The dual banking system is under mounting pressure as community banks increasingly opt for state rather than federal charters. The trend has been intensifying for years. Today just one in four banks holds a national charter, raising serious questions about the sustainability of a system long based on the concept that banks have a choice in how they are supervised.
The reasons range from cost to culture — state banks pay less for supervision and many complain federal examiners paint with too broad a brush, ignoring local conditions.
The trend has profound implications for the nation’s decades-old dual banking system.
“It is being redefined,” says John Ryan, the president and CEO of the Conference of State Bank Supervisors. “I am not entirely sure how, but I worry it will look more like a polarized system than a system of choice.”
Since 2000, the number of banks supervised by the Office of the Comptroller of the Currency has plummeted 43%, to 1,349. Over the same period, the number of state banks has fallen by 18.5%, to 5,064.
Mergers and failures have whittled the ranks of national and state charters. But choice has played a role, too. Since 2000, nearly 300 banks have turned in national charters for those issued by a state. Over the same period, 92 state banks converted to a national charter.
“It has been a silent migration,” says Jeff Gerhart, the president and chief executive of Bank of Newman Grove, Neb., which converted to a state charter. “It hasn’t made headlines. But there are more banks either doing it or talking about it across the country.”
Even though he is part of the trend, Gerhart worries about the ramifications.
“If smaller banks go to the states and the larger banks go to the OCC, at the end of the day I don’t think that’s a good thing for the dual banking system,” says Gerhart, who is the Independent Community Bankers of America’s chairman-elect. “Choice is paramount.”
For too many community banks, he says, a national bank charter is no longer a choice in light of the OCC’s one-size-fits-all approach.
“We ought to have a similar atmosphere across the regulatory spectrum,” he says. “It does not mean someone is going to go easy on you, but it is certainly good to be with an examination force that understands who you are and works with you and is not anxious to see what they can do to make life miserable for you.”
The current trend bucks the conventional wisdom that had long assumed national charters would become so dominant as to render state charters irrelevant.
“Every 10 or 20 years or so the momentum seems to go one way or the other,” says Wayne Abernathy, the executive vice president of financial institutions policy and regulatory affairs at the American Bankers Association. “It happens when you get either the national charter or the state charter becoming out of sync with the perceived business model.”
Abernathy sees a downside to a lopsided system.
“If you had only national charters for the big banks and only state charters for the small banks … over time I think you would see bank regulations and laws favoring the larger institutions,” he says.
Some community banks would argue that’s already happening as rules for large banks, written after the 2008 financial crisis, are trickling down to them.
Other questions worth posing:
Will the trend spur further consolidation among federal agencies? The Dodd-Frank Act melded the Office of Thrift Supervision into the OCC, in part because the number of thrifts dwindled from 3,150 to about 700 over the past 25 years.
Can states handle the added workload? What about resources? While most state banking departments are funded through assessments on the institutions they oversee, the money is attractive to state legislatures facing budget pressures.
Will some states end up being little more than hosts to banks either headquartered in another state or using a federal charter?
What if the fact that more community banks are choosing state charters leads the public to conclude that state regulators are more lenient than their federal counterparts? That could lead to a loss of confidence.
Of the nation’s 10 largest banks, two hold state charters: the trust and custody banks BNY Mellon and State Street.
Rounding out the top 25 only adds eight more state banks, the largest of which is SunTrust Banks with $165 billion. The numbers even out some when the universe is expanded to the top 50 banks — 28 national charters versus 22 state charters.
But it’s important to note that bank No. 50, Cullen/Frost in Texas with assets of $18.5 billion, is tiny compared to the top tier.
Bank of Newman Grove is at the other end of the size spectrum.
The $36 million-asset ag-focused bank held a national charter from 1900 through 2005, when it switched to a Nebraska charter.
Since Gerhart converted, 20 other national banks in Nebraska have followed suit. It’s the banks that are approaching the state, says John Munn, who has been Nebraska’s banking commissioner since 2005.
“I do not cold-call nationally chartered banks,” Munn says. “But once you get up to about 10 or 12 [conversions], the snowball is rolling downhill and bankers talk to other bankers.”
Before becoming a regulator, Munn was a banker for close to three decades — ironically, all at nationally chartered banks.
Munn says smaller banks are shying away from the OCC because it wants them “to have all the same systems and controls in place” as much larger banks.
“You can only put so many hats on people before they fall over,” Munn says.
The OCC defends its record on community bank supervision, noting that nearly 75% of its 2,465 examiners are devoted to community banks and almost 90% of all national banks have assets of less than $1 billion.
“The dual banking system is a very important feature of the regulatory landscape, but there is nothing in any forecast I’ve seen that suggests a significantly different composition of the banking system, even if the trends of past years continue,” acting Comptroller John Walsh said in an email. “The OCC expects to have a vigorous small, medium and large bank program as far into the future as the eye can see.”
Even so, the number of conversions is significant, especially considering the large number of banks facing enforcement action and thus barred from changing regulators.
Bank of Newman Grove is part of another trend in which the Federal Reserve System is gaining charters from the FDIC.
State banks whose deposits are federally guaranteed are also overseen on a national level and have a choice about who provides the oversight: they may join the Fed, in which case they are designated a “member bank,” or select the Federal Deposit Insurance Corp. and be designated a “nonmember bank.”
Since 2000, more than 250 state banks have left the FDIC to join the Fed. Over the same period, just 88 state banks went the other way Among the three federal agencies, the Fed also has seen the smallest percentage shrinkage since the financial crisis of 2008.
The Fed does have the smallest number of banks to supervise: 824 as of June 30. But that’s just 6.15% fewer than it had when 2008 began. Over the same time frame the OCC has lost 17.3% and the FDIC has lost 11.2%.
The Fed has seen a big increase in assets under its supervision. The 824 Fed member banks have assets of $1.83 trillion, up from $1.52 trillion at the start of 2008. Assets held by the 4,250 banks overseen by the FDIC totaled $1.96 trillion at June 30, up from $1.87 trillion at the beginning of 2008.
When it comes to assets, the national banking charter remains king.
The 1,349 banks overseen by the OCC hold $8.6 trillion in assets today. That’s up from $7.8 trillion in early 2008.
More than half of all banks overseen by the Fed are located in just three of its 12 districts: Kansas City, Chicago and St. Louis. (See chart) Among the biggest banks to make the jump to the Fed two are in the Kansas City district: the $19.4 billion-asset Commerce Bank in Kansas City, which was a national bank that converted to a Missouri charter and joined the Fed, and the $11 billion-asset FirstBank outside Denver, which moved from the FDIC to the Fed.
As with many institutions, FirstBank’s local units were separately chartered. The company decided to consolidate its 25 charters into one. On the national level, most of its units were overseen by the FDIC but it decided to switch to the Fed.
Asked why FirstBank opted for the Fed, FirstBank CEO John Ikard says the 2010 Dodd-Frank Act handed the central bank a lot of responsibility.
“The Fed seems like the big winner in all this,” he says. “I think in the long run the Fed is going to have more power and more rulemaking authority … and you want to be with the regulator that will have the most clout.”
Ikard says the fact that the Fed was already his holding company’s supervisor made the decision even easier.
Cost was not a deciding factor for Ikard, but the move from a national to a state charter does save money.
Bank of Newman Grove’s Gerhart says his tiny bank shaved its oversight costs by two-thirds, from the $30,000 it paid the OCC to roughly $10,000.
George J. Guarini, the CEO of Bay Commercial Bank in Walnut Creek, Calif., also moved from the FDIC to the Fed.
“We recognize that in the future we will be forming a holding company and we didn’t see the value of having three regulators,” he says. “We didn’t want to be a third wheel” to the Fed. “We wanted them to be with us every step of the way as we grow.”
Like most bankers, Guarini has no interest in provoking any regulator, but is pretty fed up with the adversarial nature of exams.
“It’s OK for a regulator to have a relationship with a bank, and I do feel like [the fact that] the Fed allows for a relationship with its banks, and that’s not quite as apparent with the FDIC.”
Acting FDIC Chairman Martin Gruenberg has clearly gotten the message. Ensuring the health of community banks is a “major priority,” he said in a speech to the ABA on Tuesday.
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