U.S. Regulatory Reform – Impact on the
Thrift Industry
POWERFUL INSIGHTS
On July 21, 2010, President Obama signed the Dodd-Frank
Wall Street Reform and Consumer Protection Act, the longawaited and much-debated congressional response to the
financial crisis. The Act’s many provisions will profoundly
affect the financial services industry, in its broadest sense,
for many years to come through such sweeping changes as
the establishment of the new Bureau of Consumer Financial
Protection (BCFP), stricter oversight of systemically important
financial institutions and changes to the derivatives market.
Issue
Besides being subject to the many provisions affecting
depository institutions generally, thrifts and thrift holding companies (THCs) also are affected by several specific
changes, the most important of which is the dissolution of
the Office of Thrift Supervision (OTS). The Act divides the
OTS’s supervisory responsibilities among other regulatory
agencies as follows: The Office of the Comptroller of the
Currency (OCC) will assume rulemaking authority for all
thrifts and supervise federally chartered thrifts, the Federal
Deposit Insurance Corporation (FDIC) will supervise state
chartered thrifts, and the Federal Reserve Board (FRB) will
supervise and assume rulemaking authority for thrift holding companies. The BCFP will oversee consumer compliance
at organizations with more than $10 billion in assets.
Dodd-Frank also imposes new penalties for violating the
Qualified Thrift Lender (QTL) test, establishes new rules
around the levels and composition of capital for thrifts, and
requires thrift holding companies engaging in nonbanking
activities permissible for Financial Holding Companies
(FHC) to meet the FHC qualifications of having depository
institution subsidiaries that are well-managed, wellcapitalized, and have satisfactory Community Reinvestment
Act (CRA) ratings. Additionally, for federal thrifts as well as
national banks, Dodd-Frank contains important provisions
limiting the federal preemption of state consumer law.
Challenges and Opportunities
While the thrift charter remains nominally intact, the Act
puts pressure on thrift organizations to adhere to their
residential real estate focus or consider the benefits of
converting to a bank charter. Regardless of whether a
thrift decides to retain its charter or convert to a bank, it
is certain to be subject to more “bank-like” regulation.
While some thrifts will be precluded from converting to
banks because of their ownership, those which do have
the option should undertake a cost/benefit analysis of
the thrift charter versus the bank charter to determine the
optimal organizational structure, considering QTL compliance requirements, the limitations on federal preemption
in the Act, and the organization’s current and future plans.
Both charter options require the management of thrifts
to consider new technical regulatory requirements and
prepare for changes in regulatory oversight.
Adjusting to a new regulator likely will be a significant
challenge for many thrift organizations. The OTS has a
reputation of being more accommodating than other
regulators to the institutions it supervises. Critics of the
OTS have – justifiably or not – pointed to the failure or
near-failure of financial institutions such as IndyMac and
Washington Mutual (for all of which the OTS served as the
primary federal regulator) as evidence that the agency took
an overly lax approach to examinations and enforcement.
Regardless of one’s view on that subjective question, it
generally is agreed that given the emphasis on residential
lending associated with the thrift charter, OTS examiners
have tended to specialize in and focus on that particular area.
After the transfer of regulatory oversight away from the OTS,
thrifts will likely find that other federal bank regulators take
a broader and more intensive and critical approach to regulatory examinations, particularly in areas outside of residential
lending, such as commercial banking, fiduciary operations
and investment activities. Examinations may also be more
stringent as newly formed examination teams attempt
to prove their worth during the restructuring period and
ensure that any problems detected are not on their watch.
Our Point of View
Thrift organizations must begin to consider and prepare for
new regulatory oversight and the effects that the Act’s provisions will have on their operations and strategy. Specific
questions these organizations should address include:
• What technical differences exist between current OTS
and OCC/FDIC/FRB regulations? What governance and
operational changes will be needed to close those
gaps, and what will be the cost of making those changes
(both direct and in terms of lost revenue)?
• How will our organization fare under the OCC’s or FDIC’s
approach to supervision? Are there “gray areas” from
a compliance, control or risk management perspective
where we currently take an approach that satisfies OTS
expectations but might not satisfy a new regulator?
• What will we need to do to meet leverage and capital
requirements applicable to bank holding companies?
• Are we currently engaged in any nonbanking activities
that would require us to meet more stringent FHC qualifications? How do we approach the decision-making process to ensure full consideration of all available options?
• What opportunities would be created if we were freed
from the residential real estate restrictions currently
associated with the thrift charter type? And how do we
prepare for changes in our product offerings and the
corresponding management of a changing risk profile?
PROVEN DELIVERY
How We Help Companies Succeed
Example
Protiviti’s Risk & Compliance professionals, including
former bank regulators and professionals who have held
management and executive-level positions in financial
services organizations, are well-qualified to assist financial
organizations adjust to and take advantage of the DoddFrank Act. We can help thrifts prepare for these changes by:
Anticipating that pending regulatory reform might result in
more rigorous regulatory scrutiny, broader examinations,
and higher expectations around managerial, operational,
financial and compliance performance, our client, one of
the five largest U.S. thrifts, requested that we review its
business operations from an OCC perspective to gauge
its readiness for a newly proposed regulatory oversight
structure. We assembled a cross-functional team to apply
the potential new regulator’s standards to a review of key
financial, risk management and corporate governance
areas. In response to our recommendations to address
potential regulatory concerns, our client significantly
enhanced its overall governance structure and the capabilities of its risk management activities, revised its credit risk
management strategies, and enhanced its internal selfassessment techniques.
• Conducting gap assessments between thrifts’ and THCs’
current policies, procedures and business practices and
the expectations of the OCC, FDIC and/or FRB
• Conducting “mock exams,” utilizing OCC, FDIC and/or
FRB examination procedures, to help identify issues that
may be subject to regulatory criticism by new examiners
• Assisting with the analysis of capital and strengthening
the capital planning process for thrifts and their holding
companies
Contacts
Carol Beaumier
+1.212.603.8337
carol.beaumier@protiviti.com
Cory Gunderson
+1.212.708.6313
cory.gunderson@protiviti.com
Scott Jones
+1.213.327.1442
scott.jones@protiviti.com
Patrick Mitchell
+1.954.712.3109
patrick.mitchell@protiviti.com
Michael Schuchardt
+1.312.476.6399
michael.schuchardt@protiviti.com
About Protiviti
Protiviti (www.protiviti.com) is a global business consulting and internal audit firm composed of experts specializing in risk, advisory
and transaction services. The firm helps solve problems in finance and transactions, operations, technology, litigation, governance,
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