Death Knell Chimes For Criticized Savings-And-Loan Regulator
18 June 2009 - 4:15AM
Dow Jones News
In the race to the bottom among bank regulators, the Office of
Thrift Supervision appears to be the first loser.
According to President Barack Obama's plan to re-write financial
regulation, the federal overseer of savings and loans will soon
cease to exist. Created 20 years ago in response to the nation's
last banking crisis, the maligned government agency is now widely
blamed for allowing a new larger banking crisis to balloon.
For banks, the plan will mean one less regulator competing for
jurisdiction, which could lead to harsher scrutiny and less frothy
profits.
"Regulatory reforms will bring about the end of 'light-touch'
regulation," said Philip Finch, an analyst at UBS AG (UBS), in a
note to clients. "The future will be one of lower average return on
equity" -- a key measure of firms' profitability.
Under the current regime, U.S. banks are regulated by one of
three federal bodies; one of myriad state-level banking regulators;
or some combination thereof. Other federal regulators include the
Federal Reserve Bank and the Office of the Comptroller of the
Currency -- which, like the OTS, is an agency of the U.S.
Treasury.
In the past, banks had considerable say in who regulated them,
and could often change regulators when they felt too
restricted.
Historically, banks "are able to essentially pick their
regulators," says Lauren Willis, a Loyola Law School professor and
a former Justice Department trial attorney who focused on housing
and lending discrimination.
The competition for bank charters, she says, "leads to...a race
to the bottom" among regulators, amid which banks pitted one agency
against the others to land more lax oversight.
Many former regulators have argued that thrift charters, which
reside at the OTS, often carried the least stringent
regulation.
Their argument has its merits: The OTS was officially charged
with monitoring Washington Mutual Inc. and IndyMac Bancorp Inc. --
two of the largest banks to collapse in history -- as well as
portions of American International Group Inc. (AIG), the mammoth
insurer that's required more than $100 billion in public support to
avoid failing.
The Obama administration itself placed blame on the lax
oversight of thrifts on Wednesday, and also singled out the
destructive competition among regulators for banks' business.
"The availability of the federal thrift charter has created
opportunities for private sector arbitrage of our financial
regulatory system," the administration wrote in its proposal.
Under thrift charters, companies are typically required to hold
about two-thirds of their assets in mortgage-related investments or
loans -- a reflection of the U.S. government's 80-year push to
nurture an entire industry of mortgage-focused banks. Amid the
current nationwide housing market depression, that business model
now looks especially risky.
Some OTS defenders say the mandate that thrifts focus on
mortgages helped fuel the crisis, and the OTS is simply taking the
blame. Defenders also say the entire U.S. system of patchwork-style
regulation -- not just the OTS -- has failed thoroughly.
Unlike the Federal Reserve and the OCC, the OTS didn't have the
luxury of bailing out its biggest troubled firms, says Kevin
Petrasic, an attorney at Paul Hastings and an assistant chief
counsel at the OTS.
A number of large banks overseen by other regulators "would have
failed," Petrasic says. "But because of systemic risk, they were
not allowed to fail."
What's more, the move by the administration to close the OTS may
be more political maneuvering than a genuine effort to thoroughly
scrub the national patchwork of bank regulators.
From one angle, the Obama plan merely consolidates two agencies
-- the OTS and OCC -- that have existed side-by-side at the U.S.
Treasury.
"They were obvious targets for a merger," says William Black, a
University of Missouri-Kansas City law school professor and a
former senior counsel at the OTS.
What remains far less clear is how administration officials plan
to merge the two agencies' staffs -- and how many positions they'll
fill with people from an agency the administration just openly
criticized.
"You don't want to lose the expertise" of veteran staffers,"
says Petrasic. "There's a dramatic need for talented
regulators."
-By Marshall Eckblad, Dow Jones Newswires; 201-938-4306;
marshall.eckblad@dowjones.com