Board of Governors of the Federal Reserve System v. Dimension Financial Corporation

The Board of Governors of the Federal Reserve System (the board) (defendant) had regulatory authority over certain financial institutions that qualified as banks pursuant to the Bank Holding Company Act of 1956. Section 2(c) of the Bank Holding Company Act defined a bank as any institution that (1) accepted deposits that the depositor had a legal right to withdraw on demand and (2) made commercial loans. Over time, the number of nonbank banks had been increasing. A nonbank bank was a financial institution that offered banking services similar to the services of banks but existed outside the board’s jurisdiction based on the narrow definition of a bank in the Bank Holding Company Act. Nonbank banks typically offered customers negotiable order of withdrawal (NOW) accounts, which functioned similarly to conventional demand checking accounts but without giving the depositor the legal right to withdraw deposits on demand. Nonbank banks also often offered commercial credit but limited their offerings to the purchase of money-market instruments like certificates of deposit and commercial paper. Notably, throughout the 1970s, the board’s interpretation of the term commercial loan excluded money-market transactions from its definition. In 1984, in response to the increase of nonbank banks, the board initiated a rulemaking to amend Regulation Y, which defined banks. After amendment, Regulation Y defined a bank as any institution that (1) accepted deposits that as a matter of practice were payable on demand and (2) engaged in the business of making any loans other than a loan for personal purposes, including the purchase of commercial paper, certificates of deposit, or similar money-market instruments. Several lawsuits were brought challenging Regulation Y, including a lawsuit brought by Dimension Financial Corporation (plaintiff). The cases were consolidated in the United States Court of Appeals for the Tenth Circuit. The court of appeals set aside the board’s amended definition of bank in Regulation Y. The board appealed.