Proposal worries lenders

The financial debacle hobbling the nation’s economy stems from the subprime mortgage lending crisis and the lax standards that mortgage brokers and lenders were using to approve many subprime loans, analysts say. Yet Paulson’s proposal would affect more than just the financial institutions that are being blamed for the subprime meltdown. He is proposing dramatic changes in regulations for commercial banks, including small independent banks.

Paulson is suggesting doing away with state banking charters and state regulators and requiring banks to be federally chartered. But eliminating state banking regulations would end the community banking system, said George Burns, commissioner of the Nevada Financial Institutions Division.

Burns pointed to comments from the Conference of State Bank Supervisors as evidence that the Treasury plan would end state banking laws.

“Ultimately, the plan would take states out of financial regulation, federalizing all chartering and supervisory authority,” the group said. “Its long-term goal of requiring federal charters for banks to continue to have federal deposit insurance is a backdoor way to eliminate all state chartered banks.”

Bill Uffelman, president of the Nevada Bankers Association, said he was “very concerned” about the proposed requirement for federal bank charters.

“The availability of the state charter is one of the things that has grown banking in Nevada,” Uffelman said.

About 40 years ago, a person could count the number of federal and state banks in Nevada on his fingers, Uffelman said.

Today, Nevada has about 30 state-chartered community banks with $50 billion in assets, according to the Federal Deposit Insurance Corp., which insures deposits at state and federally chartered banks.

State-chartered banks, such as $3.9 billion asset Nevada State Bank and $3 billion asset Bank of Nevada, compete with giant institutions such as Bank of America, Wells Fargo Bank and Citibank. Smaller community banks serve primarily small-business customers.

Burns and Uffelman said the nation’s banking system has flourished under a dual system of state and federal charters that dates back to the Civil War. The last major changes in the banking system were made during the Depression.

“The banking system and its regulations have been working almost 80 years,” Uffelman said. “In our efforts to correct the things that went wrong, let’s not foul up the things that do work.”

Bill Martin, CEO of Service1st Bank of Nevada and a former deputy in the office of the U.S. Comptroller of the Currency, also likes the dual bank regulatory system. But he wanted to know more about Paulson’s proposal.

“All 50 states have a bank-chartering process,” Martin said. “They historically have wanted that, but, when it comes to regulation, the FDIC represents a very strong federal oversight of the state chartered banks.”

State bank regulators participate in bank examinations, but the FDIC leads the examinations.

“(The FDIC) is either detailed or nit-picky. I haven’t decided which, but, suffice to say, it’s a very in-depth examination,” Martin said. “I would want to know what more they hope to gain in a regulatory sense.”

Burns suggested that state regulators may have a better record than federal banking officials.

State regulators started focusing on problems with predatory mortgage loans in 1999 before federal regulators started considering the issue, Burns said.

In addition, few community banks made many residential mortgage loans, much less the type of subprime loans that triggered the current credit crisis.

“The plan doesn’t really address the roots of the problem,” Burns said.

Mortgage brokerages and banking firms such as Countrywide Financial made loans following often lax standards for qualifying home buyers. Investment banks on Wall Street, which have little regulation compared with commercial banks, packaged subprime loans and sold them to large money centers and regional banks.

Bill Ochs, owner of Nevada Mortgage, blames the subprime bubble largely on the Federal Reserve Board. He said the Fed cut short-term interest rates below inflation, which started the housing mortgage loan bubble. He added that the Fed then punctured the bubble when it began raising rates.

“We don’t have anybody worried about the individual consumer,” Ochs said. “They are just worried about the big banks.”

Contact reporter John G. Edwards at jedwards@reviewjournal.com or (702) 383-0420.