Bankers rally around troubled watchdog

The Office of Thrift Supervision, on the brink of being reformed out of existence by Obama's regulatory overhaul, finds a surprising amount of support.

By Colin Barr, senior writer

President Obama wants to streamline regulation, but bankers question parts of his plan.

NEW YORK (Fortune) -- No one said selling a regulatory reform package would be easy.

As a case in point, consider the Office of Thrift Supervision. The OTS, a branch of the Treasury that was established 20 years ago to supervise savings-and-loans, would be eliminated in the oversight overhaul the Obama administration outlined Wednesday.

The Obama plan would streamline regulation by merging the OTS with another banking regulator, the Office of the Comptroller of the Currency, which supervises national banks.

The administration would also do away with the federal thrift charter that the OTS enforces. This is being done to reduce so-called regulatory arbitrage -- in which banks shop for the most lenient overseer.

"The fragility of thrifts has become readily apparent during the financial crisis," the government said in one of the five fact sheets it issued Wednesday to explain its approach. "Eliminating the thrift charter is one of the most important steps towards a more prudent, efficient financial regulatory system."

Given OTS's poor reputation, you wouldn't think the proposal would stir much interest, let alone opposition. Many outsiders say the OTS typifies the shortcomings of the current setup, in which regulators are "captured" by their subjects.

OTS was the regulator for many of the high-profile financial casualties of the past year -- including IndyMac, Countrywide, Washington Mutual and even AIG (AIG, Fortune 500). Its acting director was put on leave in March as Treasury reviewed the agency's actions in an accounting scandal at IndyMac just two months before it failed.

Yet while the banking industry took pains Wednesday to support the broad outlines of the Obama plan, it became clear it has concerns about numerous details -- such as doing away with the OTS.

"If the OTS and the OCC merge, at a minimum, the federal thrift charter should still survive and be subject to supervision and regulation by a separate division within the OCC," the Independent Community Bankers Association said in a statement.

The bankers say eliminating OTS would wipe out a culture that understands the needs of small thrifts, which are obliged to channel most of their lending to housing-related activities.

"The vast majority of OTS-regulated thrifts have done a great job supporting housing," said Chris Cole, senior regulatory counsel at the ICBA. "We think the merger could have some impact on housing lending."

Needless to say, anything that helps to make more money available for mortgages at a time when home prices in many markets are in free fall is likely to have some appeal in Congress. Bankers have taken note.

"If we want to make housing a national priority, we need to keep issues like this in mind," said American Bankers Association spokesman Wayne Abernathy.

There are also questions about whether the OCC is the right agency to take over supervising small thrifts, given its current brief of overseeing larger national banks.

"Losing the OTS would be a mistake," said Jim Wheeler, a financial institutions partner at law firm Bryan Cave in Atlanta. "What Bank of America has in common with the S&L on the corner is nothing. They don't even speak the same language."

Others go even further, noting that the OCC can match the OTS bank for bank when it comes to problems. The OCC was the regulator for Wachovia and National City, which were sold in distress to Wells Fargo (WFC, Fortune 500) and PNC (PNC, Fortune 500), as well as for Citigroup (C, Fortune 500) and Bank of America (BAC, Fortune 500), which soldier on thanks to hundreds of billions of dollars in taxpayer subsidy.

And of course, no banking overseer looks particularly good after the collapse of the biggest housing bubble in history -- which bankers say underscores the need to move carefully on regulatory reform.

"There's a need to make changes, but there's also a need to take the time to get it right," Abernathy said. "This crisis shows us the danger of making bad mistakes."  To top of page

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