Sometimes a bank just wants a little more carrot and a little less stick.
That seems to be what has motivated six state-chartered banks so far this year to make the Federal Reserve their regulator.
The move is as much a rebuke of the Federal Deposit Insurance Corp. as it is an affirmation of the Fed’s reputation, and industry experts say the FDIC may have finally received the message. The trend may be waning.
Reading Cooperative Bank, North Brookfield Savings Bank, Watertown Savings Bank, Canton Cooperative Bank, South Shore Savings Bank and Walpole Co-operative Bank all became members of the Federal Reserve system this year.
The FDIC’s bank examiners have become “overaggressive,” said one industry expert. “Some examiners have said there’s zero tolerance for non-compliance.”
And that lack of tolerance is always apparent.
The Fed itself isn’t willing to comment on what drives banks into its arms. A spokesman told Banker & Tradesman, “Selecting a regulator is a proprietary matter for each individual bank.”
Officials from the FDIC said the choice may involve more strategy than a simple preference for softer treatment.
“If they are regulated by the Fed, that makes them member banks, which allows them to borrow from the Fed, have a holding company regulated by the Fed, etc.,” Noted FDIC spokesman David Barr. “We don’t provide liquidity to the banking system in terms of borrowings, nor do we regulate holding companies.”
Killing With Kindness
But at least one of the Massachusetts banking executives to make the switch this year said the Fed’s helpful, open style of regulation differs drastically from the FDIC, which is more likely to answer a call for help with a slap on the wrist.
“It’s a very different tone coming from the top,” said Julieann Thurlow, president and CEO of Reading Co-operative Bank. The Fed wants to know, “‘What’s your business model? Show us how you’ll get there.’ They can be your partner and can work with you.”
“A few strategic decisions I’ve had to make over the last six months, I don’t hesitate to pick up the phone,” Thurlow said. “They get back to us and answer the question. The FDIC was hesitant to give a reply that wasn’t an FIL (Financial Institution Letter).”
Thurlow noted that Reading Co-operative “did fine” on its last FDIC examination. The switch “was a reaction to the tone.”
Soon after joining last February, Reading Co-operative got a visit from three representatives of the Fed’s safety and soundness department.
The visit was to discuss risks the bank faced, opportunities on which it could capitalize, and ways in which the Fed could help Reading Co-operative meet its goals and mitigate risk, Thurlow said.
“I’ve never had anyone come out and have that kind of dialogue with me,” she said.
The Fed is scheduled to visit Reading again Sept. 12 for an examination.
“In speaking with other CEOs, the Fed doesn’t take it easy on them. It’s just a different style of regulating.”
The FDIC “really got a lot of complaints,” the industry expert said, “and I think the local FDIC has heard them” and reassigned examiners.
Massachusetts Commissioner of Banks David Cotney told Banker & Tradesman the state Division of Banks is neutral on which regulator state-chartered banks choose.
And while the reasons for switching are “strategic and varied,” the division will notice if a bank is trying to switch regulators in order to avoid an enforcement action, Cotney said.
He said none of the six to make the switch this year were attempting to avoid discipline.
What they were trying to avoid was the nitpicking, the lack of flexibility and general unhelpfulness they got from the FDIC.
Thurlow had a writing analogy for the difference between regulation by the FDIC and regulation by the Fed: While the latter would want to discuss the strengths and weaknesses of what had been written, the former would “tell you about the five typos” they found.
