New Regulatory Expectations for Federal Thrifts: This Article Discusses the Changes That Managers of Federal Thrifts Should Expect from Their New Supervisors: The Office of the Comptroller of the Currency and the Federal Reserve

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THE SIGNING OF the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 has meant the abolishment of the Office of Thrift Supervision (OTS). Accordingly, managements of thrift institutions should expect the following regulatory changes: (1)

* The Federal Reserve will become the federal regulator for savings and loan holding companies and their subsidiaries (other than depository institutions) and will have rulemaking authority under the Home Owners' Loan Act, which generally covers the same types of transactions as those currently governed by Regulations O and W (as applied to thrifts).

* The Office of the Comptroller of the Currency (OCC) will be charged with regulating federal thrifts, and the FDIC will assume regulatory authority over state thrifts. The OCC will have rulemaking authority for all thrifts.

* The FDIC will retain oversight of the deposit insurance fund and resolution authority over depository institutions.

* Thrifts having more than $10 billion in assets will be subject to independent examination by the Bureau of Consumer Protection (BCP), which was created under the Consumer Financial Protection Act of 2010. The BCP will have enforcement powers to ensure thrifts' compliance with federal consumer financial laws and regulations and will also establish rules in regard to those measures.

The Federal Reserve, the FDIC, and the OCC must also identify which OTS regulations they will continue to enforce. Existing OTS orders, agreements, and regulations will continue to be in effect on and after the transfer date until rationalized by the adopting agency.

But what are the new examination hurdles that managements will need to prepare for?

Selected Changes Resulting from the Dodd-Frank Act

The breadth of changes the Dodd-Frank Act imposes on banks and thrifts is extensive. This summary addresses the more significant changes for federal thrift institutions and their holding companies.

Savings and Loan Holding Companies

Savings and loan holding companies (SLHCs) will continue to be subject to the Home Owners' Loan Act, but rulemaking authority and supervision (examination) over SLHCs rest with the Federal Reserve. The Dodd-Frank Act requires that formal capital requirements be imposed on SLHCs, similar to the capital requirements of an insured depository institution.

Additionally, SLHCs will be held to the Federal Reserve's "source of strength" doctrine, which requires that the holding company use its resources to support a distressed subsidiary bank. The Federal Reserve is expected to review its new oversight role and may impose modifications or additions that align the requirements for SLHCs with those for bank holding companies.

Transactions with Affiliates

The Dodd-Frank Act broadens the scope of covered transactions to effectively limit the assets an insured depository institution can place at risk through an affiliate. The definition of a "covered transaction" as used in Section 23A of the Federal Reserve Act is expanded to include credit exposure on derivatives transactions and securities lending and borrowing transactions, as well as the acceptance of affiliate-issued debt obligations as collateral for a loan or an extension of credit. The Federal Reserve will retain rulemaking authority over transactions with affiliates.

Deposit Cap Applies to Thrifts

The Dodd-Frank Act expands the nationwide deposit concentration limits introduced under the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. This requirement restricted the Federal Reserve from approving an interstate acquisition of a bank or bank holding company if the resulting entity would hold more than 10% of the aggregated consolidated liabilities of all financial companies at the end of the prior calendar year. Until now, thrift deposits were not included in this limitation. …