Banking is the most heavily regulated industry in America, with four different supervisory agencies at the federal level alone.
Proposals to consolidate regulators are opposed as threats to their power, their budgets, and in some cases their existence, but the regulatory turf wars are minor compared to the reaction among banks and thrifts, which fear losing their choice of regulator.
The only major change to our financial regulatory structure since the 1930s was the restructuring of the thrift regulator during the savings and loan crisis, which resulted in the creation of the Office of Thrift Supervision to replace the Federal Home Loan Bank Board in 1989. The OTS, like the Office of the Comptroller of the Currency, is part of the Treasury Department. This commonality has encouraged some, including myself, to propose merging the OTS into the OCC.
The time has come to revisit this regulatory consolidation proposal. This is not because of any past regulatory consistency or efficiency arguments or even the bad PR the OTS has gotten from a few spectacular thrift failures.
The OTS, in my opinion, can no longer function as an effective regulator of Washington Mutual Inc., the nation's largest thrift. Quite simply, it has become too big to regulate for the OTS.
It all comes down to economics. The OTS has lost money every year since 1998, and expected losses for this year were reported to be nearly $2 million. Assessment income at the OTS, which is funded solely from exam fees, has dropped markedly during the past decade, as the number of thrifts fell by more than half. The OTS responded by raising fees and examination charges.
For these and other reasons, many thrifts converted to banks. Some thrifts, like the $24 billion-asset Standard Federal Bank of Michigan, merged into affiliated banks, and others converted because of the perceived added value of a bank charter on Wall Street.
The recent conversion of the fourth-largest thrift, the $38 billion-asset Charter One Financial of Cleveland, to a national bank reportedly reduced the OTS' annual revenue by $4.2 million and caused its projected 2002 operating deficit to swell from $2 million to $5 million.
Apparently in response to its deteriorating financials, the OTS unveiled a restructuring plan to enable it to remain an independent agency. This involved a 20% staff cut, to about 930 employees, something a bank or private company might do under similar circumstances.
Compliance examiners were reduced at more than three times the rate of safety-and-soundness ones, and the OTS eliminated separate compliance exams and examiners. This is problematic, because the Community Reinvestment Act is best monitored and enforced with specialized compliance examiners and separate exams.
In an even more stunning change in bank regulatory policy, the OTS called for thrifts to conduct a "self-evaluation" of their compliance before examiners arrived for the new consolidated exam. The OTS claimed this approach would "place emphasis on institutions, not the regulator, to ensure compliance with all existing laws, including consumer protection statutes." This includes about two dozen laws such as the CRA, Truth-in-Lending, and Truth-in-Savings.
This OTS statement - in addition to being what Rep. John J. LaFalce, D-N.Y., called a "complete abrogation of the mandate your agency has been given by Congress" - is nothing less than a regulatory breakdown. The only thing worse than a compliance self-evaluation is no compliance law at all, which was the case before 1977 for CRA. Such cost cutting may be in shareholders' interest when it is done at a private firm, but it is certainly not in the public interest when done at a regulatory agency.
Since the OTS is funded solely from exam fees, it appears that much of these cutbacks were in response to the shrinking number of thrifts, and especially the absence of larger ones such as Charter One.
According to the March 31, 2002, asset totals from the FDIC, there are three other thrift companies larger than Charter One. One is the $54 billion-asset Golden State Bancorp, which is being purchased by Citigroup Inc., which will likely merge its thrift charter into that of its $32 billion-asset Citibank FSB. Another megathrift is Golden West Financial, with $59 billion of assets.
The biggest of our nation's 1,000 thrifts by far is the $275 billion-asset Washington Mutual, which bought Dime Savings Bank of New York and is rumored to be looking at other thrifts in New York and elsewhere. Wamu represents a whopping 28% of the industry's $998 billion of assets. It is also the nation's third-largest subprime mortgage lender and the only truly nationwide thrift.
Considering that the OTS likely could not survive as an independent agency with the defection of Wamu to a competitive agency, how can the OTS be an effective regulator of that giant thrift? Will the OTS really tell them what they think, or will the agency be more concerned about upsetting them and losing them as a "customer," thereby threatening the viability of the agency?
Even if Wamu agrees that it would be in stockholders' interest to have a national bank charter, what concessions might the OTS make to keep Wamu (and preserve the agency's independence)?
Who wants to be the OTS examiner to say no to Wamu, especially in a sensitive area such as subprime lending? It is not inappropriate to ask the question: Does the OTS regulate Wamu, or does Wamu regulate the OTS?
These are important public policy questions that must be answered, especially as Wamu keeps growing and the OTS keeps shrinking. These same questions are relevant, to a lesser degree, for other megathrifts like Citibank FSB, soon to be the second-largest thrift, and Golden West Financial.
These Wamu questions have never been asked about any of our four federal bank and thrift agencies, because no one institution has so dominated a regulated industry in modern times.
For example, the OCC monitors 2,200 national banks with $3.6 trillion of assets. Its largest bank is Bank of America, which has $541 billion of assets, or about 15% of the OCC total. There are other big national banks, such as the $455 billion-asset Citibank, but none dominates the OCC, nor does any financial holding company affiliate. Wamu, the lifeline for the OTS, would be just another large bank for the OCC.
Congress dismantled the old Federal Home Loan Bank Board mainly in response to the S&L crisis and the perceived poor job it did regulating that industry. The OTS is managed by a team of well-respected professionals, and in many cases, such as measuring interest rate risk and CRA enforcement, they have set the standard for other regulators.
Today's thrifts are nothing like the hundreds of troubled thrifts that were merged out of existence during and after the S&L crisis. Many thrifts, including several hundred smaller mutual institutions, are as well-capitalized and managed, if not more so, as comparably sized banks. Some thrift managers, such as the one at Wamu, are among the most admired corporate leaders, not just in finance but in all of business.
To call for the OTS' dismantling is not to point any fingers at it or its staff. The agency, like many of the thrifts that converted to or merged into banks, must itself be merged into the bank-regulating OCC as part of the continual evolution of the financial services industry.
Regulatory agencies cannot be operated like businesses, because serving and protecting the public is much different from doing so for shareholders. The merging of the OTS into the OCC is clearly in the public interest, as long as it allows mutual institutions and other specialized thrift lenders to coexist with their stock counterparts.
