The thrift industry can't seem to catch a break.
Small banks received special attention — and critical relief — in the Dodd-Frank Act and proposals tied to Basel III. Both include new minimum capital ratios, but banking companies with less than $500 million of assets are exempt from those requirements.
Small thrifts weren't as lucky. Holding companies for savings and loans with $500 million or less in assets were excluded from the capital exemptions embedded in Dodd-Frank and Basel.
A similar issue has surfaced with the Jumpstart Our Business Startups Act. The law lets more banking companies deregister as public companies, providing a way for them to lower regulatory costs.
The JOBS Act specifically uses the word "bank," leaving thrifts out in the cold. Some industry observers believe the slights are unintentional, though they concede that they perpetuate the view that federal regulators would prefer to see an end to thrift charters.
"The level playing field is tilted way against the S&Ls," says Doug Faucette, a lawyer at Locke Lord who advises mutual thrifts. "This was allowed to go through without anyone screaming foul."
While the omissions threaten a small number of thrifts, it is another example of how the industry is unfairly neglected, if not repeatedly harmed, by regulatory indifference or hostility, says Kip Weissman, a partner at Luse Gorman Pomerenk & Schick.
"Thrifts had a good record of not doing subprime lending, but they had to pay higher insurance premiums as a result of the financial crisis," Weissman says. "After all that, Congress forgets them on banking statute after banking statute."
New minimum capital requirements in Dodd-Frank and Basel III limit capital raising by requiring thrifts owned by savings and loan holding companies to report consolidated financials at a holding company level, Faucette says. Before, those holding companies often took on debt, then leveraged the capital "downstream" to their thrifts.
"The minute you're required to consolidate, your capital vanishes," Faucette says. "A possible avenue for S&Ls to raise capital has been totally choked off."
The capital exemptions do not pose an immediate threat, but they could create problems down the road, says Don Jennings, president and chief executive of Kentucky First Federal Bancorp in Hazard. The $220 million-asset company has "a level of capital where we don't worry about it too much."
"It's a theoretical problem, not an actual problem," says Jennings, who is more concerned about the JOBS Act's failure to let small thrifts deregister. Kentucky First has no immediate plans to deregister, but "it is something that we might like to consider in the future."
Most thrifts are aware of the issues, but there is little they can do about them, says Jim Fleischer, a lawyer at Silver, Freedman & Taff. Some thrifts may end up with insufficient capital but "it's going to be another regulatory violation. OK, next? You can't get blood out of a stone."
Still, there is a degree of optimism that lawmakers will fix the errors this year, though intervention is far from a guarantee, Weissman says.
The JOBS Act's original sponsors — Reps. Steve Womack, R-Ark., and Jim Himes, D-Conn. — sent a letter to the Securities and Exchange Commission in November asking the agency to treat savings-and-loan holding companies "in the same manner as bank holding companies." The letter noted that the sponsors never intended to treat thrifts "differently from bank and bank holding companies."
The SEC's staff is "aware of the concerns … and will carefully consider your thoughts in connection with [the SEC's] ongoing JOBS Act implementation effort," Mary Schapiro, the SEC's former chairman, wrote in a Dec. 13 letter to Womack. The legislator was "less than pleased" with the response and "will continue to stay on the SEC," says spokeswoman Claire Burghoff.
No one has a clear view of how regulators will enforce Dodd-Frank's provision on capital requirements. In April 2011, the Federal Reserve Board sought public comment on how to enforce the law's consolidated capital requirements.
America's Mutual Banks, a trade group led by Faucette that represents mutual thrifts, submitted a letter highlighting its concern that thrifts would not receive the same exemption as small banks, and other concerns. The public comment period closed May 23, 2011.
The Office of the Comptroller of the Currency, which regulates thrifts, and the Fed declined to comment for this story.