It was a given that thrift executives and banking trade groups would oppose the Obama administration's plan to eliminate the Office of Thrift Supervision, but there's another, less obvious constituency that also has an interest in preserving the agency: thrift investors.
That's because, when it comes to issues like stock buybacks and dividend payments, the OTS' policies are more favorable to investors than those of Federal Deposit Insurance Corp., which regulates state-chartered thrifts. Indeed, these policy differences are key reasons why most publicly traded thrifts have opted for the federal charter.
The blueprint for regulatory reform calls for merging the Office of the Comptroller of the Currency and the OTS into a new agency, the National Bank Supervisor, and doing away with the thrift charter. The Obama team argues that a separate regulator for thrifts is unnecessary because there is no longer much distinction between banks and thrifts. It also says that the housing crisis exposed "the fragility" of thrifts and that the availability of a thrift charter "has created opportunities for private sector arbitrage of our financial regulatory system" - in other words, made it too easy for institutions to shop for the most lenient regulator.
My initial reaction to the proposal was that it wasn't a big deal because many thrifts have moved to a commercial-banking model over the years, just as commercial banks, thanks to securitization, have beefed up their mortgage lending. Ask any layperson the difference between a bank and thrift and you're likely to get a blank stare. Moreover, the plan calls for retaining what is arguably the best feature of the thrift charter, the unrestricted ability to branch across state lines.
I sure did get an earful, though, when I called thrift officials to get their take on the proposal. Mostly they say they are concerned about the impact on home ownership. Yes, thrifts are making more commercial loans these days, but mortgage lending is still their bread and butter, and they worry that their new regulator won't understand the business model well enough and will steer them in a new direction, ultimately limiting consumers' options for home loans. Many industry officials are also concerned about the fate of mutual thrifts; one attorney actually said that they might be better off converting to credit unions. He may or may not have been joking.
I'm not sure how convincing the home ownership argument is. If there's money to be made in mortgage lending, institutions will find a way to stay in the business, no matter their charter type.
A case could be made, though, that eliminating the federal thrift charter might spook investors and, in turn, limit the institutions' options for raising capital. There's not enough space here to explain why mutual holding companies regulated by the OTS generally pay higher dividends than those regulated by the FDIC, but if federal thrifts are forced to convert to state charters, MHCs would be less attractive investments, unless the FDIC adopted the OTS' dividend policies, according to longtime thrift investor Theodore Kovaleff. It's a similar story for the stock buyback policies of thrifts that are 100% publicly owned, he says.
The Obama blueprint doesn't address how these policies may or may not change under a new regulatory structure, and that's no surprise. "I don't think the interest in the fate of investors is something that's near the top of the list for the Obama administration," Kovaleff says. Still, capital is king these days, and as policy makers debate regulatory reform, they need to be mindful of how their decisions will affect institutions' ability to raise it.
