Charter Flips by National Banks

Bank management can change its charter and so its supervisor(s) at any time. Some argue that the supervisory competition resulting from the existence of the charter flip option promotes more efficient bank regulation. Others assert that it leads to " competition in laxity " as supervisors compete for clientele. Research on this issue is warranted because little empirical research on charter flips is available and the frequency of flips appears to have risen during the past decade. This paper focuses on identifying the factors that best explain the decision of national banks to convert to a state charter. A discrete-time logistic hazard model is used in the study. The sample consists of 2,298 national banks followed quarterly over the 1994 – 2001 time period. The results reveal that several indicators of bank risk significantly increase the likelihood of a national bank charter flip. The opposite effect is evident for a measure of credit risk. The results also indicate that flips are more likely, the more competitive the local market in which a bank operates and in states where past flip activity has been high. Several supervisory variables also are significantly related to the likelihood of charter flips, even after including the effects of the set of variables previously discussed. In general, banks are more likely to flip their charter the worse their supervisory ratings, although the relationship is non-monotonic. * The opinions in this paper are those of the author and do not necessarily reflect those of the Office of the Comptroller of the Currency or the Treasury Department.