The dual banking system is predicated on the idea that banks have a choice in how they are supervised. And lately, more community banks have been choosing to swap out their federal charters for state charters.
It's a trend that has been intensifying for years. Today just one in four banks holds a national charter, raising serious questions about the sustainability of the current system. It's fine to give community bankers options, but if the best choice were to become exceedingly clear, was there ever really a choice at all?
Though there have been cyclical swings before—years ago a preference for national charters prevailed—some believe this latest trend, which seems more extreme, could have real staying power. Reasons behind the latest conversions range from cost to culture—state banks pay less for supervision, and many community bankers feel that federal examiners paint the industry with too broad a brush, ignoring local conditions.
The charter conversions could have profound implications for the 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 percent, to 1,349. Over the same period, the number of state banks has fallen by 19 percent, 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, chairman of the Bank of Newman Grove, Neb., which switched to a state charter in 2005. "It hasn't made headlines. But there are more banks either doing it or talking about it across the country." Though he is part of the trend, Gerhart worries about its effects. "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. Choice is paramount," says Gerhart, the Independent Community Bankers of America's chairman-elect. Being able to choose, Gerhart adds, "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."
Bank of Newman Grove had held a national charter since 1900. Converting to a state charter shaved oversight costs for the $36 million-asset agriculture-focused bank by two-thirds, from the $30,000 it paid the OCC to roughly $10,000. Since Bank of Newman Grove made the switch a half dozen years ago, 20 other national banks in Nebraska have followed suit.
John Munn, Nebraska's banking commissioner since 2005, says it's not his doing. "I do not cold-call nationally chartered banks," he says. "But once you get up to about 10 or 12 [conversions], the snowball is rolling downhill and bankers talk to other bankers." Munn was a banker himself for nearly 30 years, always, ironically, at nationally chartered banks.
The OCC defends its record on community bank supervision, noting that nearly 75 percent of its 2,465 examiners are devoted to community banks and almost 90 percent 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 wrote 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."
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. Nonetheless, the conversion activity of recent years suggests something significant is afoot—not that this would be the first time banks have reshuffled the deck for regulators.
"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."
But a more lopsided system has risks. "If you had only national charters for the big banks and only state charters for the small banks," Abernathy says, "over time I think you would see bank regulations and laws favoring the larger institutions."
But then, many community bankers would argue that's already happening.
