Bankers fear the Federal Deposit Insurance Corp.'s recently proposed corporate governance guidelines could lead to a surge in M&A and charter switches.

At the heart of the industry's concerns about the proposal, which applies to banks with more than $10 billion in assets, is increased responsibilities for directors such as creating a strategic plan, supervising senior management for operating "in a safe and sound manner" and adopting an ethics code for the board and management. The industry is arguing those duties encroach on management's job, and if directors are forced to take on more managerial duties, banks may be faced with having to pay those individuals more or find more experienced directors.

As a result, smaller banks subject to the guidelines may look to M&A to better spread the increased cost of attaining experienced directors or attempt to acquire those individuals. Further, banks could opt to switch their state charters to national bank charters to avoid the new regulation altogether.

"There are coaches, and there are players. ... I don't know that the coach is designed to jump in with a helmet on," Christopher Marinac, director of research at Janney Montgomery Scott LLC, said in an interview.

The increased duties could cause some directors to jump ship or retire early, according to Joseph Silvia, a member at Dickinson Wright PLLC who advises financial institutions on M&A and regulation.

"You have a large institution, and you've got directors that are good and knowledgeable, and you've been successfully running the institution, and then all of a sudden, their expectations and responsibilities change, [and] their liability exposure changes," Silvia said in an interview. "It's just really remarkable how much more is going to be expected for the duties as directors."

More M&A

State banking regulatory agencies and trade associations were among the loudest critics of the proposal during the recently ended comment period.

Handing increased duties to directors could lead to them requiring more compensation, which would disproportionately hurt smaller banks subject to the proposal, industry participants argued. Jeff Voss, managing partner at Artisan Advisors, suggested the proposal should only apply to banks with over $50 billion in assets, as it could lead to a financial burden for banks with between $10 billion and $50 billion in assets.

In order to better spread the costs of increased director compensation, those banks could increasingly look for merger partners.

"Since the proposed rule is not properly tailored to the complexity or size of the bank, it is logical to assume there will be significant expenses disproportionately impacting the smaller banks, which will most likely cause further bank consolidation," the Texas Department of Banking argued in its comment letter on Feb. 8.

For banks lacking directors with proper experience for the increased managerial duties, they could look to M&A as a means to find that talent.

"If you can't find board members that are qualified, you're not going to be able to run a bank effectively, and it can be a challenge in smaller communities," Voss said in an interview. "The unintended consequences are, in smaller organizations, if they ... can't get [qualified board members] for whatever reason in their communities, it could absolutely push organizations to make that decision to merge."

Charter switching

One option to avoid conforming to the proposal after it is finalized is changing to a national charter from a state charter. Nationally chartered banks' primary regulator is the Office of the Comptroller of the Currency. Those banks are not subject to FDIC rules, except rules related to deposit insurance.

The vast majority of banks hold state charters. According to S&P Global Market Intelligence data, 3,626 banks are state chartered, while just 954 banks are federally chartered.

"Due to the disadvantages, and to remain competitive, banks would likely opt into the federal banking framework instead of the state banking framework, which is an unfortunate dismantling of the successful dual banking system," the North Dakota Department of Financial Institutions wrote to the FDIC in its letter on Feb. 6.

The North Carolina Bankers Association agreed, writing in a Jan. 31 comment letter the proposed guidelines "would drive boards of some banks to consider converting their banks to national charters."

A surge of banks switching to national charters would be "very troubling" to state regulators, said William Stutts, senior counsel at Baker Botts LLP advising on bank regulation.

"If, in fact, this would be something that would push people out of the state nonmember bank system into a national bank system, that would probably hollow out, to a certain extent, the state bank regulatory system, which has historically been one of the observable hallmarks of the American banking system," he said in an interview.

State regulatory agencies are also financially motivated to try to stop any regulation that would encourage banks switching to national charters.

"[States] are examining and charging fees and collecting assessments based on the state charters that they have, so the less state charters they have, the less that they collect," Silvia said. "So the states will push back on it."

Others, like Voss and Marinac, were less convinced that one rule change would force banks to go through the process of switching their charters, but both acknowledged the negative impact such a trend could have if it does play out.

It could spell trouble for the federal regulators, as the FDIC would not want institutions to leave its oversight and the OCC might not be "prepared for an influx of new charters," Voss said.

Moreover, "creating any type of threat of movement, ... it's creating unnecessary chaos," Marinac said.