Bank Charter Conversion

Bank charter conversion is the process by which a bank changes the legal charter it operates under, and usually its primary regulator, without closing and reopening as a new institution. The most common examples are in the United States, where a bank can convert from a state charter to a national charter or the reverse, a savings association can become a commercial bank, and a credit union can become a mutual savings bank.

Conversion is possible because the US has a "dual banking system", in which banks may be chartered either by a state or by the federal government. A bank charter defines what the bank may do, which laws apply and who examines it, so changing charter can change the bank's powers, costs and supervisory relationship. Other countries have their own versions, such as the conversion of UK building societies into banks.

Think of a restaurant that has been licensed by its city council and decides to operate under a national licence instead. The kitchen, staff and customers stay the same, but a different inspector now visits, different rules apply to opening branches in other towns, and the licence fees change.

A charter conversion works in a similar way. The bank's accounts, loans and customers carry on without interruption, but the authority that oversees it, and some of the rules it follows, change. Because of that, the new regulator wants to be sure the bank is not switching just to escape a strict inspector.

• State to national. A state bank applies to the Office of the Comptroller of the Currency to become a national bank.
• National to state. A national bank applies to a state banking department for a state charter and chooses its federal supervisor: the Federal Reserve if it becomes a member bank, or the FDIC if it does not.
• Membership changes. A state bank can join or leave the Federal Reserve System, switching its federal supervisor without changing charter.
• Thrift and credit union conversions. Savings associations can convert to banks, and credit unions can convert to mutual savings banks, the latter under NCUA rules that require a member vote and disclosures.

Reasons vary. A bank expanding across many states may value the federal preemption of certain state laws that national banks enjoy. Another may prefer a state charter for lower supervisory fees, a closer relationship with a local regulator, or specific state powers. Changes in business mix also matter: a savings association that has moved away from mortgages may find a commercial bank charter fits better. After mergers, a group may convert subsidiaries to a single charter type to simplify supervision. Banks also cite the style and predictability of examinations, which is where concerns about regulatory arbitrage arise.

1. Application. The bank files with the new chartering authority, describing its business plan, capital, management and reasons for converting.
2. Review and consultation. The receiving regulator reviews the bank's condition and consults the current regulator, including about any open supervisory findings.
3. Approvals. The board and, where required, shareholders or members approve, and deposit insurance continues through the FDIC.
4. Effective date. The charter changes on a set date, after which the new regulator takes over examination and supervision.

For customers the change is usually invisible. Accounts, account numbers, cards and loan terms continue, and deposit insurance coverage is unaffected because both state and national banks are insured by the FDIC. The most visible sign may be the bank's name: national banks often add "National Association" or the letters "N.A.", while a bank leaving the national system drops them. Behind the scenes, the bank must adapt its compliance programme to any state laws that now apply to it, update regulatory reports, and in some cases adjust activities that are allowed under one charter but not the other.

Regulators have long worried that banks might convert to avoid enforcement. In 2009 the member agencies of the Federal Financial Institutions Examination Council issued a joint statement saying that charter conversions should not be approved while serious supervisory problems or a pending enforcement action remain unresolved, and that the receiving agency should expect corrective programmes to continue. The Conference of State Bank Supervisors supported the same principle for state regulators.

Outside the United States, the best-known conversions were the demutualisations of UK building societies from 1989 onwards, starting with Abbey National, which turned member-owned societies into shareholder-owned banks. Several later failed or needed rescue during the 2007 to 2009 crisis, which has been cited in debates about whether conversion changes a lender's risk appetite.

• Office of the Comptroller of the Currency
• Federal Financial Institutions Examination Council