Appeal of Thrifts Blossoming
Ford Motor Co. wants one. So does Nordstrom Inc. And Merrill Lynch & Co.
More than 66 companies have applied for federal approval this year to buy or start a thrift, more than triple the number of applications two years ago.
Why?
“It’s simple,” said banking lawyer Victoria Rostow, who recently left the Treasury Department as the agency’s liaison with Congress on financial service reform. “There’s real apprehension that Congress will never modernize financial laws. And if it ever does, there’s a chance laws could be more restrictive” than current law.
Under current law, thrifts are very attractive for two reasons:
* The more flexible thrift charter offers a nimble way around laws that make it difficult for a financial firm to sell under one roof a full range of products--checking accounts, auto loans, trust services, insurance and brokerage services.
* For nonfinancial companies, thrifts offer a way around laws intended to preserve centuries-old doctrine separating commerce and banking. These laws bar manufacturers and other nonfinancial companies from owning banks, on the assumption that allowing commerce and banking to mix leads to unhealthy concentrations of power, distortions of credit and increased risks to the federal system that insures consumer deposits up to $100,000.
Some say it was intentional, others say it was a loophole, but for whatever reason, the limits Congress placed on thrift ownership aren’t as restrictive as the ones placed on banks.
If Congress revamps banking laws and limits the mix of commerce and finance, executives hope current thrift owners would be exempted, or “grandfathered,” from new restrictions--hence the rush to get in “under the wire,” as Rostow put it.
That’s precisely what irks bank regulators at the Federal Reserve and competitors in the commercial banking industry. They argue that a dual banking system has been created--commercial banks that are tightly regulated and thrifts that have far fewer limits. The time has come, they say, to merge the thrift and bank charters, and allow uniform powers.
Thrifts used to be boutique institutions specializing in home loans. But bad management and economic shifts pushed many thrifts into insolvency, culminating in the roughly $200-billion taxpayer-funded bailout in the late 1980s.
Rather than doing away with the thrift charter as part of the bailout, Congress allowed thrifts to survive as independent from banks, though it required that thrifts direct at least 65% of their assets to home lending. But in 1996, thrift industry lobbyists succeeded in getting the charter loosened so thrifts now need to have 65% of their assets in consumer loans--which can consist entirely of loans for credit cards or other consumer products, as well as home mortgages.
The change made the thrift charter much more attractive, experts said. It means thrifts not only can do everything consumer retail banks can, but often much more. Thrifts, unlike a bank, can be owned by anyone and can more easily sell anywhere in the country any type of consumer product: checking accounts; credit cards; equity and real estate loans; insurance; and securities.
The only restriction on ownership is that a nonfinancial company can own only one thrift, though critics argue this rule, known as the unitary thrift holding company rule, is meaningless because one thrift can set up branch offices in several states.
“We’ve been encouraging our members for over two years to apply for a thrift charter,” said David Pratt, senior lobbyist for the American Insurance Assn., which represents property and casualty insurers. “It’s one of the ways to compete in the new financial services universe in case there is no fundamental change in the nation’s basic financial service laws.”
Congress has tried, but failed, in every session for more than a decade to pass a law that would revamp and make sense of decades-old financial services legislation and regulation.
Federal Reserve Chairman Alan Greenspan favors barring commercial companies from owning banks or thrifts, at least for the time being, pointing out that ownership ties between banks and manufacturing companies in Japan, South Korea and other countries in Asia helped mask problems there that have now plunged those economies into deep recessions.
Sen. Paul S. Sarbanes of Maryland, ranking Democrat on the Senate Banking Committee, and House Banking Committee Chairman Jim Leach (R-Iowa) are devout opponents of mixing commerce and banking. They say letting banks and non-bank companies affiliate will lead to dangerous concentrations of economic power; would create conflicts of interest; and would distort credit because banks might be tempted to make loans to affiliates, even if they are bad risks.
“Particularly in light of the recent experience in Asia, I believe there is compelling reason to maintain the separation of banking and commerce in our financial system,” Sarbanes said. “Affiliations between federally insured financial institutions and commercial companies . . . should not be permitted.”
He and others argue that allowing manufacturers and other nonfinancial companies to own banks increases the risk for taxpayers, who are ultimately on the hook if the federal deposit insurance fund--financed through assessments on banks and thrifts--goes bust.
The Treasury Department, which sets the Clinton administration’s policy on banking, is divided on the issue.
The Office of Thrift Supervision has been granting new charters to all kinds of companies, and its director, Ellen Seidman, favors keeping the thrift law as it is. She argues that strict limits on the ability of thrifts to lend to affiliates and to commercial companies prevent the abuses of power that worry Greenspan and others.
The frenzy to own a thrift merely reflects the desire by an array of companies to serve consumer needs, she said. “For entities whose major focus is individuals and small business, it’s a structure that allows you to do the things that are the focus of the whole financial services modernization debate, such as one-stop shopping and cross-marketing of financial markets,” Seidman said. “It’s a very forward-looking structure.”
Treasury Secretary Robert E. Rubin, however, told Congress in June that he personally agrees with Greenspan, apparently in opposition to Seidman. But Treasury officials hasten to add the department has no official position.
Thrift owners, even those who don’t engage in nonfinancial activities now, say they should be allowed to do so or to sell their thrift to a nonfinancial company. If that right is taken away by Congress, it would decrease the value of their institution.
“There is no evidence of any Asian contagion,” said Lou Nevins, president of the Western League of Savings Institutions, a lobby group that primarily represents the California thrift industry, which holds about 25% of the industry’s assets.
“The industry just earned $2.23 billion in the third quarter of 1998, and you have to believe that the thrift charter and the powers that go with it are at least part of the reason for this incredible comeback,” he said, referring to the industry’s troubles in the 1980s. “One of the reasons the industry has been successful is the value of the unitary charter in attracting investments to the industry.”
