The Quiet Metamorphosis: How Derivatives Changed the 'Business of Banking'

70 Pages Posted: 21 Oct 2009 Last revised: 20 Feb 2010


This Article uncovers and analyzes an important part of our recent regulatory history, one that provides a key to understanding some of the deeper, hidden causes of the recent financial crisis. It offers an in-depth analysis of an extensive body of regulatory decisions - interpretive letters issued by the Office of the Comptroller of the Currency (OCC), the primary regulator of federally chartered banks - that constitute the primary source of the U.S. commercial banks’ legal authority to trade and deal in a wide range of derivative instruments. In these letters, issued between the mid-1980s and the end of 2008, the OCC interpreted an ambiguously phrased central clause in the National Bank Act of 1863, which sets forth activities permissible for national banks, as authorizing derivatives transactions as part of the “business of banking.”

While legal scholars have thoroughly examined the evolution of the statutory concept of the “business of banking” in the context of banks’ attempts to conduct securities, insurance, or real estate activities, to date, the far-reaching regulatory implications of the OCC’s interpretive efforts in the derivatives area have gone largely unnoticed. This Article develops a typology of methods the OCC used to interpret the statutory language as permitting banks to engage in an increasingly complex set of derivatives transactions. It argues that, in the course of issuing these interpretations, the OCC gradually formulated an excessively broad definition of the key statutory concept of the “business of banking” as encompassing all types of financial intermediation and dealing in all forms of financial risk. Through the seemingly routine and often non-transparent administrative actions, the agency effectively enabled large U.S. commercial banks to transform themselves from the traditionally conservative deposit-taking and lending institutions into a new breed of financial “super-intermediaries,” or wholesale dealers in pure financial risk. By indirectly removing most of the restrictions on activities of commercial banks, the OCC’s interpretive efforts had an ironic effect of prolonging the life of an obsolete statute and potentially impeding legislative reforms necessary to bring the regulatory framework in line with the changing business and risk profile of modern financial institutions. Understanding this process and its outcomes provides a more nuanced context for the ongoing debate on the future of financial sector regulation.

Keywords: business of banking, bank powers, national bank, bank regulation, financial regulation, derivatives, systemic risk, OCC, Comptroller of the Currency, interpretive letter, agency interpretation, regulatory reform, financial intermediation

Suggested Citation

Omarova, Saule T., The Quiet Metamorphosis: How Derivatives Changed the 'Business of Banking'. University Miami Law Review, Vol. 63, p. 1041, 2009, UNC Legal Studies Research Paper No. 1491767, Available at SSRN:

Saule T. Omarova (Contact Author)

Cornell University - Law School ( email )

Myron Taylor Hall
Cornell University
Ithaca, NY 14853-4901
United States

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