The Depression-era federal thrift charter was designed to implement congressional housing policy. Since then, the world has changed. In the wake of the Dodd-Frank Act, many institutions are asking themselves whether it might be more advantageous to convert to a national bank charter.
For a stand-alone federal thrift, the analysis may be fairly straightforward. For one controlled by a grandfathered unitary thrift holding company, a conversion would also entail transformation into a bank holding company. Reconciling the issues depends on an institution's ownership structure, business lines, and long-term strategic plan.
Before Dodd-Frank, federal thrifts had several advantages over national banks, including consolidated supervision by a single regulator; broad interstate branching; "field preemption"; the absence of activity and investment limitations for holding companies; and the absence of holding company capital adequacy and "source of strength" requirements. But the qualified thrift lender test also brought significant limitations on diversification and commercial lending.
Dodd-Frank has essentially eliminated the advantages of the federal thrift charter. With the demise of the Office of Thrift Supervision, there will no longer be consolidated supervision by a single regulator. Field preemption for federal thrifts has been discarded, and these institutions are now limited to the same preemption afforded national banks under Dodd-Frank. The grandfathered unitary thrift holding companies will be subject to capital adequacy requirements and will be subject to a statutory requirement to serve as a "source of financial strength." Branching powers will essentially be the same as for national banks.
At the same time, failing to be a qualified thrift lender subjects the institution to a prohibition (with some exceptions) against paying dividends and may subject it to enforcement. Also, the parent holding company must register as and be deemed to be a bank holding company (with the concomitant activities restrictions) within one year. Even conversion to a financial holding company, assuming the eligibility criteria can be met, does not yield asset powers as favorable as those enjoyed by a grandfathered unitary thrift holding company.
All the other disadvantages of a thrift charter vis-a-vis a national bank remain, including caps on commercial lending and nonresidential mortgage lending, prohibitions on making secured consumer loans, and holding commercial paper and corporate debt securities in excess of 35% of assets.
Another potential problem for healthy federal thrifts is their treatment under a new regulator unfamiliar with their culture. Notwithstanding the presence of former OTS personnel, thrifts may feel like second-class citizens at the Office of the Comptroller of the Currency.
Grandfathered unitary thrift holding companies enjoyed two advantages over bank holding companies (and even financial holding companies): no activities limitations, and no capital requirements. The first survives Dodd-Frank, but the second does not, because capital requirements will be imposed on all holding companies.
Under Gramm-Leach-Bliley, a qualifying bank holding company may elect to become a financial holding company and engage in any activity that is "financial in nature" or incidental or complementary to such activity. To qualify for these expanded powers, any depository institution subsidiary must be "well capitalized," "well managed," and rated "satisfactory" or better for Community Reinvestment Act compliance. In addition, Dodd-Frank has now layered the "well-capitalized" and "well-managed" requirements onto the financial holding company itself.
While significantly broader than the scope of activities permissible to "standard" bank holding companies, financial holding company "nonbanking" activities pale beside what grandfathered unitary thrift holding companies can do. They are not confined to activities that are "financial in nature," nor, for activities not already on that list, need they worry about seeking approval from the Federal Reserve or the secretary of the Treasury.
Moreover, the eligibility criteria for a grandfathered unitary thrift holding company are far easier to maintain, as the thrift the holding company controls essentially need only continue to meet the qualified thrift lender test.
In contrast with financial holding companies, grandfathered unitary thrift holding company status is not lost if the thrift institution subsidiary ceases to be well capitalized or well managed or receives a CRA rating of "needs improvement."
Failure to maintain qualified thrift lender status is the worst-case scenario, as it might require conversion of the grandfathered unitary thrift holding company to a bank holding company. It is difficult to imagine such a failure being beyond the control of the grandfathered unitary thrift holding company and the insured thrift, as compliance with the qualified thrift lender test is relatively easy to manage.
But failure to meet financial holding company eligibility requirements could well be entirely beyond the control of the financial holding company and its depository institution subsidiaries and carries with it potentially severe penalties, up to and including divestiture of activities impermissible for a standard bank holding companies.
To be sure, Dodd-Frank has somewhat devalued the grandfathered unitary thrift charter by imposing capital adequacy and "source of strength" requirements and potentially greater supervision with the interpolation of "intermediate" holding companies designed to separate their financial and nonfinancial activities. For now, the grandfathered unitary thrift holding company still offers more flexibility than the financial holding company variant. Moreover, since Gramm-Leach-Bliley there are no more unitary charters to be granted.
That means voluntarily jettisoning grandfathered unitary thrift status is a one-way street with no turning back.
