January 22, 2009

Banks can dodge federal regulators

At least 30 U.S. banks since 2000 have sidestepped federal directives by switching to state supervision, a Washington Post study found.

Over the past eight years 240 banks have chosen to make the switch from federal oversight to state charters. Of those 240, it is difficult to assess how many anticipated federal action they wanted to avoid, the Post reported Thursday.

The various standards between federal regulations and the 50 different state systems creates what former Federal Reserve Chairman Arthur Burns once called, a competition in laxity.

A bank that's under an enforcement order may be trying to just get out from under that enforcement order. We don't think as a matter of public policy that that's prudent bank regulation, said attorney Robert Lamont at the West Virginia Division of Banking.

About 1,550 banks operate under national charters, which places them under the jurisdiction of the Office of the Comptroller of the Currency. About 5,600 banks are state-chartered.

Similarly, the Office of Thrift Supervision oversees federally chartered savings-and-loans in competition with state systems.

The systems also include a fallback federal regulator, the Federal Deposit Insurance Corp.

Treasury Secretary nominee Timothy Geithner at his confirmation hearing on Capitol Hill called for a stronger, more resilient system.