Federal Charter Switch Is Thrifts' Best Bet

The thrift industry's lack of interest in switching to state savings bank charters comes as no surprise.

From the beginning, thrift executives viewed the charter flip with skepticism, and some executives are now considering a federal charter as an alternative.

The state savings bank charter was touted by state regulators as a way to avoid Office of Thrift Supervision assessment fees. But a charter switch now appears pointless since Congress is considering merging the OTS and the Office of the Comptroller of the Currency into one agency, the Federal Banking Commission. What is more, the cost of converting to a state savings bank charter is not cheap. The flip could easily cost $50,000 or more.

Regulation Is Going Federal

The conversion to a federal charter, on the other hand, makes sense and must be viewed as an attractive alternative. This is especially true if one embraces the belief that the future of banking regulation lies with the federal regulator.

And there's good evidence to support this belief. For starters, the keys to the Federal Deposit Insurance Corp.'s bank fund are held by the federal regulator, and decisions with respect to closing down or seizing a troubled thrift are not always made with the concurrence of the state regulator.

In fact, OTS has the authority to step in and issue a cease-and-desist order without the blessing of the state regulator.

Today, even the staunchest supporters of the dual banking system concede that it will be an uphill fight to halt the federalizing of this country's banking regulatory authority over FDIC-insured institutions.

It's a Cost Cutter

The most compelling reason to change to a federal charter is to save the time and expense of separate state and federal examinations.

In addition, many areas of bank operations - including permissible loans, equity investments, minimum regulatory capital levels, and limits on loans to one borrower - are controlled by federal law. Determination of compliance should properly be the work of examiners from the appropriate federal agency: the OTS or the FDIC.

Many states have examiners who possess a working knowledge of OTS and FDIC regulations. However, the interpretations of federal regulations that are rendered by state examiners are just that, interpretations.

Granted, the interpretations of examiners from the federal agencies may not be the only ones that stick, but they are the ones that spell the difference between compliance and regulatory violations.

The members of the banking world need no introduction to the Truth In Lending Act, the Equal Credit Opportunity Act, the Fair Housing Act, and other consumer laws and regulations of federal original.

Here again, the compliance examination conducted by the federal examiners is the one that carries the greatest weight.

Even with the Community Reinvestment Act, the state regulator has nothing to do with the determination of CRA rating. In 1977, Congress placed CRA regulatory jurisdiction at the federal level.

The Power of a Myth

In recent years, there has been a growing public misperception that the word "Federal" in a thrift institution's corporate title ensures that that particular institution, apart from other thrifts, is backed by the federal government.

In reality, of course, the deposits of these institutions were always backed by the federal government, regardless of whether the institution was state or federally chartered.

Nevertheless, some customers construe the word "Federal" in an institution's name as indicating that the institution is a safer and sounder place to make deposits.

No Longer Works

The dual banking system served this country well for more than 100 years, but not anymore. And there once was a time when state and federal regulators worked together to serve the public good. But that is also no longer the case. The savings and loan debacle has changed all of that, with state and federal regulators pointing fingers and blaming each other.

Federal deposit insurance is important for the preservation of public confidence in banking. Yet state regulators have nothing to do with decisions affecting the FDIC insurance fund.

The federalizing of the banking system is sure to escalate in the years ahead.

The American taxpayer does not want to pay for another savings and loan type cleanup, and Congress will therefore thrust more enforcement authority upon the federal banking regulatory agencies.

In the process, the authority of the state regulator will sink even lower.

Mr. Zadworny is a senior vice president of Roma Federal Savings Bank, Trenton, N.J.

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.