MISSING the mark

Northwestern Financial Review, May 1-May 14, 2008 by Bengtson, Tom

Treasury's "blueprint for reform" ignores community banks, unlikely to spur change

The U.S. Treasury Department's proposal for regulatory reform, announced March 31, completely ignores the community bank sector of the financial services industry, leaving many industry analysts scratching their heads. The so-called "blueprint" presented by Treasury Secretary Henry Paulson proposes sweeping reform which would essentially eliminate the states' role in financial services regulation.

"This proposal makes any state charter redundant," said Wayne Abernathy, a former Treasury Department official who now works for the American Bankers Association. "You could have a state charter, but it would serve no purpose. It forces everyone to get a federal charter. They believe they need to federalize the entire financial system."

The idea of federalizing all banking institutions, similar to the government's federalization of all airport security personnel following 9-11, isn't going over well in the Upper Midwest, where three-quarters of the banks hold state charters. In the 14 states that make up North·Western Financial Review's coverage area, 2,691 of 3,532 banks hold state charters. "Our bankers support the overall concept of charter choice," observed Joe Witt, president and CEO of the Minnesota Bankers Association.

"In Iowa, we have a very good state system," noted John Sorensen, president and CEO of the Iowa Bankers Association. "Our law requires our chief banking regulator to have experience as a banker." Sorensen said the nation's dual banking system has spawned product innovation that makes the banking industry in the United States a world leader.

Jeff Gerhart, president of the Bank of Newman Grove, Neb., said bankers need to have charter options. Gerhart converted his $31 million bank to a state charter in 2005 after it had been a national bank for more than 100 years. "It would not be a good environment for bankers if we didn't have a choice," Gerhart said. Nearly a dozen Nebraska banks have changed charters in the last couple of years, Gerhart noted.

Tom Johnson, president of American National Bank of Minnesota, based in Baxter, knows the value of charter choice. The company opened in the early 1980s with an industrial loan company charter from the state of Minnesota. After establishing several branches, it converted to a national bank charter in 2001.

While Johnson said he can appreciate the need for regulatory restructuring, he said the dual banking system is not the problem. "What we need is a system that regulates banks and very large banks, separately," he commented. Large banks with international operations should be regulated by one agency and community banks by another, he suggested.

Proposal details

In March of 2007, before many people were talking about a subprime mortgage crisis, recession and a housing slump, the U.S. Treasury Department hosted a conference on capital markets competitiveness featuring participants such as Warren Buffett, J.P. Morgan Chase CEO James Dimon, General Electric Chairman and CEO Jeff Immelt, Charles Schwab founder Charles Schwab, New York City Mayor Michael Bloomberg, former Federal Reserve chairmen Alan Greenspan and Paul Volcker, former SEC chairman Arthur Levitt and former Treasury secretary Robert Rubin. Follow-up work during the intervening year resulted in a 218-page report which was released to the public on March 31, 2008.

Camden Fine, president and CEO of the Independent Community Bankers of America, slammed the report with this comment that was published on the front page of the April 1 Wall Street Journal: "It reads like amateur hour and it's because none of those guys ever worked in a regulated, chartered bank."

Paulson, a former CEO of Goldman Sachs, outlined a three-part plan to change the country's financial regulatory system. The plan is made up of a series of short-term, intermediate, and long-range recommendations. In the near term, Paulson said the Federal Reserve should have the opportunity to collect more information from non-bank financial institutions which rely on the Fed for short-term liquidity. This includes conducting on-site examinations. Treasury also recommends creating a new entity called the Mortgage Origination Commission, which would evaluate, rate and report on the adequacy of each state's system for licensing and regulating mortgage originators. Paulson said the commission is a response "to the fact that a very large percentage of the problematic subprime mortgages originated in the last four years were originated by state-regulated entities."

Intermediate term recommendations include a suggestion that state chartered banks be subject to direct federal supervision. Treasury recommends a study be conducted to streamline the regulation of state-chartered banks with a federal guarantee by either the Federal Reserve or the FDIC. "Rationalization in this area would result in a more efficient and less duplicative regulatory system," Treasury says. The plan further calls for the phase-out of the federal thrift charter and the elimination of the Office of Thrift Supervision.