How This Week's Bank & Thrift Data Undermine Obama's Plan To Merge Regulators

What’s the difference between a thrift and a bank, other than that the former has a number of dangerous regulatory loopholes it can jump through whenever it pleases and a lax regulator? That was the Obama Administration’s rhetorical question to bankers and policymakers earlier this year, when it first laid down proposals to merge the Office of Thrift Supervision (OTS), a thrift regulator, together with the Office of the Comptroller of the Currency, a regional bank regulator.

With the release of OTS and Federal Deposit Insurance Corporation (FDIC) data, the President’s claim that thrifts would thrive just as effectively under a combined bank-thrift regulatory body has gotten a whole lot weaker.

Wednesday, OTS reported that of the 794 thrifts the regulator oversees, 40 are considered problematic, while 8 have been forced to close. The next day, FDIC said that 434 of the 8,246 banks whose deposits it insures are still unsafe, while 81 have been forced to close. Notably, exactly the same percentage of thrifts and banks are on some sort of “sick” list, and the thrifts have a similar chance of survival. So far, so good.

FDIC Chairman Sheila Bair doesn’t expect that situation to change much, either. “We expect the numbers of problem banks and failures will remain elevated, even as the economy begins to recover,” Bair said in a statement.

The statistics weighing against disbanding the thrift model get stronger when you take into account the various sizes of the institutions involved. While thrifts posted a collective net profit of $4 million last quarter — their first in two years — banks insured by the FDIC made a loss of $3.7 billion. Judging by the second quarter earnings reports that made the headlines, most of the losses were realized by small banks.

It’s hard to stand up for OTS. Any regulator that oversaw IndyMac, Countrywide, Washington Mutual and AIG is clearly asleep at the switch some of the time. But small thrifts represent an important part of society, providing real-estate related loans and mortgage services. As such, homeowners need thrifts to have a regulator with that specific interest in mind.  

Safeguarding smaller institutions is clearly something bank regulators are very bad at doing. By far the majority of the 81 banks which have been forced to close are regional banks such as Guaranty and Colonial BancGroup. That’s because upon bankruptcy, banking regulators can often farm out the prettier assets of the smaller banks to larger ones, and still look as if they are doing their job.

The same is not true of thrifts, many of whose customers would be massively disadvantaged if their assets were sold off to a national bank, since its priority is quarterly interest profit maximization and large-scale cost-cutting.

“Losing the OTS would be a mistake,” Jim Wheeler, a financial institutions partner at law firm Bryan Cave in Atlanta told CNN Money. “What Bank of America has in common with the S&L on the corner is nothing. They don’t even speak the same language.”  

The data presented this week clearly outlines that although thrifts might not have the best supervision in the boom times, in the lean ones there is someone looking out for their interest.