BANK BILL: Overhaul Punishes Regional Banks

In its financial overhaul legislation, Congress seems to be sending a message to the nation's banks: Be very small or very big.

In many ways, the banks most affected by the new legislation will be regionals.

The largest banks have the scale and revenue diversification to dilute--or circumvent--the costs of the slew of new regulations that will likely follow the financial overhaul bill. Lawmakers finalized the bill Thursday night and it's expected to be voted into law next week. Community banks with less than $10 billion in assets, on the other hand, are escaping the overhaul almost entirely.

That has filled George Engelke Jr., chairman and CEO of Astoria Financial Corp. (AF), with consternation. His Lake Success, N.Y., company, with $20 billion in assets, is one of the nation's largest thrifts, and will get hit with new capital rules and a new regulator. "We didn't cause all these problems," he said.

Big banks get off easy, he complained, while the bill "primarily smacks around" regional banks with more than $15 billion in assets.

The bill stipulates that in five years trust preferred securities will not count as Tier One capital, a critical regulatory measure.

Though many of the trust preferreds will have matured in five years, Engelke is worried regulators might take a tougher stance and force banks might to replace them with equity earlier.

Engelke was angry that Senate Agriculture Chairman Blanche Lincoln (D., Ark.) raised the exemption from this rule for banks with assets of more than $10 billion, a move that will shelter Arvest Bank Group Inc. of Bentonville, Ark., Lincoln's home state. Arvest Bank is predominantly owned by the Walton family, of Wal-Mart Stores Inc. (WMT). "I can't call anybody" in Congress to lift the threshold further, Engelke said. "If I were Wal-Mart, the rules would be $25 billion." Left unaddressed is why trust preferred securities have merit in small banks but not in large ones, he said.

A spokeswoman for Lincoln said last week she was pushing the change to make sure "no Arkansas bank--no matter its owner--is punished" by the provision."

Astoria is also going to be impacted by the merger of its primary regulator, the Office of Thrift Supervision, into the Office of the Comptroller of the Currency.

Engelke fears that the OCC, to prove itself to Congress, will take a tougher stand than the OTS. Thrifts "are going to pay the price" for the "leaning curve" at the OCC as well, he said.

Indeed, some thrifts or even regional banks may seek to be regulated by state banking supervisors, who bankers feel might have a better understanding of their specific local needs, rather than federal overseers, said Gerard Comizio, a senior partner in the bank regulatory group of law firm Paul, Hastings, Janofsky & Walker LLP.

Regional banks larger than Astoria got hit even harder. Those with more than $50 billion in assets will pay a fee to cover the cost of the financial overhaul. All banks have to pay more attention to state laws because federal regulators would not be able to preempt state legislation as easily as they can now. All this will add to the banks' legal and regulatory costs, without creating too much of a headache for the big banks.

Banks with less than $10 billion in assets will escape the consumer protection bureau established in the legislation. "The community banks are clearly the winner of this bill," Comizio said.

-By Matthias Rieker, Dow Jones Newswires; 212-416-2471; matthias.rieker@dowjones.com

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