To the Editor:
The new director of the Office of Thrift Supervision, John Reich, is off to a great start by suggesting that our present methods of funding bank and thrift supervision need to be reexamined. It is important, however, to be clear about just what the problems are and what the implications are for different approaches to funding.
We have an important tradition in the United States of keeping bank supervision as free as possible from political influence and interference. At the heart of this tradition is the precept that the funding for supervision should not be subject to the appropriations process.
For this reason, supervision of the national banking system has long been funded by assessments on the banks themselves. Similarly, at the state level, state supervision has generally been funded by assessments on state banks.
Any proposal to alter the present means of funding that would inject politics into supervision would be an extremely bad idea.
One problem with the present system is that as much as 80% of the supervision of state banks is performed by the Federal Reserve and the FDIC, yet these agencies refuse to pass on the costs of this supervision in the form of assessments.
Therefore, though national banks pay the full cost of their supervision, state banks are recipients of a federal subsidy, worth about $1 billion a year, that frees them from paying for the preponderant costs of their supervision.
Most of the subsidy comes out of the deposit insurance fund to which national banks contribute ratably with state banks, and it provides a continuing incentive for national banks to convert to state charters. Scores of such conversions occur each year.
The Office of Thrift Supervision faces a different problem. The number of federally regulated thrifts has been declining.
While OTS assesses all federally insured thrifts ratably, its assessment base has become quite highly concentrated, with just a few very large institutions accounting for a large portion of its assessment revenue. OTS is therefore at risk that a departure of one or more of these large institutions through merger or conversion could put an enormous hole in its resources.
In such a situation the OTS' ability to continue to provide quality supervision for its remaining institutions could be put under great pressure. While it might try to increase assessments to cover the shortfall, such an action might only encourage additional departures.
Several years ago the OCC aired a proposal to fund all bank supervision out of the earnings on the FDIC insurance funds. At today's levels the funds earn annually well more than the total cost of federal and state supervision combined.
We proposed that a nondiscretionary formula be devised that would make allocations from the fund virtually automatic, without any need for the FDIC to exercise control over the funding of other supervisory agencies.
Though this proposal was dismissed as "unworkable" by some, what really underlay the opposition was a concern about the dual banking system.
There are many who believe that without the advantage of a federal subsidy - that is, in an environment in which national banks and state banks were each charged for the full cost of their supervision - many state banks would convert to the national charter.
I don't share that view by any means, but it is the fear of that result that has been a roadblock to any meaningful reform of supervision funding.
I wish Director Reich good luck in his reexamination of this important issue. But concerns about undue political interference, on one hand, and the vitality of the dual banking system, on the other, are likely to remain the Scylla and Charybdis of his brave journey.
John D. Hawke, Jr.
Partner
Arnold & Porter LLP
Washington
Editor's Note: The author was the comptroller of the currency from 1998 to October 2004.
