The Washington Post has a very good story this morning on bank regulation.
It found that at least thirty banks have escaped impending consequences from the feds by switching to state charters, something that, inexplicably, is legal. Here’s the excellent second graph:
The moves, known as charter conversions, highlight the tremendous leverage that banks hold in their relationships with government supervisors.
Yes, they can do this:
Federal regulators, for instance, came down hard on Commerce Bank/Harrisburg last February, ordering the Pennsylvania lender to limit its dealings with companies owned by its officers and directors. The bank submitted an application to be chartered and supervised by the state of Pennsylvania, which was granted in November. As a result, the company said, the federal limitations no longer applied.
And this isn’t an isolated incident.
About 12 percent of the banks that moved to state charters escaped federal regulatory actions, and experts on bank oversight say such cases are the tip of a broader pattern. They note that some banks convert in anticipation of a public enforcement action, or after persuading federal regulators to terminate an action.
Other banks may have converted after being subjected to less serious regulatory actions, which are typically confidential. Only the most serious problems draw a public order, such as indiscriminate lending, flawed accounting or refusing to make requested changes voluntarily.
And this is disturbing:
Regulators are funded by assessments on the banks they oversee, so the agencies tend to treat the banks as customers because they end up competing for their business. Critics have long complained that the system allows banks to play regulators against one another, creating what former Federal Reserve Chairman Arthur Burns memorably described as a “competition in laxity.
I like a lot about this story, including how it says point blank what the problem is and doesn’t pussyfoot around proffering the obvious solution. The Post gave it considerable space and put it on page one, too.