National trade groups are supporting a government plan to streamline approvals for state-chartered banks seeking to develop real estate and underwrite insurance.
The Federal Deposit Insurance Corp. proposal would reduce the regulatory burden on state banks and give customers new products without placing the deposit insurance funds at risk, wrote Neil Milner, president of the Conference of State Bank Supervisors.
The Independent Bankers Association of America disputed a few details but said it "fully endorses" the proposal's overall reduction of red tape.
However, many banks in Massachusetts strenuously objected, saying in comment letters due last week that the proposal jeopardizes millions of dollars in tax breaks and violates the 1991 thrift bailout law.
The FDIC proposal "would be extremely burdensome and costly," wrote William F. Howard, president of Beverly Co-operative Bank.
Objections primarily were focused on a requirement that banks deduct from capital any investments in subsidiaries that hold corporate equities.
Massachusetts taxes investment subsidiaries of banks at a rate of 1.32% instead of the regular bank tax rate of 11.32%, according to the Massachusetts Bankers Association. As a result, most banks in these states hold securities in subsidiaries. This practice was legitimized in the 1991 thrift bailout law, which exempted these institutions from an overall ban on holding securities in bank portfolios without regulatory approval.
However, the FDIC proposes to punish institutions that do not hold securities directly in the bank by making them deduct the capital investment, the Massachusetts bankers complained.
"A bank with an investment subsidiary holding equities would have a significant reduction of Tier 1 capital, with a major impact on an institution's capital evaluation," wrote V. James DiFazio, president of Ipswich Co-operative Bank.
Instead, the banks argued that the grandfather clause in the 1991 law prevents the FDIC from penalizing them for holding securities in subsidiaries.
More than 100 bank investment subsidiaries in Massachusetts collectively hold at least $10 billion in debt and equity investments. Similar grandfather clauses affect banks in Connecticut, Maine, and New York. These bankers should also be concerned, said Charlotte M. Bahin, regulatory counsel for America's Community Bankers.