October 1, 1984, [with certain exceptions regarding the effective date].
Brokered Deposits; Limitations on Deposit Insurance, 49 Fed. Reg. 13,003, 13,011 (April 2, 1984). Rather than limiting insurance to $100,000 per depositor per financial institution, the new regulations would lump together all funds placed in a particular institution through a single deposit broker and limit insurance to $100,000 per deposit broker. The insurance ceiling would thus not be based on beneficial ownership of the deposits or, in the case of those deposits held directly by a deposit broker's customers, even on who is listed as the nominal depositor on the records of the financial institution, but instead on the basis of how the deposits were made. Thus an individual who deposits $10,000 in a particular institution on his own initiative, and then subsequently utilizes the services of a deposit broker to place an additional $10,000 deposit with that institution, would presumably be fully insured on the first deposit but would be at risk on the second.
Plaintiffs argue that the new regulations are inconsistent with the FDIA and the NHA, which they contend guarantee each depositor insurance up to $100,000 per institution no matter how the actual deposit is arranged. The FDIC and the Bank Board disagree with this interpretation of the statutes, and point to several statutory provisions which they argue give them authority to promulgate the challenged regulations. The Court must consider, therefore, both the extent of insurance coverage which the FDIA and the NHA were intended to provide and the extent to which Congress has given the FDIC and the Bank Board authority to alter such coverage.
The FDIA and the NHA were designed to provide stability to the banking industry by guaranteeing federal deposit insurance to depositors in qualifying institutions. As the statutes governing the FDIC and the Bank Board make clear, these agencies are required to provide such insurance. "[The FDIC] shall insure . . . the deposits of all banks which are entitled to the benefits of insurance under this chapter." 12 U.S.C. § 1811 [emphasis added]. See also 12 U.S.C. § 1821(a) (1). An insured deposit is defined as "the net amount due to any depositor" up to $100,000, § 1813(m)(1) [emphasis added], and if an institution fails the FDIC is directed to make payment on insured accounts. § 1821(f). Likewise, "[the FSLIC] shall insure the accounts of institutions eligible for insurance," and each insured institution " shall be entitled" to insurance up to $100,000 for "the accounts of each of its members and investors." 12 U.S.C. §§ 1725(a), 1728(a) [emphasis added]. The FSLIC is also specifically directed to make payment on insured accounts in failed S&L's. § 1728(b).
The legislative history of the Banking Act of 1935 makes clear that the "depositor" who is entitled to the deposit insurance under the statute is the beneficial owner of the account, at least where his ownership is reflected on the books of the bank. "The law specifically makes the test the individual ownership." Banking Act: Hearings on H.R. 5357 Before the House Comm. on Banking and Currency, 74th Cong., 1st Sess. 27 (1935) (statement of Banking Comm. Chmn. Steagall). "The command seems to be clear . . . where the records of the institution show for whose benefit the account is maintained the legal measure of insurance protection for each cannot be withheld." Id., at 128 (statement of FDIC general counsel L. E. Birdzell).
The National Housing Act, which is generally to be construed together with the FDIA, similarly contemplates that deposit insurance will run in favor of the owner of the deposit, although its language and statutory history are somewhat less explicit. See 12 U.S.C. § 1724(b) (defining "insured member" as "an individual, partnership, association, or corporation which holds an insured account").
This interpretation of the statute has consistently been followed by the FDIC and by the Bank Board in administrative interpretations prior to the present controversy. See, e.g., 11 Fed. Reg. 9500 (1946) (interpretive opinion by FSLIC Legal Department):