The Office of Thrift Supervision will be phased out in July of this year. Most of the agency will be absorbed into the Office of the Comptroller of the Currency, with some employees going to the FDIC and the newly created Consumer Financial Protection Bureau. The Federal Reserve Board will assume authority over thrift holding companies and the OCC will supervise all federal thrifts. This is the culmination of a convergence of commercial banking and residential mortgage lending that has been underway for thirty years.
What does the agency realignment mean for the more than 700 thrifts that are regulated by the OTS? Undoubtedly, there will be tactical changes. For instance, we know that that the Thrift Financial Reports will be phased out by 2012, and that thrifts will use the same call reports that are currently used by national banks. Among other implications, this means thrifts will to incorporate interest rate sensitivity into their reporting, as this is not currently required on TFRs.
More importantly, will the OCC will take a harsher view in examinations and supervision? That is the prevailing fear among thrift executives. Unfortunately, we believe their fears will be realized. The top priority of the combined entity will be implementation of new capital requirements and liquidity standards, largely in-line with proposed Basel standards. Also, we expect a more proactive examination approach regarding loan concentration issues, loan-risk rating rigor, and reserving methodologies.
Capital sufficiency will be determined on institution-by-institution basis. Expect the post-merger agency to issue more individual minimum capital ratio orders than in the past. Regulators will employ this instead of the capital standards that would be grounds for a prompt corrective action order, and will do so even on institutions which have CAMEL ratings of 1 or 2. Also, regulators will take a more proactive approach in forcing management changes when there is a dominant figure on the executive team or board that unduly influences the direction of the company.
These changes in supervisory standards and approach will exert more pressure on the viability of the traditional operating model of thrifts.