WASHINGTON — The Office of the Comptroller of the Currency has reversed a policy allowing banking licenses for trust companies without deposit insurance, a change likely to further diminish interest in the federal trust charter.
The OCC had long allowed nondepository trusts to get charters without Federal Deposit Insurance Corp. approval if they had no deposits and were narrowly focused on trust-related business. Sixty-three uninsured trust banks fall under the OCC's watch. But an OCC official at a recent American Bar Association event revealed the agency is removing the special treatment for new entrants. Existing trusts will be grandfathered.
The move could mean more institutions are affected by a temporary freeze on FDIC approval for limited purpose charters that can be owned by commercial firms, although observers appear more confident the decision will force potential applicants to refocus on states that still do not require FDIC involvement. The decision also levels the playing field between national trust banks and thrift charters, which have always needed deposit insurance.
"I would love to see the OCC be more open to these sorts of entities because I think they serve a great purpose, and unfortunately I believe that what they're doing here will further restrict the number of charters that are issued and the number of people that are in the business," said Thomas C. Blank, a partner at Shumaker, Loop & Kendrick in Ohio and general counsel of the Association of Trust Organizations.
In a statement emailed to American Banker, the OCC said FDIC support offers protections if a trust needs to be put in receivership.
"In addition to other safeguards required by the OCC when a de novo" national trust bank "is established, requiring FDIC insurance provides additional safeguards that may be used to ensure an effective resolution of these institutions, if needed," the OCC said.
The agency added that even though it does not have plans to require existing OCC-chartered trusts to obtain FDIC approval, requiring deposit insurance "could be considered when an existing NTB files subsequent applications." Meanwhile, trust "subsidiaries of national banks are not required to get FDIC insurance," the OCC said.
But Blank, who said he heard about the policy change in February, expressed doubt that the FDIC will easily approve new bids. The agency has faced criticism from the industry for a scarcity of decisions on applications overall since the crisis, and the attorney said his initial contact with FDIC officials did not offer more clarity.
"One of my great concerns … is the FDIC may make a determination that they don't want to do this, or they're not going to do it unless they get significantly more [deposit insurance] premiums," said Blank, who had contacted the agency on behalf of a client who has since decided to abandon plans for a national trust charter. "At least the mid-level people I spoke to at the FDIC sounded unsure about what they would do if an application were filed for an organization like a nondepository trust company to get deposit insurance to allow them to become a national entity.
"The state charter in my mind is the route that almost any but the largest organizations will head to," he added.
While a bank account pays customers a stated interest rate, an institution offering trust services places a customer's funds in an investment vehicle where a trustee either manages the account or simply provides custodial services. Many banks offer trust accounts in addition to banking products, but the OCC had allowed charter holders to skip an FDIC application if the institution only provided trust services and did not offer deposit accounts.
The previous OCC policy had been in effect for about 20 years. Previously, it used to be the case that deposit insurance was automatic with any OCC charter, requiring no separate FDIC approval. But as a result of the thrift crisis, the deposit insurance agency began reviewing applications separate from the chartering authority. It was at that time the OCC started allowing trust banks to be uninsured.
The change could also subject nondepository trusts — which under federal law can be chartered by nonfinancial owners — to the same uncertainty facing other limited-purpose banks, including industrial loan companies. In debate over the 2010 Dodd-Frank Act, lawmakers had said the law would exempt nondepository trusts from a three-year moratorium that prevents the FDIC from approving applications of nonfinancial firms to create or purchase ILCs, other types of trusts and limited-purpose credit card banks. It is still unclear what policymakers will do when the moratorium expires in July. But some experts say the OCC's decision could put certain trust applicants in the same limbo as others.
An FDIC spokesman said the agency has not received any applications for limited purpose charters during the moratorium. (The FDIC declined to comment further for this story.)
Blank said the moratorium is not relevant since nondepository trusts generally are chartered by financial companies, but others were less convinced. Historically, there has been a mix of financial and nonfinancial companies receiving the OCC charter for trust banks.
Certain OCC trust applicants "can't get federal deposit insurance now because of the Dodd-Frank Act moratorium," said an attorney familiar with the OCC's policy change who asked not to be identified. "A financial company could technically avoid the moratorium, but other types of entities will potentially run into some obstacles. As a practical matter, the OCC's decision could drive all future applicants to the states."
Before Dodd-Frank, trusts with federal thrift charters regulated by the Office of Thrift Supervision had to obtain FDIC insurance as mandated by prior statute. But Dodd-Frank closed the OTS and authorized the OCC to supervise thrifts. Yet that resulted in certain trust companies facing disparate regulatory treatment over their deposit insurance status even though they shared the same regulator.
Observers said the OCC's rationale for the policy shift mirrors concerns the OTS had about the potential for needing to resolve a failed trust that lacked deposit insurance.
"My understanding is that there is a similar reasoning that the OCC gave for requiring deposit insurance," said V. Gerard Comizio, a partner at Paul Hastings. "Jurisdictionally, and practically speaking, the OCC is not equipped nor inclined to handle a potential trust company receivership."
Since the FDIC requires insured institutions to have deposits on their books, the OTS-regulated trusts had typically accepted a nominal deposit of around $500,000 from their parent company to be in compliance. Under the new policy change, new OCC-supervised trust institutions are expected to follow a similar approach.
Blank said the shift is the rare case of the OCC's adapting to former OTS policy.
"Most of the transition has been OTS regulations being morphed into OCC regulations, and the OCC regulations being imposed upon formerly OTS-regulated institutions," he said. "This is one where the OCC looked at it and took just the opposite opinion. They looked at what the OTS used to do and made a determination that they liked that concept because it would get out of them of the spotlight if one of these" institutions failed.