A Senate proposal to strip the Federal Reserve of some of its regulatory powers could have an unwanted side effect: drastically higher fees on smaller state-regulated banks.
If it causes a rush by state institutions to change charters, the proposal could threaten a dual system of state and federal banking regulation in place in the United States since 1864, say state regulators, who oppose the provision.
Ohio, Alabama and New York state regulators have been lobbying lawmakers over the past weeks, arguing that Senate Banking Committee Chairman Christopher Dodd's proposal would prompt the largest banks to switch their state charter to become national banks.
The resulting loss of examination fees from larger state banks, state regulators say, would force them to drastically hike fees for those state chartered banks that remain under their watch, in an attempt to recoup lost revenue. The higher fees could then prompt more banks to abandon their state charters, they say.
The Senate is expected to vote within weeks on the reform bill, which President Barack Obama says will put rules in place to tighten the screws on banking regulation after the worst financial crisis since the Great Depression.
Under the Senate bill, the Federal Reserve would supervise bank holding companies with more than $50 billion in assets. But the Federal Deposit Insurance Corp. (FDIC) would be the federal regulator for all state chartered banks.
That means 11 of the 15 state-chartered banks with more than $50 billion in assets currently overseen by the Fed and the state would get a third regulator in the FDIC.
But swapping a state charter for a national bank charter would keep oversight of those banks with only two regulators, the Office of the Comptroller of the Currency and the Fed.
"You'd have a much higher practical burden, not to mention the fees" under the proposal, said Mike Van Buskirk, president of the Ohio Bankers League, a bank lobby group. "Given that, why would anyone be a state-chartered bank?"
State banking regulators say the Senate bill could be changed to take their concerns into account.
"I am hopeful a compromise will be found," said Trabo Reed, deputy superintendent at the Alabama Banking Department.
John Reardon, superintendent at the Ohio State Banking Department, said the message he has been taking to elected officials in his state appears to be getting through.
"I think people in Congress just hadn't understood that the unintended consequence of the bill is higher fees for small banks," Reardon said.
A spokeswoman for U.S. Senator Sherrod Brown of Ohio said Brown supports efforts to strengthen regulation of Ohio's biggest banks and also recognizes the need to preserve the number of state chartered banks.
Not all are convinced by state banking regulators' arguments, arguing that some of the blame for the subprime mortgage crisis can be traced to failures in state regulation.
"Many of the worst residential loans were made by entities solely subject to state regulation and supervision," such as subprime lender New Century, said Douglas Landy, partner at Allen & Overy in New York.
The 11 banks central to state regulators' concerns hold a collective $1.1 trillion of assets and pay a substantial amount of examination fees to eight state banking departments.
If Alabama's two largest banks, Regions Financial Corp and BBVA Compass Bancshares, dropped their state charter, Alabama would lose about 46 percent of the fees it takes in from bank examinations, for example.
Ohio would lose about 40 percent in fee revenue if its largest bank, Fifth Third Bancorp, converted to a national bank charter, and New York would lose 22 percent upon conversion of its five largest state charters.
"What you'll see is a tremendous increase in cost to the smaller banks, which at the moment are subsidized to some extent by the large banks' fees," said Reed.
Ernest Patrikis, partner at law firm White & Case in New York and a 30-year veteran of the New York Federal Reserve, said he expects the lobbying by state regulators will give Congress pause.
"If you believe in the dual banking system, the state banking regulators' concerns are rational and real," Patrikis said.
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