States' Inaction on Derivatives May Send State-Chartered Banks Over a Risk Management Cliff
Effective January 21, 2013, state-chartered banks will be prohibited from entering into interest rate swaps or other over-the-counter derivatives, unless authorized by their chartering state. This impending precipice is due to Section 611 of the Dodd-Frank Act which permits state-chartered banks to engage in derivative activities “only if the law with respect to lending limits of the State in which the insured State bank is chartered takes into consideration credit exposure to derivative transactions.”
Notwithstanding this seemingly clear directive from Congress to the states to address derivatives in their state lending limit laws or regulations, or suffer very definite contraction of their banks’ powers, only a handful of states have taken action. In order to avoid this potentially harsh result, state-chartered banks should determine whether their chartering states have taken action, either by legislative amendment, administrative rulemaking, or agency interpretation, to conform to the requirements of the Dodd-Frank Act. Reed Smith’s Financial Industry Group stands ready to assist banks in determining what course of corrective action is warranted, and then pursuing an aggressive campaign to achieve the necessary results.
Travis P. Nelson is a senior associate in the Financial Services Regulatory Group at Reed Smith LLP, resident in the Princeton and New York offices. Prior to joining Reed Smith, Travis was an Enforcement Counsel with the Office of the Comptroller of the Currency, U.S. Treasury Department, in Washington, D.C. Travis is also adjunct faculty at Villanova University School of Law, and a frequent lecturer at national and regional banking conferences. Andrew P. Cross is a partner in the Financial Industry Group at Reed Smith LLP and a Team Leader for the Derivatives & Structured Products Group. Andrew is also the Editor-in-Chief of The Swap Report, a blog that discusses regulatory and transactional issues related to derivatives. Andrew conducts specialized training sessions for financial institutions and corporations with respect to the effect of Dodd-Frank derivatives reform on business activities, as well as the documentation of derivatives under a variety of master agreements (e.g., ISDA Master, FEOMA, IFEMA, MSFTA).