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NBD Bancorp has agreed to buy Summcorp of Fort Wayne, doubling its Indiana presence to 99 offices and $4.7 billion of assets.
December 24
WASHINGTON — A Treasury Department plan to revamp financial services regulation is expected to produce some significant changes but fall far short of the massive overhaul Secretary Henry Paulson outlined Monday.
In interviews with analysts, academics, regulators, bankers, and other industry representatives, there was widespread agreement that there is likely to be increased oversight of the mortgage market, including nonbank originators and brokers, in the near term. Looking further ahead, many saw growing momentum for an expansion of the Federal Reserve Board’s powers to handle systemic market risks, a drive to merge the bank and thrift charters, and some limited regulatory consolidation.
But few — other than Treasury officials — said there was much chance for more radical changes, including the creation of a single federal prudential regulator, the elimination of the federal credit union charter, and stripping direct bank supervision from the Federal Deposit Insurance Corp.
The Treasury’s plan, unveiled formally Monday after much of it leaked over the weekend, calls for short-term, intermediate, and long-term steps.
Not surprisingly, the short-term steps, including the creation of a federal mortgage commission to oversee origination standards across the industry and the expansion of the President’s Working Group on Financial Markets to include more bank regulators, appeared to be the easiest to accomplish, observers said.
“Certainly the streamlining and re-regulation of mortgage lenders” is likely to happen, said Chris Low, chief economist for First Horizon National Corp.’s FTN Financial Capital Markets. “That’s one that both parties can get behind.”
Stricter oversight of mortgage brokers is already included in reform legislation the House passed last year, as well as in a bill pending in the Senate. Senate Democratic leaders said Monday they were open to many of Treasury’s suggestions but said policymakers had to focus on stemming the housing crisis first.
Less clear — though still probable over the long term — was whether the bank and thrift charters should be merged, and whether the Office of Thrift Supervision should be folded into the Office of the Comptroller of the Currency.
Mr. Paulson called the thrift charter “obsolete” at a press conference.
The charter is “no longer necessary to ensure sufficient residential mortgage loan availability for U.S. consumers,” he said. “We have concluded that the thrift charter has run its course and should be phased out. With the elimination of the federal thrift charter, the OTS would be closed, and its operations would be assumed by the OCC.”
Merging the charters remains unpopular with banking industry representatives, who moved quickly to oppose it. Despite their opposition, the idea has gained momentum in recent years, particularly during the housing crisis. Supporters of a charter merger argue that the differences between banks and thrifts have become so narrow that it is no longer necessary for thrifts to have a separate charter and their own regulator.
Many also have noted that several of the top thrift companies in the country, including Washington Mutual Inc. and Countrywide Financial Corp., have struggled during the housing crisis. Countrywide ultimately agreed to sell itself to Bank of America Corp., and there are persistent rumors Wamu may be sold to a banking company soon. Their troubles raised concerns about the viability of the charter.
The number of thrifts has declined to 826, although assets have grown to $1.51 trillion.
Analysts said Monday that there would undoubtedly be a fight to preserve the thrift charter, led by the American Bankers Association and the Independent Community Bankers of America, but that it was only a matter of time before the charters and the agencies overseeing them were merged.
“The easiest thing to get done would be the merging of bank and thrift charters,” said Brian Gardner, an analyst with KBW Inc.’s Keefe, Bruyette & Woods. “There’s so little difference between the charters today, and … I think the writing is on the wall for that. I’m sure there would be thrifts that would not want to see that happen, but they’re less powerful now.”
Richard Baker, a former Louisiana congressman and now the president of the Managed Funds Association, agreed.
“There’s a good opportunity for that. The lobby that used to be there in the old days when I talked about it is pretty much gone,” Mr. Baker said. “A lot of folks have turned in the S&L charter and flipped over” to the bank charter.
Merging the OTS and the OCC has been endorsed by House Financial Services Committee Chairman Barney Frank, D-Mass.
Industry representatives said they were poised to fight to protect the thrift charter and the OTS in Congress. “We very strongly believe there is room for multiple charters,” said Camden Fine, the president of the ICBA.
OTS Director John Reich sent an e-mail to employees Friday reminding them that other regulatory revamp proposals had failed.
While industry groups were preparing to fight, some large bankers appeared open to some type of regulatory consolidation, though they steered clear of specific recommendations.
“What we do know is patchwork regulation is simply outmoded,” said Richard Kovacevich, the chairman of Wells Fargo & Co., said in an interview. “We’ve got to somehow make some changes that could include reduction in the number of regulators. … All this needs to be discussed.”
While putting the OTS on the chopping block, the Treasury proposed expanding the Fed’s powers to allow it to serve as a market stability regulator. The Treasury said the central bank should have the responsibility and authority “to gather appropriate information, disclose information, collaborate with the other regulators on rule writing, and take corrective actions when necessary in the interest of overall financial market stability.”
The Treasury also wants the Fed to be able to require corrective actions to address risks or constrain future risk-taking. But the department said this authority should be limited to instances where overall financial market stability is threatened.
Most observers said some kind of expanded Fed role was likely, particularly after it gave investment banks access to the discount window.
“We would agree that expanding the role of the Fed to look at capital markets is healthy,” said Richard Neiman, the commissioner of the New York State Banking Department. “Acknowledging that institutions, whether investment banks or commercial banks, have similar systemic impacts — that is a clear lesson from this crisis, and I think it will have wide support.”
Several groups also voiced support Monday for a federal insurance charter. The idea has split the insurance industry, which currently faces state regulation. But many observers said a federal insurance charter was likely in time.
Several other Treasury proposals, however, including the creation of a single federal deposit insurance institution charter and setting two regulators to oversee it — one for prudential regulation and the other for business practices — were deemed a bridge too far.
Observers said that creating a single regulator was simply too difficult, given the current system, and that overhauling it would alienate too many constituencies.
“It seems like it’s more of an academic piece if you were writing a financial system from scratch,” said V. Gerard Comizio, a partner in the corporate department at Paul, Hastings, Janofsky & Walker LLP. “But the reality is you can’t, because you have a system that’s been in place for 150 years.”
Analysts also gave a plan to eliminate the federal credit union charter virtually no chance. The credit union lobby is considered one of the most powerful in Washington, in part because it can mobilize members to contact their representatives directly. The industry’s representatives were already vowing to go to war if necessary.
“In a nuclear battle, as many as half of the 90 million credit union members would come to our defense,” said Dan Mica, the president of the Credit Union National Association. “If there is ever a serious threat to shut down credit unions, we will not hesitate to use the nuclear option.”
Observers also said the Treasury’s suggestion that the FDIC should be stripped of its direct supervision of banks, serving solely as an deposit insurance agency with limited backup supervisory powers, was unrealistic.
“If the FDIC were stripped of its supervisory authority, that would be one of the worst ideas I could imagine them coming up with,” said William Isaac, a former FDIC chairman. “One of the problems we had in the S&L crisis [was] there was no independent insurance agency.”
