Why Some Banks Are Ditching Their State Regulators
September 17 2019 - 12:48AM
Dow Jones News
By Lalita Clozel
WASHINGTON -- A national bank regulator is trumpeting his
agency's oversight as a good business proposition.
Banks are taking him up on it.
Fifth Third Bancorp is the latest company to seek supervision
from Trump-appointed regulators who have struck a friendlier tone
with the industry.
The Office of the Comptroller of the Currency, a national bank
regulator, last week approved Fifth Third's application to be
primarily regulated by the OCC. The Cincinnati-based bank is
currently overseen by Ohio regulators.
OCC head Joseph Otting, a Trump appointee who calls banks
"customers," has praised national charters as a way to let banks
operate more efficiently and be regulated more thoroughly. "The
national bank charter continues to have great value in providing
banks a flexible regulatory framework," Mr. Otting said in an email
response to questions.
Banks in the U.S. may be licensed and overseen primarily by
state or federal regulators. While firms may switch in either
direction, banks usually switch from federal to state regulators,
because state regulators are generally viewed as more accessible
and flexible than their Washington-based counterparts.
From 2014 to 2016, no state banks converted to OCC oversight,
according to the Federal Deposit Insurance Corp. Fifth Third, if it
completes the change, would be the sixth firm since 2017 to switch
to a national bank charter, and the biggest.
To be sure, banks are still moving from federal to state
charters. Last year, 29 banks made that move, according to the
FDIC. But many of those banks were small community lenders.
The banks converting in the opposite direction tend to be
bigger. More than $100 billion in bank assets went from state to
federal oversight through such conversions in 2018, compared with
$8.6 billion going from federal to state oversight that year,
according to data from state regulators.
Banks typically say they switch regulators to seek examiners who
better understand their model or to streamline their compliance
operations when they grow.
"We believe a national charter will be more efficient, given
national banks are regulated and examined by the OCC, rather than
on a state-by-state basis, and subject to a uniform set of laws and
regulations," Gary Rhodes, a spokesman for Fifth Third, said in an
email response.
But critics say the moves amount to " regulatory arbitrage,"
allowing banks to shop around for more favorable regulators and
encouraging lax oversight.
"It's clear that we've gone back to the days when the OCC was
the cheerleader for the national banking industry and an aggressive
champion for every kind of deregulation," said Arthur Wilmarth, a
law professor at George Washington University.
Mr. Wilmarth said the agency had a history of courting banks but
relented in the years after the 2008 financial crisis. He has
advised state regulators in lawsuits against the OCC.
Some of the moves have caused friction between the OCC and state
regulators, which are both funded by fees assessed on the firms
they oversee.
In 2017, a U.S. unit of Japan's biggest bank converted to OCC
oversight, sidestepping a continuing investigation by the New York
Department of Financial Services, its regulator at the time. The
OCC approved the move in days, prompting criticism from the New
York regulator. (The OCC was then under acting head Keith Noreika,
another Trump appointee, though an OCC spokesman at the time said
Mr. Noreika recused himself from the decision.)
The Japanese business, a unit of Mitsubishi UFJ Financial Group
Inc., then sued New York to halt the investigation. In June, the
bank agreed to pay $33 million to settle with the New York
regulator. It didn't admit wrongdoing.
Mr. Otting, a former bank chief executive, said banks have long
been able to choose between state and federal regulators. The OCC,
he added, offers an "unmatched quality" of supervision. "As a
banker," he said, "I slept better knowing OCC examined my
banks."
Write to Lalita Clozel at lalita.clozel@wsj.com
(END) Dow Jones Newswires
September 17, 2019 00:33 ET (04:33 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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