The advantages and disadvantages of converting to a commercial bank
With the Office of Thrift Supervision seeing its last days on earth, what will become of the thrifts themselves?
The Dodd-Frank Act stipulated that the Office of the Comptroller of the Currency would be the new regulator for federally chartered thrifts, and thrift holding companies would be governed by the Federal Reserve, starting July 21.
The savings and loans can keep their thrift charter, or they can convert to commercial banks or bank holding companies. Office of Thrift Supervision examiners will be kept on hand to provide a transition in regulation. The OCC last week said thrifts and banks will be charged the same regulatory assessments based on size; some thrifts will find themselves paying more and some less.
Keith Fisher of Ballard Spahr in Washington, D.C. is one attorney who thinks many federal thrifts will convert to banks.
“Over the next 10 years, I would be surprised to see there were many thrifts left at all,’’ he says.
He thinks there are more reasons for thrifts to convert to commercial banks than drawbacks. For one, they can get rid of limitations on the types of loans they can make (thrifts must keep 65 percent of portfolio assets in qualified loans— mostly residential mortgages).
With periodic residential housing booms and busts causing hardship and failure for so many thrifts, Fisher thinks some thrifts will be attracted to the idea of branching out, say into commercial and industrial loans. The OTS supervised 724 thrifts at the end of March, 114 fewer than it did at the beginning of 2007 (another thrift failed last month, the $129.4 million-asset Coastal Bank of Cocoa Beach, Florida).
Plus, there’s the potential for thrifts to suffer the consequences of being “a stranger in a strange land” at their new regulatory home.
“I’ve spoken to the OTS people and they don’t think (thrifts) will be treated as equals,’’ he said.
The drawback is that federally chartered banks expanding into other states have to submit to each state’s rules on branching, unlike thrifts. Plus, thrifts will have to learn how to handle hugely different lending categories and funding mixes.
For institutions that have savings and loan unitary holding companies, the decision to convert will be more complicated. Bank financial holding companies were created by the Gramm Leach Bliley Act of 1999 to allow banks to engage in activities that formerly were forbidden, such as underwriting and selling insurance, selling securities and merchant banking. But those institutions and each depository institution must be well capitalized, well managed and maintain a satisfactory Community Reinvestment Act rating.
The consequences of failure to do so can be dire: The Federal Reserve can come up with new rules for the holding company and if the holding company doesn’t agree, it could be forced to sell assets.
“This is not a one-size-fits-all,’’ Fisher says. “There are a lot of thrifts that will say: ‘We like being a community institution and we’ve been profitable and we’d rather not rock the boat.’ Yes, I think they’d be well advised to stick to their knitting and continue what’s been working for them. But some may have been hampered by the fact that (qualified thrift lending) keeps them constrained. They might be persuaded to at least consider conversion.”
(By the way, Fisher actually defends banks in real life and in the movies. He plays the defense attorney in Cleveland vs. Wall Street, a fictionalized account of a real lawsuit where the city of Cleveland sued 21 banks in 2009 to try to hold them accountable for the foreclosure crisis. The movie opened at the Cannes Film Festival last year and Cleveland last month and has been released on DVD in France. It hasn’t opened in other cities or been released on DVD here yet. The real lawsuit by the city of Cleveland was dismissed before it ever got to trial).