This month the United Nations celebrated the contribution cooperative financial institutions have made throughout the world by declaring 2012 as the “
The Office of the Comptroller of the Currency apparently missed the celebration. (Perhaps the agency’s invitation was apparently lost in the mail)
The agency, which inherited supervision of mutually owned thrifts from the departed Office of Thrift Supervision, promised to reach out to these cooperatives, but the perception is that it’s failed to deliver. While this may be a function of adjustment to the transition, recent informal polling on the topic during the fall convention season reveals a trend toward conversion to state savings bank charter. Indeed at the New York Bankers Association’s annual financial services forum at the Waldorf Astoria, the superintendent of the state’s Department of Financial Services, Benjamin Lawsky, unabashedly announced an intention to recruit federal thrifts to the New York charter, stating that his office is actively seeking conversions of federal thrifts which have become discouraged by the demise of OTS. He went so far as to use the word “poach” when speaking of New York's effort to attract federals.
At first blush this regulatory competition for charters appears a healthy development—a normal adjustment in the dual system. However, it takes two to compete and unless the OCC views migration of federal mutuals to the states negatively, as a loss of turf, this situation will lead to more difficulties for federal mutuals.
Could it be that Superintendent Lawsky believes he has little to fear from a turf war with the OCC? After all, his boss Governor Cuomo, when he was Attorney General, engaged in numerous skirmishes with the OCC regarding the regulatory reach of New York over national banks.
It appears the states and the Federal Reserve Banks are trying to cherry-pick the larger and more profitable federal thrifts. Of course, Dodd-Frank outlawed the cherry-picking of weak banks that were seeking to evade tougher regulation by switching charters, by giving the chartering agency a veto over conversions of banks with supervisory problems.
As strong thrifts leave the OCC, it will have even less reason to modify its policies to become more mutual-friendly. Supervisory guidelines and policies will increasingly move toward the one-size-fits-all approach – the one size being that of commercial banks. For stockholder-owned federal thrifts, the choice will be to either conform to the national bank model in their operations, making the necessary adjustments because of the limitations on federal thrift power and the Qualified Thrift Lender test, or convert to national bank. Some wonder how they will satisfy OCC concentration guidelines and the Qualified Thrift Lender test’s housing concentration requirements.
However, it remains to be seen whether the OCC has any appetite for small thrifts to convert to national banks. Reports that the OCC encouraged the removal of a provision from Dodd-Frank at the last minute that would have authorized conversion and de novo chartering of mutual national banks, do not bode well. If the OCC is less than sensitive to the peculiar needs of mutuals, they will have little choice in chartering authorities. For those fortunate to have larger asset size, primarily in the northeast, the state charter will be a viable or even attractive option. Many state savings bank laws offer more investment authority. However, with the exception of a handful of states in the Bortheast, most state regulators have even less familiarity with mutuals than the OCC. More importantly, in states with few or no state chartered mutuals there is usually an outdated state legislative scheme for mutuals with no compelling reason to update it.
What this demonstrates is the critical need for the OCC to take a more proactive approach to its new stewardship of mutuals. What may start as a migration to state savings bank charters may well result in a diaspora.
Given the OCC's attitude so far, what hope is there it will change in time to avoid this result?
First, the OCC may come to realize that most mutuals are more committed to their virtuous form than it realizes. Most do not see the demise of the OTS as a handy excuse to convert to stock inasmuch as they are committed to and value the federal charter.
Unfortunately, that commitment to mutuality is not as obvious to the OCC, nor have the trade groups been particularly vocal in transmitting that message. With the exception of America’s Mutual Banks, which I represent, no trade group has filed a single comment letter on any of the numerous Dodd-Frank regulations on the issue of how the regulations will affect mutuals.
Mutuals everywhere and of every size need to be more demanding of their trade groups, which may or may not have an interest in seeing federal associations preserved. They also need to engage the OCC and the Federal Reserve Board more vigorously.
Relief, in the form of a sympathetic ear, could come from the confirmation of FDIC board member Tom Curry, who as the former Massachusetts Banking Commissioner has more experience with mutuals than any other proposed agency head. However, his fate as Comptroller lies with the reelection of President Obama, a prospect not welcomed by many banks. If he is not confirmed or the President is not reelected and the cherry-picking process accelerates, then the OCC may realize that it may be left holding the bag –a bag of small and weak thrifts.
Such a development will strain OCC supervisory resources with little assessment revenue. The OCC will be boxed in, some say hoisted on its own petard, as it won’t be able to convert the thrifts to national banks nor will it be able to force them to merge with banks. Conversion mergers would likely ignite a political firestorm similar to the FDIC’s experience with the notorious white paper that questioned the public need for mutuals (likening their situation to the March of Dimes after polio was cured). The paper proposed various methods to distribute their net worth.
Perhaps the former OTS staff will be able to influence the OCC to be kinder and gentler with respect to thrifts. But the OCC has made an effort to integrate, some fear indoctrinate, the OTS employees as bank supervisors.
As Congress will not in the near future take any action to accommodate mutual national banks, a more practical solution is for the OCC to borrow from a precedent it created several years ago and allow federal mutuals to reorganize as mutual holding companies and convert the stockholder-owned federal subsidiary to a national bank. This has a certain elegance, as mutuals could retain their mutuality and federal charter as well as expand their investment powers—a win-win. Lastly, without addressing the possibility that small mutuals will seek to convert to credit unions and eliminate their tax revenue, the Treasury and the banking industry would like nothing better than to see more credit unions convert to taxpaying banks. This is hardly going to happen if they perceive the OCC as an inhospitable regulator of their mutual form.
If the banking industry, which has shed crocodile tears for the plight of the thrifts, realizes that the OCC’s insensitivity to mutual thrifts will deter credit unions from converting to banks and discourage any further efforts to transfer regulatory authority away from the NCUA, it will be more interested in the OCC becoming more hospitable to mutuals. The prospect of more assessments because of a dwindling base and increasing supervisory problems will not go unnoticed. Finally, while state regulators may see the migration to their charter as a benefit, the embracing of the state regulator by mutuals as a last resort will embolden some legislators to pass laws that will be more in the nature of social engineering, rather than enhancing safety and soundness, which is always a function of profitability.
In short, there are many unintended consequences, but the absence of a clear direction by Congress to foster the preservation and promotion of the mutual form could have dire consequences for a form of ownership that has served the country well and is celebrated by the international community.
Douglas Faucette is a partner in the Washington office of Locke Lord Bissell & Liddell LLP. He heads the firm’s banking and transactional group and is counsel to America’s Mutual Banks.
