Island Investing: Bank Regulators

My column in today’s KeysWeekly:

Q. Who regulates the banks?

A. Banks are not simply assigned a regulator, as you might expect. Instead, they pick their own regulators through a process informally known as regulatory arbitrage. In essence, banks shop around to find the best outfit to oversee them. You may also find it ironic that regulators’ budgets are often determined by the number and size of the banks they oversee.

Let’s say your company were in the insurance business and wanted to get into banking. How would you do it? While there are many different regulators your existing business might work with, you would choose only one lead regulatory agency to work with as a bank.

Your options among the four federal regulators are as follows:

The Fed – This powerful institution’s main job is to set monetary policy, but it also oversees state-chartered banks and trust companies that belong to the Federal Reserve System.

FDIC – The Federal Deposit Insurance Corporation regulates state-chartered banks that do not belong to the Federal Reserve System and offers insurance to every bank. The FDIC has responsibility for the whole deposit insurance system and may seize unhealthy banks.

The Office of the Comptroller of the Currency – OCC regulates most of the big national banks. Read into that what you may. More pointedly, the OCC can preempt state rules, so those large banks can in many cases ignore state regulations.

Office of Thrift Supervision – OTS regulates thrifts and savings-and-loans, which are similar to commercial banks except they have requirements as to percentages of home mortgages or business loans held. OTS has looser capital requirements and less paperwork than the Fed.

All that said, regulators have overlapping oversight roles, so it can still be very difficult to determine which regulator actually has the authority over a particular bank. Bank of America, for instance, is big and diverse enough that its commercial banks are regulated by OCC, but it owns thrifts regulated by the Office of Thrift Supervision and its holding company is regulated by the Fed. And you thought credit default swaps were complex.

Cale Smith

About Cale Smith

Portfolio Manager at Islamorada Investment Management.

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