WASHINGTON — Thrift owners are about to get a lot more attention from federal examiners.

Office of Thrift Supervision Director Ellen Seidman is retooling the agency’s approach to supervising the 173 diversified firms that own thrifts as a sideline to their main business. Less than half their net worth and earnings come from the thrifts, which hold a collective $10.36 billion of assets.

Among the companies targeted for closer oversight are Merrill Lynch & Co., E-Trade Securities Inc., American International Group Inc., General Motors Corp., Archer Daniels Midland Co., and Federated Department Stores Inc.

“We cannot look at these new thrifts in isolation,” Ms. Seidman said. “We must look at the risk posed by the entire organization.”

The agency’s more vigorous approach will include prior notification of significant transactions by the parent, tougher capital requirements, and on-site exams.

In an interview, Ms. Seidman said the agency’s plan reflects a shift in the way thrift holding companies operate.

Until the 1990s, a thrift holding company’s dominant asset was its thrift. The few insurance or commercial firms that owned thrifts gave them significant autonomy, providing the institutions with their own boards and managers. Government examiners could safely confine their reviews to the thrifts, without having to scrutinize the operations of the parent.

But today things are quite different.

“Unlike traditional thrift holding companies, many of these new holding companies have formed thrifts that are highly integrated with the activities of the parent company and are highly dependent upon the parent company for financial and managerial resources,” Ms. Seidman said in a speech last month.

The agency’s holding company oversight has been evolving for months, Ms. Seidman said, and the next step will be a proposal to require that parent companies notify the OTS before issuing debt, pumping up assets, or trimming capital. The proposal is still being written, and Ms. Seidman said she expects it will be released “within a few months.”

“The proposal, if adopted in its current form, would require prior notice from many savings and loan holding companies and non-thrift subsidiaries before they renew, guarantee, or issue substantially more debt, and before they enter into a significant transaction that would markedly increase consolidated assets or reduce capital below a specified level,” Ms. Seidman said in the speech.

“We have felt that where there are big enough deals, because of the size of the deals or the manner in which they are financed, they could have a major impact on the thrift,” she explained in the interview.

Ms. Seidman cited the hypothetical case of a thrift holding company which, convinced that smart card technology was on the verge of wide acceptance, decided to go deeply into debt to buy a chip manufacturer. If another technology won out, and the investment was a bust, Ms. Seidman said, the holding company could look to the thrift for a bailout.

“The problem is the holding company is loading up on debt that it expects the thrift to help pay off, that debt can have a serious impact on the thrift,” Ms. Seidman said.

By requiring advance notice of any significant transactions, Ms. Seidman said she actually expects to shorten the time it takes the agency to approve deals. That’s because the agency will be fully aware of the parent’s operations and will need less time to evaluate new moves.

The OTS does not have a standard capital requirement for holding companies, and it is unlikely to adopt one. But, Ms. Seidman said, the OTS will set capital standards on a case-by-case approach. The agency’s decisions, she said, will be guided by factors such as the holding company’s risk profile, the extent to which parent and thrift share staff, the amount and nature of transactions with affiliates, and the nature of the thrift’s operations.

“Our overall objective is to use consolidated holding company capital as a tool that can be ratcheted up or down, on a case-specific basis, to ensure that an appropriate equity buffer exists to shield the thrift from an unexpected problem at the parent,” Ms. Seidman said in her speech. “We are also prepared to take aggressive measures to establish appropriate firewalls to insulate the thrift from a parent that is in a distressed financial condition.”

Ms. Seidman is also advocating what she calls “risk-focused, joint holding company and thrift on-site safety and soundness examinations.”

To determine how much time parent company executives will need to spend with examiners, OTS will look at the company’s assets and activities, at whether it performs core functions for the thrift, and at how dependent the thrift is on the parent. The riskier a parent company’s operations are, the more closely they will be examined.

To assess a parent company’s risk, Ms. Seidman said, the OTS will look at its activities, assets, and financial strength. The agency will also look at whether it performs core functions for the thrift, acts as a major source of funding, or conducts numerous transactions with the thrift.

Thrift holding companies may wonder why Ms. Seidman, a Democrat, is tackling such broad reforms in the midst of a presidential election year. “I do not think that safety and soundness is an issue that is political,” she said. Her five-year term ends in October 2002, and she said she intends to complete it.

“Because the operations of the thrifts and their holding companies are today often far more integrated than in the past, this old approach is no longer enough,” Ms. Seidman said.

“These new companies have forced us to develop a new, more comprehensive approach.”


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