As the thrift industry's leading federal regulator, Jonathan L. Fiechter has a unique position from which to evaluate legislation that would force a merger of the thrift and banking industries. Though Mr. Fiechter, the acting director of the Office of Thrift Supervision, supports changes in the thrift charter, he opposes the broad approach being taken in Congress.
Following are excerpts from congressional testimony Mr. Fiechter gave last week in which he criticized attempts to require federal thrifts to convert to bank charters by Jan. 1, 1997.
The OTS fully supports reforming the thrift charter. The combination of the qualified thrift lender test, which forces thrifts to concentrate their lending and investment activities in residential mortgages, with barriers to thrift institutions converting to commercial banks, has caused problems at some thrift institutions.
Commercial banks have greater ability to alter their lending and investment activities in response to shifting market conditions. The typical thrift, by contrast, has an infrastructure geared toward residential mortgage lending and must remain in this market in both good years and lean years.
Arguably, in the past, the disadvantages of forced specialization by thrifts in home lending were offset by a number of regulatory benefits, including liberal branching authority, the deposit rate ceiling differentials, support from the Federal Home Loan Bank System and Federal Home Loan Mortgage Corp., and favorable tax treatment.
But in the last 15 years, virtually all of these benefits have either been eliminated or shared with competitors. Once the Savings Association Insurance Fund is fully capitalized and the funding of the Financing Corp. bonds are resolved, the barriers to thrift institutions converting to banks should be removed.
I strongly recommend that charter reform legislation be developed in a careful and deliberative manner. Before we modify or abolish the thrift charter, we need to define our objectives and make certain that the "solutions" meet the objectives.
I believe the first objective should be to preserve the safety and soundness of today's thrift institution in order to protect the insurance fund. A second, and more ambitious, objective is to create a flexible and competitive charter or set of charters that will allow all insured depository institutions to retain and better serve their retail and corporate customers.
The merits of any charter reform proposal should be measured by these standards. There are at least three alternative charter reform approaches.
One option is what I refer to as the "free market" approach. This involves reducing, but not eliminating, the mortgage concentration requirement for thrifts without altering other aspects of the charter.
If combined with eliminating the current tax barrier to thrift-to-bank conversions, then market forces could dictate charter type by permitting institutions' boards of directors to decide for themselves whether to continue in the thrift business or become commercial banks. It avoids the government substituting its judgment for that of the market.
Another option is to force thrifts to become commercial banks and, subject to limited grandfathering, relinquish activities and powers that go beyond those permissible for national banks. This is the approach taken in the legislation.
A third approach would be to develop a new charter that incorporates the best of both the commercial banks and thrift charters.
I am concerned that Option 2 may be the least desirable. It is not obvious that conversion to a bank charter would improve the financial performance or safety and soundness of the typical thrift institution.
I do not intend to suggest that, on balance, the current thrift charter is better than the national bank charter. National banks are not lining up to convert to federal thrifts.
The forced mortgage concentration requirement of the thrift charter may be problematic in highly competitive markets. But for institutions that are located in markets where specializing in mortgage lending is still attractive, the thrift charter offers distinct advantages. This prompts two important questions.
First, will the cause of financial modernization be advanced or hindered if we eliminate the federal thrift charter, without simultaneously modernizing the national bank charter?
Second, in an era in which the Congress, the administration, and the banking regulatory agencies are seeking to eliminate unnecessary regulatory constraints on depository institutions, does our financial system benefit from eliminating a charter option that offers certain advantages over the current bank charter? Forced conversion from a thrift to a bank charter may strip thrift institutions of operational flexibility without conferring any meaningful offsetting advantage.
If forcing thrifts to convert to commercial banks does not meet a market need, we risk weakening rather than strengthening our system of depository institutions. The commercial lending market is very competitive. It is also a market that is built around personal relationships. Thus, it will prove difficult for most thrifts, with their mortgage lending background, initially to compete in the commercial lending arena.
I have seen no evidence to suggest that our country needs 1,500 additional commercial banks. In fact, a number of studies conducted over the years have concluded that the regulatory framework governing today's commercial bank charter is outmoded.
Many of the outdated restrictions referred to above do not apply to thrifts. Thus, it is not clear that simply forcing thrifts to adopt a commercial bank charter will strengthen insured financial institutions and reduce risks to the FDIC.
Thus, Option 2 does not fare well under the first objective I articulated above - preserving safety and soundness. Moreover, Option 2 would not result in a more flexible and competitive charter for banks or thrifts. Indeed, it could impose significant initial costs on existing thrift institutions. Thus, Option 2 also does not fare well under the second objective - enhanced flexibility and competitiveness.
In my view, Option 3 is the best approach. Option 3 would combine the best aspects of the thrift and bank charters.