The Dodd-Frank Act generally bans a federally chartered bank or thrift from converting to a state-chartered institution—as well as a state-to-federal charter conversion—if the institution is under an enforcement action for a significant supervisory issue.
Yet the law provides exceptions in cases where, essentially, the old and the new regulator agree the bank is on its way to recovery.
In a joint statement Monday, three federal agencies and the Conference of State Bank Supervisors said such conversions would be allowed only in limited cases.
"The agencies expect that such exceptions would be rare, and generally would occur only when an insured depository institution has already substantially addressed the matters in the enforcement action or there are substantial changes in circumstances," said the CSBS, Federal Deposit Insurance Corp., Federal Reserve Board and the Office of the Comptroller of the Currency.
The law allows the exception when the new regulator—having signed off on the swap—submits a plan to the current regulator on how the converted institution would address any remaining supervisory concerns, and the current regulator then gives its approval.
The statement said a prospective and existing regulator should discuss the plan before it is formally submitted. The formal plan should include an evaluation of the institution's compliance with existing supervisory actions and a schedule for satisfying requirements not yet addressed, among other requirements. The existing regulator would then have 30 days to object.
"If the current federal banking agency or state bank supervisor objects to the conversion or the plan, the conversion remains prohibited under" Dodd-Frank, the statement said.