WASHINGTON - Despite skeptical lawmakers and a cold shoulder from some fellow regulators, Comptroller of the Currency John D. Hawke Jr. has turned up the heat on his campaign to bring exam fees for national banks in line with the lower fees paid by their state-chartered competitors.
For the past several months, Mr. Hawke and outgoing Office of Thrift Supervision Director Ellen Seidman have been making a presentation to trade groups and legislators on why the issue should be part of deposit insurance reform, and arguing that if the disparity is not resolved it could spell doom for the dual banking system. Congress has rejected such proposals in the past, and the Federal Deposit Insurance Corp. dodged the issue in its reform plan, but Mr. Hawke said in a recent interview that he is slowly winning over critics.
"As we've tried the idea out on policymakers around town, we are getting a very understanding and sympathetic response," Mr. Hawke said. "People say, 'Gee, there is really a problem here and something ought to be done about it.' And if it's not done in the context of deposit insurance reform, I don't see where the engine is that will pull that train."
Though industry officials acknowledged the disparity should be examined, they say they want hands-off deposit insurance reform.
"Politically, they are tilting at windmills," said Edward L. Yingling, chief lobbyist for the American Bankers Association. "If there were any attempt to put it in deposit insurance legislation, it would kill the whole bill. It is just way too controversial. Therefore, I do not think Congress will do it."
But the OCC and the OTS are giving it their best shot.
National banks pay the OCC for exams every year, while federally chartered thrifts pay the OTS. But state banks essentially pay half their supervision costs because they only pay state regulators, who conduct every other exam. The other half of exams are done free by either the FDIC or the Federal Reserve System. For FDIC-regulated banks, the cost of their supervision is taken out of the insurance funds.
The difference in exam fees can equal big bucks for banks and has caused several to switch charters in recent years. The OCC said the average annual assessment on a $500 million-asset bank would be $113,000 if it were a national bank but only $43,000 if it were a state bank.
The prospect of more defections has the OCC and the OTS worried, in part because the exit of a large institution could hurt their revenues. For example, if Bank of America were to switch to a state charter, the Comptroller's Office would lose about 10% of its assessment fees, which would require the agency to make major cost cuts and trim staff. For the OTS, a defection by Washington Mutual Inc., even before it completes its deal to merge with Dime Bancorp Inc., would have a similar impact - reducing its assessment income by 11%. Many state regulators face similar dilemmas.
That kind of vulnerability scares more than just the regulators.
"It is a matter of concern that 10% of operational revenues come from the fees for one bank," said Kenneth A. Guenther, president and chief executive officer of the Independent Community Bankers of America. "It does call out for a solution because it is not a healthy situation. But we do not want this tied in an integral way to deposit insurance reform."
Mr. Hawke and OTS Deputy Director Richard M. Riccobono argued in interviews that any charter switching should be based solely on powers or other legal advantages - not for the lure of lower assessment fees.
"What's wrong with the current funding system is the volatility we live with," Mr. Riccobono said. "Some institutions might shift charters because of exam fees and that is totally inappropriate. The regulation should be the same across the board. We have four banking regulators - two are funded from the assessments on institutions they regulate, and the other two get a free ride. It just doesn't make any sense."
Though attempts to charge state banks for their federal regulation have failed repeatedly on Capitol Hill, Mr. Hawke has devised a new plan that would use earnings produced by the FDIC reserve funds to pay supervision costs. That would mean that banks would no longer be charged for their exams, and the OCC, OTS, and state regulators would be reimbursed for their costs. (The Fed would continue to pay for its supervision through its open-market activities and would not be affected by the proposal.)
Mr. Hawke and Mr. Riccobono said that type of system would help resolve the inequity.
According to the OCC presentation, the supervisory costs for all of its banks last year amounted to $394 million, but the agency recouped almost all of that in the fees it charged banks. For state banks, the cost of federal and state supervision was nearly $1.1 billion, but state banks were charged only $160 million of fees.
Mr. Hawke said that if earnings were not enough to cover costs, banks would be assessed for the difference. But he pointed out that over the past five years the Bank Insurance Fund's investment income, which excludes any premium income, averaged 140% of the combined 2000 supervisory expenses of the FDIC, OCC, and state supervisors.
Though the fund's growth would be slowed because fewer earnings would be pumped back in, Mr. Hawke emphasized the reserve ratio would not be significantly affected because the cost of supervision would be taken from the earnings on the funds and not from the principal.
Moreover, he said that national banks deserve to reap some of the benefits from the fund because their deposit insurance premiums payments during the past decade contributed to it. The OCC report said that 55 cents for every $1 in the bank fund income spent on supervising FDIC banks comes from earnings derived from premiums paid by national banks.
"Part of the rationale for this is that the major purpose of supervision is really to protect the insurance fund against loss," Mr. Hawke said. "It is not illogical to have the fund bear the costs of that."
Mr. Hawke and Mr. Riccobono both argued that the plan should be a part of any deposit insurance reform bill, and should have been included in the FDIC recommendations issued in April. But outgoing FDIC Chairman Donna Tanoue has been adamant that the two issues be kept separate.
"The OCC's financial problem isn't a deposit insurance issue, it is a supervisory issue, and it has no place in deposit insurance reform," Ms. Tanoue said in a statement Tuesday. "As a supervisory issue, all four banking agencies should be involved in addressing it."
It remains to be seen if her successor will agree. Texas community banker Donald E. Powell, who is likely to be confirmed sometime soon, is a longtime national banker, as was FDIC board member John Reich. It is possible that those two may be more sympathetic to the OCC's concerns.
"I know Don very well, he's an old friend," Mr. Hawke said. "I don't want to speak for Don Powell, and the FDIC board has obviously not considered it yet. But Don certainly knows as a national banker what it means to pay the full cost of your supervision. He will have had, as John Reich does as well, firsthand experience with the issue. They have a broader set of issues to address but at least we will be talking to people who have a firsthand understanding of what this is all about."
Though state banking supervisors would also receive money from the insurance funds, industry representatives said it might come at too high a price.
"With federal dollars come strings, and my experience tells me it would be a more expensive, more burdensome regulatory system," said John Ryan, senior vice president of policy for the Conference of State Bank Supervisors.
"I think for the FDIC to take money it's supposed to use for protecting deposit insurance funds through its own regulation, and turning that over to someone else without conducting that supervision is probably an abrogation of its responsibility as an insurer."
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