June 30, 2009 at 4:52 pm Leave a comment

       The United States Department of the Treasury’s recently released “White Paper” has buzzed around for the past two weeks, with most talk about the paper focusing on the proposed expansion of the Federal Reserve’s regulatory authority and the proposed creation of a consumer protection regulator.  While these topics probably deserve to receive most of the attention in the mainstream media, the White Paper is loaded with other proposals that, if adopted, would drastically shift the current legal framework in the community banking industry.   Over the next few days, we intend to post several items to this blog that discuss some of these less-heralded proposals.  Today, we are posting about the White Paper provisions that would affect the regulatory balance between federal and sate charters.  Some of these include:

        Elimination of the federal thrift charter.  According to the White Paper,

    • The federal thrift charter is a relic of a bygone era.  While federal thrifts were necessary to stabilize the housing market in the 1930s, securitization markets, commercial banks and the Federal Home Loan Banking System have supplanted federal thrifts as the key engines of the mortgage market, rendering federal thrifts unnecessary.
    • Because federal thrifts are required to focus their lending on residential mortgages, they were more vulnerable to the current housing downturn
    • “Private sector arbitrage” has exploited the financial regulatory system, especially through the use of federal thrift charters for residential mortgages.  Eliminating the federal thrift charter would prevent such arbitrage.
  • Reduce the differences in substantive regulations and supervisory policies applicable to national banks, state member banks and state non-member banks.
  • Restrict the ability of troubled banks to switch charters and supervisors.
  • Eliminate barriers to interstate branching by national and state banks.
    • Eliminate states’ ability to prevent de novo branching across state lines
      • allowing banks to enjoy the unrestricted ability to branch across state lines (a privilege currently afforded only to federal thrifts); or .
      • imposiong minimum requirements on the age of in-state banks that can be acquired by an out of state bank.
    • All consumer protections and deposit concentration caps with respect to interstate banking would remain. 

            These proposals are ambitious.  Although the elimination of the federal thrift charter might be feasible, state regulators and community banking groups will greet any attempt by Congress to impose uniform chartering standards or to eliminate interstate branching barriers with skepticism  (at best) or open hostility (most likely). 

            The dual banking system is founded not only on basic principals of federalism, but also on the concept of regulatory innovation—i.e., the creation of effective and innovative regulatory policies and oversight that results from regulatory competition for institutions to charter.  Enactment of the proposals in the White Paper would reduce the concept of regulatory innovation to nothing more than a quaint afterthought.  On the other hand, if a uniform system of regulations would increase stability within the overall banking sector, it might be worth sacrificing some regulatory innovation.  Stay tuned.

Entry filed under: Uncategorized.

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