WASHINGTON - Savings and loan executives argued Wednesday that the Office of Thrift Supervision should withdraw a proposal requiring state-chartered thrifts to maintain membership in the Federal Home Loan Bank System.

In a public hearing at OTS' Washington headquarters, the S&L managers charged that the agency was holding them hostage. The 12-bank system has 3,200 members and acts as a liquidity source for the industry.

A law passed in 1989 requires federally thrifts to buy stock in one of the 12 Home Loan banks to help pay for the bailout of the industry's deposit insurance fund. But Congress neglected to mention state-chartered institutions in the law.

Correction Was Proposed

Last March, in an attempt to correct the oversight, the OTS proposed a regulation that would force state-chartered S&Ls and thrifts to buy stock.

In the meantime, it has blocked several attempts by state-chartered S&Ls who have become disillusioned with the system to cash out of their stock holdings. One big source of discontent is a large drop in the dividends paid by the banks.

"We are being forced to support a system that no longer serves our needs," testified Raymond Perry, president of state-chartered Wauwatosa Savings and Loan in Wisconsin, which has tried unsuccessfully for the past three years to quit the system. In 1990, the regulators threatened to yank the S&L's deposit insurance if it quit.

Wednesday's hearing was conducted by a five-member OTS panel headed by the agency's director, T. Timothy Ryan. The panel members seemed concerned that a lifting of membership requirements would lead to the collapse of the bank system and rob the S&L bailout effort of some $300 million a year that comes from Home Loan bank earnings.

"There is a safety-and-soundness issue for even letting a portion of the institutions leave," said Jonathan Fiechter, deputy director for the OTS' Washington operations. "If a lot of good thrifts choose to leave . . . you get into a death spiral."

An All-or-None Approach

Philip Conover, deputy executive director of the Federal Housing Finance Board, which regulates the banks, said the only way state-chartered S&Ls should be permitted to leave was if all S&Ls were given permission to leave.

"If state-chartered savings associations are allowed to withdaraw from the system, these assessments [for the S&L bailout] will impose an even greater burden on the remaining members," he said.

David Holland, an S&L executive testifying for the Savings and Community Bankers of American, doubts an exodus will take place if S&Ls are given a choice.

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