Whether the federal thrift charter should be eliminated is a question that can hardly be avoided as the second session of the 105th Congress quickly unfolds.

Upon even cursory examination, however, the arguments for doing so are not terribly persuasive. One might even argue that they are reasons for maintaining, indeed promoting, the charter.

Some argue that the charter's elimination was part of the compromise underlying the 1996 legislation that recapitalized the Savings Association Insurance Fund.

This is merely an historical assertion with little real meaning. The fact is that Congress did not legislate the end of the charter. That question was left for future review and consideration and was to be addressed before the merger of the Bank Insurance Fund and SAIF.

An equally fair assessment of the 1996 events would be that Congress intended to allow the charter to continue as part of its evaluation of the financial services industries. In any case, the matter should be reviewed on the merits and not through some historical interpretation.

Some people point to earlier legislation to support their argument for eliminating the charter.

They say the existence of a charter that allows nonbanking companies effectively to own banking institutions exposes the financial system to the dangers that the Bank Holding Company Act of 1956, as amended, was intended to forestall. Others add that, by allowing securities firms to own and operate depository institutions, the thrift charter allows exposure to some of the risks that were limited by the Glass-Steagall Act, which separated commercial banking from investment banking.

These arguments provide equally scant support for thrift-charter opponents. The evidence does not support the argument that the long- standing exclusion of federal thrifts (at least in the case of unitary thrift holding companies) from the anti-affiliation provisions of these laws was a cause of the thrift crisis of the 1980s. Indeed, the evidence collected by the Federal Deposit Insurance Corp. suggests that a lack of supervision was the problem.

The arguments for eliminating the charter also are shortsighted. The need for financial modernization in the United States is now widely accepted. Technological advances have made obsolete many branch-centered delivery vehicles. At the same time and, perhaps because of technology, consumers now demand a broader range of products, conveniently provided.

One-stop shopping for financial services, including banking, insurance, and securities products, is the new financial services paradigm.

Yet the system of regulation of financial services remains largely fragmented and based on concepts of separation that date back, in some cases, to the Great Depression.

The federal thrift charter is arguably the only vehicle that now provides for affiliations among all financial service providers and, hence, a road map out of this fragmentation.

I would argue that the affiliation arguments against the charter should really be arguments in favor of the charter's preservation.

Without the thrift charter, depository institutions would be left to compete with unregulated companies that could offer bank-like products-both loans and deposits-in conjunction with insurance and securities.

Preservation of the federal thrift charter and its permitted affiliations allows for innovation in the provision of financial services in a relatively controlled environment.

There are several reasons for this proposition. First, the size of the deposit base at risk is modest compared with total deposits subject to a federal guarantee. Federal thrifts held only 17.6% of guaranteed deposits at Sept. 30.

A second reason for confidence in the federal thrift charter as a safe environment for innovation is the growing sophistication of the Office of Thrift Supervision as a regulator.

The agency's capacity as a regulator has been strengthened since 1989. The recent confirmation of Ellen S. Seidman as director and the deliberate pace and care shown by the OTS in approving new charters have added to this perception.

Further, the ability of commercial firms, such as securities or insurance companies, to deal with federally insured thrift affiliates already is severely circumscribed by Sections 23A and B of the Federal Reserve Act.

These provisions limit the ability of the nonbank affiliate to sell assets to, or borrow from, the insured bank affiliate.

These restrictions are not perfect-indeed, they are highly complex and perhaps require expansion-but they are a significant barrier to the dangers commonly associated with affiliations between banking and securities or banking and insurance firms.

Other regulatory tools ensuring the safe operation of depository institutions affiliated with insurance and securities firms include the existing agency policy on the sale of uninsured products.

While this policy has already been shown to be effective, it nevertheless would make sense for the OTS to consider expanding the scope of the policy to include sales of insurance products.

There are also limits on the amount of an investment in a service corporation engaged in activities not permissible for federal savings associates, limits on dividends and other capital distributions from a savings association to its parent holding company, and, of course, the examination powers of the OTS.

In summary, the federal thrift charter supplies a basis for innovation in the formation and affiliation of financial services entities.

Because of the existing regulatory framework, these affiliations, and the innovations in delivery of financial services likely to result from them, can take place in a controlled, regulated environment.

Should the thrift charter, therefore, be eliminated? To this writer, the real and only question, as these institutions take the lead in financial services evolution in the United States, is: How should the current regulatory system for federal thrifts be strengthened?

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.