In the early 1950s, Glenville Bank found itself trapped in its lone office on Mohawk Avenue. The bank wanted to broaden its reach by opening branches throughout the Capital Region, but it kept getting stonewalled by its banking regulator: the state.
Bank executives side-stepped that problem by trading their state banking charter for a national bank charter in 1952. They changed the bank’s name to 1st National Bank of Scotia and opened their first branch in Niskayuna in 1956. Eight more offices followed over the half century.
“We would have been stuck with this one office if there wasn’t a choice” in regulators, said 1st National President John Buhrmaster.
But as the Bush administration looks to put the U.S. financial regulatory system through its biggest overhaul since the Great Depression, area bankers such as Buhrmaster worry they will lose that choice.
The U.S. Treasury Department on Monday unveiled a series of sweeping proposals to consolidate regulatory agencies and put more financial institutions under the federal government’s eye. The proposed changes come as the federal government is trying to get its hands around an unruly economy battered by the housing slump and the credit crunch it spawned.
Among Treasury Secretary Henry Paulson’s plans that have irked area bankers is the proposal for direct federal supervision of state-chartered banks. He also wants to eliminate the national thrift charter for savings banks, which primarily hold retail deposits and make residential mortgages.
“When you only have one choice, you lose leverage. You can’t say, ‘I’m going to walk,’” said Buhrmaster.
In the last six years, three area banks have chosen to become national thrifts: TrustCo Bank in Glenville, First Niagara Bank in Lockport and Patriot Federal Bank in Canajoharie.
“They ought to have that choice,” said John Scarchilli, president and chief executive office of Pioneer Bank, a state-chartered bank based in Troy.
Although the task of overhauling the regulatory system will likely be left to a new president and Congress, its prospect is stoking a decades-old debate on how to modernize the financial industry.
“We believe that we should be focusing on strengthening, not weakening, the dual [regulatory] banking system. There is brilliance to this centuries-old system that fosters innovation, protects consumers and serves as a restraint on excessive or unreasonable regulation,” state Department of Banking Superintendent Richard Neiman said in a statement.
In defending his regulatory “blueprint,” Paulson called the thrift charter “relatively obsolete” and “no longer necessary to ensure sufficient residential mortgage loans availability.” He wants to combine the Office of Thrift Supervision, which was created in 1989, with the Office of the Comptroller of Currency, which oversees national banks, such as Bank of America in Charlotte, N.C., and KeyBank in Cleveland.
But TrustCo did not view the thrift charter as obsolete when it traded its national charter for a thrift charter in 2002 — the year the bank launched its expansion into Florida. TrustCo Vice President and Treasurer Kevin Timmons said thrifts’ greater flexibility in expanding across state borders attracted the bank to that charter.
In 2003, First Niagara traded its state charter for a national thrift charter. The switch came when the bank’s parent, First Niagara Financial Group, completed a full initial public offering.
First Niagara Chief Financial Officer Michael Harrington said the bank went with the national thrift charter because its mandate for heavy residential mortgage lending practices best reflected First Niagara’s loan portfolio.
The Office of Thrift Supervision limits thrifts’ lending activities by putting caps on various types of loans. At least 55 percent of their portfolios must consist of residential housing loans.
National banks lack those restrictions on residential, commercial and consumer loans. The American Bankers Association pointed to thrifts’ strong residential mortgage base in defending their charter.
“The thrift charter is a strong point in our financial system, converting savings into new home opportunities. As long as home ownership remains a high priority — and the ABA believes that it must be — we need an industry focused on and dedicated to promoting and financing homeownership,” ABA President and CEO Edward Yingling said in a statement.