The Office of Thrift Supervision is using the availability of federal capital programs as a bargaining chip to strengthen its oversight of holding companies.
The regulator has been asking companies that want funds from the Treasury Department's Troubled Asset Relief Program to sign a pledge that they will give subsidiary thrifts as much capital and "managerial assistance" as the OTS deems necessary. Signing is a prerequisite — though not a guarantee — for the agency to recommend a company to the Treasury for Tarp.
The original version of the agreement, which began circulating in January, was considered particularly onerous, in large part because of language that lawyers said would make executives and directors personally liable for violating the terms.
After an uproar, the OTS removed that language and other passages from the agreement that the industry found troublesome. Thrifts that initially balked now say they intend to sign it. But the agency also expanded the scope of the agreement. It now remains in effect as long as a company participates in Tarp, or the Federal Deposit Insurance Corp.'s debt guarantee program — or any "successor" to Tarp.
Such programs have created "an opportunity to get S&Ls to agree to this when they would otherwise not agree to it," said David Baris, the executive director of the American Association of Bank Directors. "We thought money was going to be available under Treasury's program if a bank was healthy, not if the holding company agreed to keep the capital at the thrift forever adequate," he said.
But Tarp has given the OTS "a pressure point they are asserting to get holding companies to agree to it," Mr. Baris said. A company would not "agree to an open-ended obligation without getting something in return. And what they are getting is qualified support from OTS to carry their application for Tarp money forward."
The OTS said it has also asked companies that already received Tarp funds to sign. The agency said it has a long-standing practice of requiring thrift holding companies to act as a source of support for subsidiaries. The agreement is a way of ensuring regulated institutions are clear on the agency's expectations, it said.
"We wanted to make it explicit that since these companies would be receiving support from the government they would be expected to support subsidiary institutions," said Timothy T. Ward, the deputy director for examinations, supervision, and consumer protection at the OTS.
The OTS' expectations are written in thrift holding company handbooks and parent companies that have been around for a long time know it is policy, Mr. Ward said. But new thrift holding companies, either those that formed in recent years or that have acquired thrifts during the downturn, may not have known about it, he said. (A spokesman for the OTS said it asked all thrift holding companies applying for government support — not just the young ones — to sign the agreement because the agency wanted to be consistent.)
"You have a lot of new companies that have been coming in to acquire thrifts," said Diane Casey-Landry, the chief operating officer of the American Bankers Association. "If someone is buying or looking at a thrift and has challenges in other parts of the company, then the OTS wants them to give the capital that is needed to the thrift."
The insurers Hartford Financial Services Group Inc. and Lincoln National Corp. were among those approved in January to acquire troubled thrifts. None of the insurers have been approved for Tarp funds.
The original version of the agreement said it was "legally binding," and cited the section of the Federal Deposit Insurance Act that authorizes regulators to take enforcement actions. Critics said this essentially raised the agreement to the level of an enforcement action.
"That means if the agreement is breached, then the directors and senior officers are potentially liable for civil money penalties," Mr. Baris said. The passage, which the agency ultimately removed, "is saying whatever the OTS wants, the OTS gets, and is obligating the company to that."
T. Alan Harris, the principal of Harris Law Firm PC in Houston, said the language of the new agreement is still worrisome because "it could be interpreted to include other [government] programs that are created in the future. The open-endedness of that is a concern."
But he said the new agreement is more palatable than the old one. "Even though I am still a little wary of the agreement, because it does create a greater obligation for the holding company than they have under existing law, I would advise an institution that really wanted to get Tarp funds that the potential risks don't so exceedingly outweigh the benefit," he said. "I think what I will tell a client is even though the agreement is not without risk and has some ambiguity and open-endedness, I wouldn't be adamantly opposed to them signing like I was before."
The original agreement also had no expiration date. The revised one expires when the thrift holding company is no longer participating in federal programs.
John C. Roman, the president and chief executive of Naugatuck Valley Financial Corp. in Connecticut, said that change was important to him. Because the Tarp term sheets for mutual holding companies such as Naugatuck have not been released yet, Mr. Roman said he was hesitant to sign an agreement that might remain in place even if his $525 million-asset company ultimately decided not to participate in Tarp.
"If we signed the agreement and didn't get Tarp, then" it was not clear to Naugatuck "if the agreement would survive," he said. "These clarifications help."
Tom Schneider, the president and CEO of the $350 million-asset mutual holding company Pathfinder Bancorp Inc. in Oswego, N.Y., said he too had concerns with the initial agreement's lack of an expiration date and had asked the OTS for clarification. But with that point changed, he said, he plans to submit a signed copy of the agreement to the agency.
"Generally speaking, we have no difficulties with the agreement," he said. "It was good to put some time frames on the agreement."
Still, Mr. Schneider said, if this was already a policy, he does not see the need for the agreement. If the OTS does want it to be a known official policy, it should make that happen, he said.
"It would make sense to me that if it is a policy, that it be applicable and go through normal mechanisms of policymaking, instead of being only applicable for certain organizations and programs that haven't even come into fruition yet," he said.
Mr. Ward of the OTS agreed that reiterating the regulator's expectations for all its regulated entities would be a logical next step.
