By Switching Their Charters, Banks Skirt Supervision

By Binyamin Appelbaum
Washington Post Staff Writer
Thursday, January 22, 2009

At least 30 banks since 2000 have escaped federal regulatory action by walking away from their federal regulators and moving under state supervision, taking advantage of a long-standing system that allows banks to choose between federal and state oversight, according to a Washington Post review of government records.

The moves, known as charter conversions, highlight the tremendous leverage that banks hold in their relationships with government supervisors.

The financial crisis has pushed regulatory reform high up the agenda of the Obama administration and congressional leaders. Timothy F. Geithner, the Treasury secretary nominee, sounded the theme at his confirmation hearing yesterday, calling for a "stronger, more resilient system."

Some regulatory experts say that eliminating the opportunity to switch regulators is critical to strengthening oversight.

The number of public enforcement actions nearly tripled last year as federal regulators struggled to contain the spreading financial crisis. The actions typically require banks to make major changes that improve their financial health and reduce the risk of failure. But because regulators cannot prevent charter conversions, banks also have the option of changing their regulator.

Federal regulators, for instance, came down hard on Commerce Bank/Harrisburg last February, ordering the Pennsylvania lender to limit its dealings with companies owned by its officers and directors. The bank submitted an application to be chartered and supervised by the state of Pennsylvania, which was granted in November. As a result, the company said, the federal limitations no longer applied.

Since 2000, about 240 banks have converted from federal to state charters. Regulators and bank executives say many of those institutions simply wanted to save money. While national charters allow banks to operate more easily across state lines, state charters are cheaper. State regulators also advertise their accessibility and say they better understand local conditions and concerns.

But the pursuit of leniency is an important undercurrent. About 12 percent of the banks that moved to state charters escaped federal regulatory actions, and experts on bank oversight say such cases are the tip of a broader pattern. They note that some banks convert in anticipation of a public enforcement action, or after persuading federal regulators to terminate an action.

Other banks may have converted after being subjected to less serious regulatory actions, which are typically confidential. Only the most serious problems draw a public order, such as indiscriminate lending, flawed accounting or refusing to make requested changes voluntarily.

The consequences of any conversion are hard to measure. One of the 30 banks that terminated a public enforcement action by switching charters subsequently filed for bankruptcy protection and several others were sold. Experts say that when banks avoid taking necessary medicine, the economy ultimately is weakened.

Most of the proposals to overhaul financial regulation are variations on the idea that the government should oversee more kinds of financial companies, such as hedge funds and mortgage lenders. But a number of experts say the existing system also needs urgent reform, including the relationship between state and federal banking regulators. They warn that putting more companies beneath the government's umbrella must be combined with a plan to patch its holes.

"The whole framework of our system was set up at a different time in American history, and it's really much more a matter of history than logic," said Eugene Ludwig, who served during the 1990s as Comptroller of the Currency, the chief regulator for national banks.

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