A Thrift Charter Could Be an Attractive Alternative for Banks

Article excerpt

THE GARN-ST GERMAIN depository Institutions Act of 1982 sought to help financial regulators deal with troubled institutions, to increase competition for financial services, and to revitalize the thrift industry. Among its provisions, the act gave thrift institutions new powers similar to those of commercial banks.

It also enabled a commercial bank to convert to a savings institution or to a federal savings bank. In the latter case, the institution could maintain the word "bank" in its title yet not be subject to the restrictions imposed by the Bank Holding Company Act -- an important advantage. Passage of the garn-St Germain Act faciliated bank charter conversions, even though some state already permitted such transformations prior to 1982.

To date, only two commercial banks have completed conversion from a bank to a savings institutions, but recent developments could increase this activity. First, the Federal Home Loan Bank Board recently adopted a ruling change that makes it easier for commercial banks to obtain federal thrift charters. With this change, depository institutions may engage in purchase and assumption conversions with federal stock associations, an option we will discuss later. The ruling was designed to alleviate some of the financial pressures on the insurance fund of the Federal Savings and Loan Insurance Corp. by providing the FSLIC with an alternative to costly deposit-payouts -- seeking an acquirer for a failing thrift.

The FSLIC can attempt to make trouble thrifts attractive acquisition targets for banks that wish to convert to thrift charters. Such banks must hold a relatively high level of mortgage loans in their portfolios if they are to meet the bank Board's qualified thrift lender standards.

By purchasing operating thrifts, converting banks can achieve the requisite levels while at the same time unburdening the FSLIC's insurance fund. By clarifying the previous law, the Bank Board's move also will facilitate decisions on pending charter transactions and hasten resolution of the thrift industry's problems. A second new development that may foster bank conversion is the growing popularity of seminars on the advantages of becoming a thrift and the steps involved in doing so.

Weighing the pros and cons of thrift charters for commercial banks also highlights competitions among regulators. According to William J. Brown, "one of the historic objectives of dual banking has been to provide alternative supervisory frameworks under which commercial banks may choose to operate, thereby safeguarding against the extension of harsh, oppressive, and discriminatory supervision to institutions without recourse to alternative arrangements."

The possibility of a commercial bank's converting to a federal savings institution places the Bank Board in direct competition for banks with bank regulatory agencies. Regardless of whether one views this situation as a competition in laxity in bank supervision, empowering banks to adopt thrift charters eventual may force changes in bank regulation.

The Garn-St Germain legislation permitted conversions to help assure financial stability, but in large numbers such activity would have a far wider, and perhaps unintentional, impact on the banking and thrift industries. For example, bank-to-thrift conversions would shift the balance of depository institutions, and alter the mix of allowable activities for depository institutions.

We will discuss the pluses and minuses of bank-to-thrift conversions for both state- and federally chartered institutions, examine current levels of conversion, and comment on the likelihood of a future wave of bank-to-thrift conversions. In the process, we will review thrift asset and liability powers and discuss what coverting from a commercial bank to a savings institution entails. Despite the obvious advantages of conversion -- ability to own and operate interstate automated teller machines. …