Federal Reserve lacks authority to control new limited-service, `non-bank banks,' high court says

The Supreme Court, in an important ruling for the financial community, said Wednesday the Federal Reserve Board is not authorized to regulate ever-increasing limited-service banks in the United States. The court ruled unanimously that the Fed lacks the power to check unrestricted growth of the financial institutions, which are also known as ``non-bank banks.'' Congress may still have the final say in the dispute. A Reagan administration bill to expand the Fed's jurisdiction to include limited-service banks has been bottled up in Congress.

Chief Justice Warren E. Burger said the Fed had expanded the definition of a bank beyond what federal law intended.

``Without doubt there is much to be said for regulating financial institutions that are the functional equivalent of banks,'' he said. But Congress ``defined with specificity certain transactions that constitute banking subject to regulation. The statute may be imperfect but the [Federal Reserve] Board has no power to correct flaws that it perceives in the statute it is empowered to administer.''

``Non-bank banks'' provide checking accounts or commercial loans -- but not both. These limited-service banks are springing up as major brokerages, such as Merrill Lynch & Co., and leading corporations, such as J. C. Penney and Gulf & Western, enter the field.