The Treasury blueprint; Treasury Secretary Henry Paulson started a conversation in Washington when he proposed a sweeping blueprint for revamping regulation of U.S. financial services providers. Winners and losers are lining up on both sides of the proposal

Mortgage Banking, Sept, 2008 by Jack Milligan

Stay tuned, because the Fed's role as a lender of last resort to ailing non-bank financial companies raises the controversial policy question of whether such companies should be saved in the first place. It also pits the Fed against the SEC in a classic Washington struggle over turf.

Future of the dual-banking system

Among the blueprint's long-term recommendations is the creation of a single prudential financial regulator in Washington to replace the five federal agencies that currently perform that function, and the establishment of a new federal insured depository institution (FIDI) charter.

In order to obtain deposit insurance, all depository institutions would have to obtain an FIDI charter--including those that already had state charters. The ABA's Abernathy worries that if it ever found its way into law, this change could sound the death knell for the dual-banking system. Many small banks, for example, might simply forego the expense of maintaining two charters.

"The proposal wouldn't ban state charters, but everyone would have to get a federal charter to get deposit insurance," says Abernathy. "If you do that, you don't need a state charter."

Despite being a former federal bank regulator, Hawke defends the dual-banking system as something that has stood the test of time. "Having duplication of regulation, even though there is some overlap, is a good thing," he says.

Another former federal bank regulator, speaking on background, questions whether the Treasury proposal consolidates too much power in Washington. "I don't think the country is ready for a regulatory system that is so monolithic," this person says.

Elimination of federal thrifts

Among the blueprint's intermediate recommendations would be the phasing out of the federal savings association charter, established in 1933 to provide a stable source of funding for home mortgage lending. Eventually all federal thrift charters would be transitioned to national bank charters, and the OTS would be merged into the OCC.

The blueprint's rationale is that the importance of federal thrifts as a source of mortgage funding has gradually diminished in recent years, even as the thrift industry itself has shrunk. And while this trend is an indisputable fact, the thrift charter still commands the loyalty of a significant number of diehards.

"This is another example of an issue where someone who is new to town says, 'Why do we have two different [federal charters]?,'" says Hawke. "My reaction is: So what?"

The way Hawke sees it, the future viability of the thrift industry depends on there being a sufficient number of institutions to fund their own regulatory agency. And the day may come when the industry's ranks have dropped too low to justify its continued independence. "But that's not the case now," Hawke says. "The [OTS] is still viable."

The ABA's Abernathy also makes the point that so long as it continues to be a national policy priority to promote homeownership, it is useful to have a financial institution whose primary mission is to support that objective. "The [Treasury's] argument is either wrong or premature," he says.