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Brooklyn Law School




In 1983 South Dakota passed an Act permitting its chartered banks to sell and underwrite insurance.1 The issue that I address is whether states should have the power to pass such a law. I am not concerned here with interpretation of positive law but with public policy implications.

The issue is a matter of congressional policy. Like most financial intermediaries banks are regulated by both state and federal laws,2 but it is clear that the federal government has the power to preempt state laws that regulate banks. Therefore, whether South Dakota can pass the statute is not a question of constitutional mandate or "states' rights" 3 but essentially a matter of congressional choice.

A theory guiding this choice is especially necessary today because there is much dissension among interest groups and regulators regarding the scope of bank regulation. Congress is being pressured to take conflicting approaches to bank regulation.4 When interest groups are in sharp conflict, as they are now, Congress may be unable to act, even when legislative solutions are appropriate. Absent principled analysis, it is likely that decisions to act or to avoid action will be politicized, and Congress will not attempt to determine what is the best solution to a problem.5

What policies should guide Congress in allocating bank regulatory powers among state and federal governments? When should federal law preempt state law? Particularly, should the South Dakota statute be upheld or overruled by Congress?

To answer these questions, I first list the arguments for and against the current system and opt for the system. I then attempt to develop a test for allocating regulatory powers by focusing on a hypothetical "best regulator" and testing South Dakota against that hypothetical regulator. I conclude that South Dakota should be permitted to enforce its statute.



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