In recent months at least 650 thrift institutions have experienced a change in supervisory agency from the Office of Thrift Supervision to the Office of the Comptroller of the Currency as mandated by Dodd-Frank. Also, thrift holding companies now come under the supervision of the Federal Reserve Board.
That might appear to be a relatively seamless transition. All are federal agencies, they examine for similar safety and soundness and regulatory compliance issues, the OTS and OCC shared seemingly equal standing as entities within the Department of the Treasury, and regulatory expectation for thrift holding companies would not seem to differ greatly from their bank holding company counterparts.
But, as a number of thrifts have already discovered, that transition can be anything but smooth. There are a number of reasons why. Some are historic, some have to do with differing priorities among agencies, some relate to the natural competition among banking regulators, and some are the natural result of adjusting to the new Dodd-Frank legislation.
Start with the impact of Dodd-Frank. Even if the OTS had not been merged, all thrifts over $10 billion in assets (roughly 100) would have a new regulatory agency for compliance – the Consumer Financial Protection Bureau.
That change alone would have been disruptive, but it is made worse by a second factor, the instinctively competitive relationships among regulators. Each of the three remaining federal banking agencies (FDIC, Federal Reserve, and OCC) in some manner think of themselves as the greatest among equals. With minimal encouragement, representatives from any one of the agencies can give a compelling description of how their agency is superior in some way to the others. For that reason, whenever a new agency gains supervisory authority over a financial concern, there is an instinctive skepticism about the rigor with which that entity had been supervised in the past and therefore a tendency to be particularly thorough in the initial review. The difference is even more dramatic for holding companies. The Bank Holding Company Act has long had rigid parameters on what holding companies could do. By contrast, a holding company parent of a thrift had few historic product limitations.
Third, in addition to the inter-agency competitive factor, whenever a fresh set of eyes or hands engage a newly-acquired client or regulatee, a new baseline relationship is established and the new party will want to ensure that any weaknesses are identified and addressed in the initial review. This does not just occur with bank regulators. The Public Company Accounting Oversight Board has found that there is a relatively tight correlation between public companies making changes in external auditors and their subsequent restatements of earnings from prior years. Some attribute this to a complacency that can develop when there are lengthy relationships between auditors and clients. I am inclined to think it is more a function of the new party wanting to start a new relationship with a clean slate.
A fourth, and perhaps more controversial reason, may relate to the history of thrift industry regulation. Though the Federal Home Loan Bank Board (predecessor to the OTS) was established at about the same time as the FDIC, the FHLB board was perceived to be a gentler regulator than its banking industry brethren. This point historically was used as a selling point for the thrift charter. The industry regulator was identified as an "advocate" for the thrift industry and occasionally called a "cheerleader" for the thrift charter. That term actually appeared in a 1989 General Accounting Office study of thrift industry failure in the mid-1980s financial crisis.
In 1982 Congress passed the Garn/St. Germain Act, which broadened the authority of thrift institutions by allowing them to engage in real estate development and non-real estate commercial and consumer loans within certain limitations. However, Congress also ensured that the industry would continue to have only modest regulatory oversight by not authorizing any additional funding to broaden oversight on these expanded powers.
When the Office of Thrift Supervision was created in 1989 to succeed the Federal Home Loan Bank board, efforts were made to strengthen thrift industry regulatory oversight and, indeed, giant strides were made. But old images die hard, especially when fueled by inter-regulator competition.
Many thrift institutions are preparing for this change by re-evaluating their risk disciplines to ensure they are consistent with OCC or Fed expectations. This is particularly true where subjective judgment is a significant component of a management decision. A classic example is reviewing how commercial real estate portfolios are managed. Many financial institutions pay scant attention to commercial real estate loans that are performing as agreed, even though there may be weaknesses in the value of the underlying collateral or the financial health of the borrower. As most commercial real estate loans held by banks and thrifts carry bullet (or balloon) payments, an early warning of impairment is now expected to be a component of thoughtful loan administration policy. Under OCC or Fed oversight, commercial real estate portfolios are expected to be managed more in line with other commercial loans by requiring regular updates on the financial health of the property owner or other updated information on the repayment capability of the borrower.
A related example is the rigor with which write downs are taken on a loan portfolio. A thrift institution should take particular note of banking industry guidance regarding loan loss reserving.
Even the smallest thrift institutions are being asked to demonstrate an enterprise risk management culture. Institutions that qualify as thrift holding companies but have a thrift institution as only a small component of their business may wish to reconsider the value proposition of the new regulatory expectations.
The best preparation by a historic thrift for its first full OCC or Fed exam is to ensure that it can demonstrate that careful attention is being given to managing risk according the standards of the new regulator.
Mark W. Olson has served as a Federal Reserve Board governor, chairman of the PCAOB and chairman of the American Bankers Association. He currently serves as co-chairman of Treliant Risk Advisors LLC and can be reached at
