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.