Why Some Banks Are Ditching Their State Regulators

WASHINGTON—A national bank regulator is trumpeting his agency’s oversight as a good business proposition.Banks are taking him up on it.

Fifth Third Bancorp

FITB 0.46%

is the latest company to seek supervision from Trump-appointed regulators who have struck a friendlier tone with the industry.The Office of the Comptroller of the Currency, a national bank regulator, last week approved Fifth Third’s application to be primarily regulated by the OCC. The Cincinnati-based bank is currently overseen by Ohio regulators.

OCC head

Joseph Otting,

a Trump appointee who calls banks “customers,” has praised national charters as a way to let banks operate more efficiently and be regulated more thoroughly. “The national bank charter continues to have great value in providing banks a flexible regulatory framework,” Mr. Otting said in an email response to questions.

Banks in the U.S. may be licensed and overseen primarily by state or federal regulators. While firms may switch in either direction, banks usually switch from federal to state regulators, because state regulators are generally viewed as more accessible and flexible than their Washington-based counterparts. From 2014 to 2016, no state banks converted to OCC oversight, according to the Federal Deposit Insurance Corp. Fifth Third, if it completes the change, would be the sixth firm since 2017 to switch to a national bank charter, and the biggest. To be sure, banks are still moving from federal to state charters. Last year, 29 banks made that move, according to the FDIC. But many of those banks were small community lenders. The banks converting in the opposite direction tend to be bigger. More than $100 billion in bank assets went from state to federal oversight through such conversions in 2018, compared with $8.6 billion going from federal to state oversight that year, according to data from state regulators.

Banks typically say they switch regulators to seek examiners who better understand their model or to streamline their compliance operations when they grow. “We believe a national charter will be more efficient, given national banks are regulated and examined by the OCC, rather than on a state-by-state basis, and subject to a uniform set of laws and regulations,” Gary Rhodes, a spokesman for Fifth Third, said in an email response. But critics say the moves amount to “regulatory arbitrage,” allowing banks to shop around for more favorable regulators and encouraging lax oversight. “It’s clear that we’ve gone back to the days when the OCC was the cheerleader for the national banking industry and an aggressive champion for every kind of deregulation,” said Arthur Wilmarth, a law professor at George Washington University. Mr. Wilmarth said the agency had a history of courting banks but relented in the years after the 2008 financial crisis. He has advised state regulators in lawsuits against the OCC.

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Some of the moves have caused friction between the OCC and state regulators, which are both funded by fees assessed on the firms they oversee. In 2017, a U.S. unit of Japan’s biggest bank converted to OCC oversight, sidestepping a continuing investigation by the New York Department of Financial Services, its regulator at the time. The OCC approved the move in days, prompting criticism from the New York regulator. (The OCC was then under acting head Keith Noreika, another Trump appointee, though an OCC spokesman at the time said Mr. Noreika recused himself from the decision.) The Japanese business, a unit of

Mitsubishi UFJ Financial Group

then sued New York to halt the investigation. In June, the bank agreed to pay $33 million to settle with the New York regulator. It didn’t admit wrongdoing. Mr. Otting, a former bank chief executive, said banks have long been able to choose between state and federal regulators. The OCC, he added, offers an “unmatched quality” of supervision.  “As a banker,” he said, “I slept better knowing OCC examined my banks.” Write to Lalita Clozel at lalita.clozel@wsj.com

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