Thrift Charters: Now You See Them, Maybe Tomorrow You Won`t

The fate of the venerable thrift charter and its companion, the unitary thrift holding company, is the hot topic of the day for many constituencies. Among them:

• the Congress
• the Office of Thrift Supervision (OTS)
• all of the banking organizations (American Bankers Association, Independent Bankers Association of America, and Americas Community Bankers)
• the board rooms of most insurance companies and investment banking firms
• the Federal Reserve.

First let me define some terms. A unitary thrift holding company is any corporation that owns a single thrift. Why is it of such interest today? The reason is because the law now allows financial companies to own a deposit-taking institution without becoming a bank holding company. And because a thrift charter allows its owners to do almost everything commercial banks can do (and lots of things they can’t do) it is a very attractive financial entity in which to invest and operate, particularly if you’re unable to obtain a bank charter because of bank holding company restrictions. But taking a more global view, why are all these folks mentioned above so interested in unitary thrift holding companies? Let’s take a closer look.

The Congress is interested in thrift charters because it’s an enormous issue in the whole debate this session on financial modernization. Politicos are trying to grasp the effect that the fate of thrift charters would have and determine whether this special breed of institution should be terminated, grandfathered, or whether the status quo should be maintained. Also Congress wants to make the decisions on the future of financial institutions rather than allow the regulators to call the shots, because Congress can’t pass a financial modernization bill.

At the Office of Thrift Supervision (OTS), to put it bluntly, it’s a matter of life or death. If the thrift charter is eliminated, as the Treasury proposes, OTS goes out of business. In fact, the bill being considered by the House Banking Committee folds OTS into the OCC.

At the banking organizations, a primary interest in modernization is to create one financial institution charteru00e2u20ac”with no special privileges accorded to thrifts (i.e. Glass Steagall; bank holding company rules don’t apply, etc.) These organizations are vying for a level playing field, and if you eliminate the thrift charter, the field is virtually flat. Of course, America’s Community Bankers (ACB) favors continuing thrift charters because that is their primary membership. Without them, ACB would simply be another IBAA representing smaller banks. Their membership also includes many big banks that own thrifts.

As for the life insurance and investment banking industries, the thrift charters they own, and the hundreds of applications for charters for which they have filed, are necessary to allow them to be in the deposit-taking financial business. Interestingly, under today’s rules, the banks can buy investment banks and insurance companies, but the investment banks and insurance companies cannot buy banks. If financial modernization were to be passed in Congress, the bank holding company rules would be changed, permitting these businesses to own banks without becoming a bank holding company. Thus, their interest in maintaining the thrift charter would be reduced. But that’s a lot of “ifs,” and for now, insurance companies and investment banks view owning thrifts as a “bird in the hand,” in the battle to compete with banks.

At the Federal Reserve, the thrift holding company issue is a direct attack on its ability to separate commercial companies from the financial companies (the basic reason the holding company statutes were enacted). Because the Fed’s principal regulatory role is supervision of bank holding companies, its turf would be reduced if thrift holding companies escape its controlu00e2u20ac”as they do under today’s rules. In the legislation presented to the House by the combined House Banking and Commerce Committees early in March, however, it was proposed that the thrift charter be eliminated for all those that are not grandfathered and that the Fed would control thrift holding companies. (That bill was recommitted by the Rules Committee.)

So the battle is on, and the future of the thrift charter is at the center. We’ll just have to see whether financial modernization legislation is actually enactedu00e2u20ac”but with Congress’s track record, I wouldn’t give it any better than 50/50 odds. As I’ve said so often, “Stay tuned.”