WASHINGTON – State regulators are urging Senate Banking Committee Chairman Chris Dodd to change a provision in the regulatory reform bill they claim would force most large state banks to convert to national charters.
Those conversions, in turn, would rob eight states of the funding necessary to police banks under their jurisdictions, according to analysis by American Banker, an affiliate of Credit Union Journal.
"A cascading effect will result as state banking departments lose their largest fee-providing banks and are forced to make up the difference by raising fees on the smaller banks, thus incentivizing even more charter flipping," Richard Neiman, the New York State Superintendent of Banks, told American Banker.
Under the Dodd bill, all state-chartered banks, regardless of size, would be regulated by the Federal Deposit Insurance Corp. In most cases, their holding companies would be as well. The Federal Reserve Board only would regulate holding companies with more than $50 billion of assets – and just 15 state-chartered banks belong to companies of that size.
What concerns Neiman and other state regulators is that 11 of those 15 banks would gain a third overseer. They would go from having two regulators under the current system (the Fed and the state) to three under the bill (the FDIC, the Fed and the state).
Those 11 state member banks hold a collective $1.13 trillion of assets and pay significant fees to eight states, including New York. Neiman said it is likely that those banks would convert to national charters so they would only have to answer to two agencies – the Office of the Comptroller of the Currency and the Fed.
"The Dodd bill at its core says it is supportive of the dual banking system and wants to maintain the dual banking system," Neiman said in an interview with American Banker. But "transferring supervision from the Fed to the FDIC for state member banks has an anticipated significant impact on the dual banking system."
That added complication of an additional supervisor, combined with a perception among some that the FDIC is not as experienced a regulator for the largest institutions, would lead most or all of those banks to flip charters, Neiman said.
There would be "concern by the member banks as to the FDIC's level of current experience with respect to complex institutions of that size," Neiman said.
Ernest Patrikis, a lawyer at White & Case LLP who spent 30 years at the Federal Reserve Bank of New York, said Neiman's argument makes sense.
"Banks would no longer be supervised by the Fed, who is familiar with their business, and then to be subject to three supervisors … they just might bite the bullet and convert to a national bank," he said.
State banks may also have an additional incentive to switch: higher exam fees.
