Unitary thrift holding companies - one-thrift parents that can affiliate with commercial and industrial companies - are under attack from House Banking Committee Chairman Jim Leach. On Tuesday, Patrick Forte, president of the Association of Financial Services Holding Companies, defended the unitaries. (See accompanying article.) Here are excerpts from his testimony.
The history of the affiliation issue is inextricably tied up with the history of the thrift industry, which can best be seen as a compact between the government and the industry.
In exchange for foregoing a diversified asset base and concentrating in residential lending as required by the tax code, thrifts received certain benefits including: a bad-debt loss reserve incentive; membership in the Federal Home Loan Bank System, with its low-cost advances, the ability to match funds, and a high dividend yield; and the right to affiliate with non bank entities through the thrift holding company structure.
Congress has consistently refused to disturb the unitary thrift holding company affiliation authority. In 1968, Congress restricted the permissible activities of multiple savings and loan holding companies, but left intact the ability of unitary holding companies to engage in commercial and industrial activities through the use of affiliates.
Two years later, when the Bank Holding Company Act Amendments became law, Congress again declined to restrict the authority so long as the unitary holding companies did not engage in any activity that threatened the safety and soundness of the underlying insured institution.
In 1987 and 1989, when Congress passed landmark legislation in the Competitive Equality Banking Act and the Financial Institutions Reform, Recovery, and Enforcement Act, it again wisely left intact the unitary thrift holding company ability to affiliate.
One of the major lessons of the 1980s was that concentration of assets whether by type of loan (e.g. oil or real estate) or location (e.g. the Southwest or Northeast) is potentially lethal for financial institutions. The right to affiliate with noninsured institutions serves as an important counterbalance to the high level of concentration in residential lending required to meet the qualified thrift lender test.
In February 1995, the association commissioned an independent study of the thrift holding company experience. That study found that the preponderance of evidence suggests that commercial firms should continue to be permitted to acquire control of thrifts.
Among the reasons for that finding was the lack of evidence that a holding company or a holding-company affiliate caused thrifts to fail. Thrifts controlled by a holding company failed less frequently and precipitated smaller losses than independent thrifts.
The sound record of the unitary thrift holding company structure is not accidental. A significant reason is that the OTS has the right of prior approval of any company seeking to acquire a thrift and can reject any proposed acquisition on grounds of potential harm to the thrift, the community in which a thrift conducts business, or the Savings Association Insurance Fund.
A more general reason is that commerce and banking, when conducted in separate affiliates within a holding-company structure and with appropriate transaction-with-affiliates safeguards, does not pose a problem for properly supervised insured-institution subsidiaries of the holding company.
It is also clear that the unitary holding company structure has produced positive benefits for both (the industry and SAIF). During the 1980s, when the thrift industry experienced dramatic losses and erosions in capital, a number of prominent commercial firms made investments (in thrifts) that prevented even larger losses to the insurance fund.
Insufficient capital was available for rescue purposes from the commercial banking industry; however, prominent commercial firms like Ford, Sears, Weyerhauser, ITT, Dana Corp., Household, and Temple-Inland acquired thrifts.
More than $2 billion was invested by these and other commercial firms in thrifts. Without their investments, the cost to the taxpayer would have been substantially higher. In addition, these companies were a significant source of management expertise, which substantially benefited the industry.
Not only has the unitary thrift holding company structure provided benefits to the industry and to the taxpayer, who ultimately stands behind the SAIF, but it has also provided consumer benefits. Holding companies can provide customers with a broad variety of financial services at a single location or through a single phone call.
The customer with multiple accounts with holding company affiliates can be treated as a single customer relationship thereby improving operating efficiency, reducing costs, reducing customer information errors, and improving the quality of credit decisions.
This is particularly important for low- and moderate-income customers, who traditionally have found it more difficult to obtain a full range of financial services from multiple providers.
There should be no concern that the thrift subsidiaries of unitary thrift holding companies have a competitive advantage. The clearest evidence of this is supplied by the marketplace itself. If there were such an advantage, then banks would be converting charters in great numbers.
It is no answer to say that grandfathering solves the problems identified above. For example, we are aware that today the very existence of section 104 is frustrating the recapitalization of a SAIF-insured institution with approximately $2 billion in assets.
Closing for the transaction had been scheduled for a date subsequent to the Jan. 4, 1995, cutoff date. The primary source of additional capital is an entity that, because of its varied commercial activities, would be precluded from acquiring control of the thrift by section 104.
If the recapitalization fails, then Federal Deposit Insurance Corp. and Resolution Trust Corp. experience suggests that the RTC could be depleted by more than $100 million, and perhaps as much as $500 million. If the date is changed to accommodate this transaction, what about similar, future transactions?
The association submits that the access to capital in commercial firms is so important a benefit that it should be preserved, not restricted.