Federally Chartered Banks Can Get Out From Under the OCC's Thumb

Federally chartered banks that would prefer to avoid the aggressive regulatory approach the Office of the Comptroller of the Currency apparently has planned for this examination season suddenly have a workable alternative: they can flip to state-chartered status, and have state regulators do the job.

Don’t wince, it may not be the multi-jurisdictional nightmare you think. For banks in three states in the Northeast, in particular, flipping to state charters became a very sensible option as of a couple of weeks ago. On April 15, the chief banking regulators of New Jersey, New York, and Pennsylvania signed a tri-statebanking compact that will materially lighten the regulatory burden on banks that operate across those three states’ borders, by essentially granting banks’ home-state regulators regulatory preemption in all three jurisdictions.

Which clears away an awful lot of red tape. For years, after all, one of the chief benefits of a federal charter has been that it allows a bank to operate under a uniform set of rules of the OCC, regardless of where it opens branches. State-chartered banks that operate in multiple states, by contrast, operate under a patchwork of state regulation.

The new compact changes that. What’s more, the agreement will likely soon extend beyond just New Jersey, New York, and Pennsylvania. Steven Goldman, New Jersey’s banking and insurance commissioner says he’s received indications of interest from other states interested in joining the pact. And the three states are each considering legislation that would have the effect of allowing their banks to open new branches in 22 additional states.

In addition, the banking laws in all three states are written in such a way that federally chartered institutions that choose to switch to state charters will be able to keep offering all the products and services they offer under federal charter. So the practical, operating effect of switch from federal to state regulation will be basically zero.

This is a very big deal, in my view. For years, banks that operate in multiple states had little choice but to operate under federal charter, and were stuck with regulation by the OCC no matter how matter how hard-nosed the agency became. No longer. Now they have some options. I wouldn’t be surprised if a lot of institutions make the switch.