Although one of the first steps the conference committee took last week was to preserve the existence of the thrift charter in the final regulatory reform bill, the charter's days are likely numbered anyway.
The merger of the Office of Thrift Supervision into the Office of the Comptroller of the Currency will eliminate some of the key benefits of choosing the charter, and leave a single agency trying to enforce two different sets of rules, observers said.
Ultimately, many said they expect the thrift charter to fade away. "It's a little complicated with two different charters in one agency," said James Barth, a finance professor at Auburn University and a senior fellow at the Milken Institute. "It seems it's not a real complete merger. I would think down the road one would want to eliminate that distinction."
The future of the charter is just one of the difficulties stemming from the pending OTS-OCC merger, observers said, including how best to integrate the agencies' personnel, cultures and different supervisory approaches.
"It's not a question of the OTS," said Doug Faucette, a partner at Locke Lord Bissell & Liddell LLP. "That's a foregone conclusion; that's gone. The real question is then what will the attitudes and culture of the new agency be like."
Although the bill has yet to pass — conferees were slated to address some of the remaining issues surrounding the merger during their session today — implementation of the agencies' combination has already begun.
The OCC and OTS have both created transition teams with legal, human resources, supervisory and financial staff in an attempt to prepare. Both the House and Senate bills would give the agencies a year to complete the merger, allowing for an extension of up to six months. After the merger the OTS would officially be eliminated within 90 days. The Obama administration has hired McKinsey & Co. to assist with the transition.
While the OCC focuses on the day-to-day impact of the merger, however, observers are more concerned with the future of the thrift charter.
William Longbrake, an executive in residence at the University of Maryland and former vice chairman of Washington Mutual, said the new regulatory structure kills many of the benefits of the charter. For example, under current law thrifts face just one regulator for both their holding companies and subsidiaries.
Once the merger is complete, however, the OCC will supervise thrifts, while the Federal Reserve Board oversees their holding companies.
Moreover, the newly merged OCC is unlikely to treat national banks and thrifts in an inconsistent manner. That prospect has many wondering what the point of opting for a different charter would be.
"Part of the reason the thrift charter was retained by 700 institutions was because it was supervised by the OTS, and now that's gone," Longbrake said. "There are not really any advantages of the thrift charter anymore. The advantage was with the holding company, but if that goes to the Fed that takes away the advantage."
Observers speculate that many thrifts will convert to a national bank or opt for a state thrift charter. (State thrifts are regulated by the Federal Deposit Insurance Corp.) They see Hudson City Savings Bank, a $60 billion-asset thrift in Paramus, N.J., that converted to a national bank in March, as just the tip of the iceberg.
"Some institutions are saying, let's stay with the charter for the near term and see how that works out; others are saying since it's inevitable, let's switch to the bank charter now and get used to that," said V. Gerard Comizio, a partner in the corporate department at Paul, Hastings, Janofsky & Walker LLP and a former OTS staff member. "The smaller thrifts are less likely to aggressively seek to change charters. I think the larger thrifts are going to look very carefully. It's not going to be just a question of national bank versus national thrift. I think many are going to look at the state thrift charter as well."
Barth said most of the differences between the charters are gone anyway.
"I don't see why you'd want a federally chartered bank and a federally chartered thrift if they are doing basically the same thing," he said. "The argument has always been an institution that doesn't like its regulator can convert to a different charter. But why would one want to allow institutions [to be] a federal thrift or bank if you have the same regulator?"
But Diane Casey-Landry, senior executive vice president and chief operating officer of American Bankers Association, said it may make it easier to convert to a thrift. Previously, some may have seen that as a way to escape harsher supervision.
"The reality is that the having the same regulator might eliminate some of the doubts that now you are choosing the charter based on the business plan that you want to enact not on the regulator," she said.
Tom Vartanian, a partner at Fried Frank Harris Shriver & Jacobson, said that with no "large" thrift remaining — the OCC considers large banks those with assets of $100 billion or more — the OCC would view thrifts more like community banks.
Even if a flood of thrifts don't convert, sources said the new OCC will regulate them much more like banks.
"One of the problems will be since they are going to keep two charters, which I think is unfortunate, is they are going to have to figure out how to do the regulations of savings and loans more together with how national banks have been supervised," said Bob Clarke, a former comptroller now with Bracewell & Giuliani. "There are differences in how thrifts are allowed to operate, and the OCC will have to accommodate that. But I'd have to believe the OCC is going to move thrifts more in line with bank standards."
Although the bill suggests the OCC should form its own division to handle thrifts, Faucette said thrifts worry they will be treated as second-class citizens.
"Thrifts are afraid that OCC examiners will go to school on them comparing their operations to commercial banks unfairly," he said.
That banklike supervision treatment for thrifts is a big concern for thrifts, said Kip Weissman, a partner at Luse Gorman.
He said it's "naive" for thrifts to believe that just because their charter and OTS employees are being preserved, their treatment will be the same. He said examinations, regulations and enforcement will become more banklike.
"It's not only a fear; I think it's going to be a reality," Weissman said. "The good news is thrifts are much more similar to banks than they were several years ago. If this would have happened in 1990, this would have been a fiasco. The regulations themselves will probably not change for a while. Over time" thrifts "will become more banklike and will be enforced in a more banklike manner."
How well the two agencies will be integrated, however, remains a concern. Under the revised bill, OTS employees will be protected for three years. The bill allows the OCC to retain them or for their transfer to the FDIC for state thrift supervision, the Fed to oversee thrift holding companies, or the new consumer protection regulator.
Vartanian said the move to the OCC may actually be a benefit for OTS staff, many of whom are demoralized as a result of constant talk about the elimination of the agency. "If you are not in the business of having to defend your existence every day, it's likely going to be a relief," he said.
How the new OCC will deal with a sudden influx of staff — the OTS has more than 1,000 employees, compared with the OCC's 3,000 — is unclear.
Faucette said the agency is unlikely to lay off its own personnel, while the bill specifically protects OTS employees. "Generally speaking you'd expect in any merger the acquired employees would be the first to go," he said. "My point is this is not a corporate merger. In a corporate merger profits are everything. In the government there is no one looking at the bottom line. I just don't think there are going to be wholesale firings."
Longbrake predicted that for specialty areas such as risk management, staff will mesh, but the new OCC will have separate groups for legal, regulatory and examination teams, while senior management will integrate quickly.
Some expect the two agencies' distinctly different cultures to create problems.
"From the bankers' experience, there is the belief the OCC at least on credit has been far more precise, far more disciplined and far more demanding," Longbrake said. "On the other side, the OTS, because it's been more of a specialist agency on housing, it is more knowledgeable on that area than the OCC and more understanding on that activity."
This story has been reprinted with permission from American Banker.
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