CHICAGO -- Continental Bank Corp. filed applications Friday to sever ties with the Office of the Comptroller of the Currency and to put its lead bank under Illinois regulators.

The bid to switch from a national to state charter, which is expected to be approved, came after a series of skirmishes between Continental and the Comptroller's office, according to Washington sources.

The disputes reportedly involved the adequacy of Continental's credit-quality disclosures and the Comptroller's denial of an informal application for additional banking powers, which were sought by chief executive Thomas C. Theobald.

Pursuing Cost Savings

But a Continental spokesman said the application was filed purely on the basis of prospective cost savings.

The company's annual examination fees would be chopped by 40%, he said, declining to specify the amount. A regulatory source put the annual savings at more than $1 million. Continental Bank's noninterest expenses for the first half of this year were $320 million.

Removal of the $22 billion-asset Continental Bank from the Comptroller's oversight would be one of the largest charter switches seen in the banking industry. The application adds momentum to a trend toward charter-shopping among major banking institutions.

Marine Midland Bank, which has $16 billion in assets and is based in Buffalo, last month applied to switch from a national to state charter.

Wells' Backdown

And the $50 billion-asset Wells Fargo Bank, San Francisco, dropped plans in October to switch to a thrift charter only after getting stem regulatory warnings that the move would spark a political fire storm.

Coming fast on the heels of Marine Midland's charter conversion application, Continental's move "may represent the start of a trend in which large institutions seek greater comfort with state banking regulators," said Thomas Brooks, a partner in the Chicago law firm of Vedder, Price, Kaufman & Kammholz.

The controversy surrounding charter switches centers on concerns that banks are playing regulatory agencies against each other in a bid to obtain maximum operating -- and ultimately risk-taking -- liberties.

"From a public policy standpoint, you've got to ask whether this is a good thing," said Comptroller of the Currency Eugene A. Ludwig in an interview with American Banker.

Regulatory Consolidation

Mr. Ludwig said Continental's move to switch charters, though understandable from a pure business perspective, "offers a fresh illustration of why the administration supports consolidation" of the regulatory agencies.

Mr. Ludwig gave no indication he would try to block the charter flip, and the Illinois state banking commissioner indicated he would move quickly to approve Continental's application.

One Illinois lawyer, who asked not to be named, said it was open knowledge that the state's regulators were trying to woo banks away from the OCC. "There is a rivalry between the two agencies for charters," he said. "In a consolidating industry, when you are talking about charters, you are talking about jobs."

According to Washington sources, Continental ran afoul of the OCC when it proposed forming a derivatives trading subsidiary that would be capitalized with equity siphoned from the lead bank. The institution long has suffered from credit-quality problems and comparatively weak capital and reserve ratios.

"Continental's management has been extremely difficult to deal with when it comes to acknowledging problems," a source said, indicating that a lack of regulatory confidence in the bank was the deciding factor in discouraging the derivatives trading application.

Theodore McDougal, managing director of corporate communications at Continental, acknowledged that the Comptroller had discouraged plans for a derivatives trading subsidiary. The company understandably was disappointed, he said.

But he declined to comment on the nature of the dispute. And he maintained that "the denial of our preliminary application had nothing whatsoever to do with the decision to seek a state charter."

Richard Luft, commissioner of banks and trusts for the State of Illinois, said, "I don't see anything sinister about Continental's decision," adding that regulatory oversight would not be relaxed.

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