Article: A Threat to Dual Banking
There is a sleeper provision in section 612 of the Wall Street Reform and Consumer Protection Act currently being worked on by a House-Senate Conference Committee that unnecessarily erodes the dual banking system that has been in place for almost 150 years.
The provision would ban banks from converting their charters if they are subject to a formal or informal administrative action, regardless of the reasons or whether a conversion would be in the bank’s best interests.
With more than a quarter of U.S. banks estimated to be subject to a formal or informal administrative action, this provision will have widespread repercussions. It serves no legitimate bank supervisory purpose and should be either deleted or amended to be consistent with the position that the federal and state banking agencies agreed to last year.
The Committee Report of the Senate Committee on Banking, Housing and Urban Affairs states that the provision “codifies” the Statement on Regulatory Conversions adopted in July 2009 by the Federal Financial Institutions Examination Council. It does no such thing. Instead, it overturns the careful process that the FFIEC established to ensure that banks under formal or informal administrative actions will continue to be subject to equivalent actions after they change their charters.
The statement sets forth a procedure in which the prospective and current supervisors consult with one another to obtain information on any pending or outstanding supervisory actions. The statement anticipates that the prospective supervisor’s initial examination and enforcement action program will follow the work of the existing supervisor. If the existing supervisor’s examination is not recent, or if other circumstances warrant, the prospective supervisor may choose to conduct an eligibility examination and may invite the current supervisor to participate to help ensure continuity in the bank’s supervision.
The statement does not bar banks subject to administrative orders and memoranda of understanding from converting their charters. It implicitly recognizes that even banks under administrative orders may have legitimate reasons for converting their charters that will be in the best interests of the bank. The converting bank is not “escaping” current or prospective supervisory actions because the same corrective program will be in place following the conversion.
Since 1863, the year that the National Banking Act was enacted, the United States has had a vibrant dual banking system. Banks may freely choose to change their charter, subject only to the approval of the new chartering authority. This freedom to choose has allowed banks to operate under the charter that best serves the bank, its depositors, borrowers and shareholders. It also has helped prevent the concentration of regulatory power in one agency, thus avoiding some of the abuses that may result from an all-powerful bank regulatory agency.
A 2005 study by the Conference of State Bank Supervisors said charter choice that banks have “creates a healthy dynamic tension among regulators, resulting in a wider range of products and services available to consumers, lower regulatory costs, and more effective, more responsive supervision.” It quotes from a Treasury Department report that “Diversity increases the chances that innovative approaches to policy problems will emerge … A sole regulator, not subject to challenge from other agencies, might tend to become entrenched, conservative, and shortsighted.”
The Conference Committee should either delete section 612 or clarify the language in section 612 so that it honors the intent of the Senate Banking Committee, as expressed in its report, to codify the statement. By requiring that equivalent corrective programs be instituted following a conversion, the clarification will reinforce the FFIEC’s position that banks under administrative actions are not automatically disqualified from converting their charters but will remain subject to continuing corrective programs following conversion.
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