Great Western Seeks to Become Banking Firm : Finance: The nation’s second-largest savings and loan wants to take advantage of lower deposit insurance fees.

In a blunt challenge to federal policy-makers, Great Western Financial Corp., the nation’s second-largest savings and loan, Wednesday sought approval for two national banking charters in an effort to take advantage of the lower deposit insurance fees that regulators propose charging commercial banks.

If Chatsworth-based Great Western’s application is approved, it could spark similar moves by other large and financially strong thrift institutions, jeopardizing the effort by Congress and the Federal Deposit Insurance Corp. to bolster the savings and loan deposit fund.

Some experts said a stampede out of the fund could bring on a new thrift crisis.

“This is very significant and very troublesome,” Rep. Marge Roukema (R-N.J.), who chairs a House subcommittee looking into deposit insurance problems, said Wednesday night. “It could open the floodgates,” she added.

Commercial banks and savings and loans currently pay roughly equal deposit insurance fees, about 23.5 cents per $100 of deposits. But the FDIC has proposed slashing the fees for healthy banks to 4.5 cents per $100 of deposits, an action that could take effect as early as July.

For Great Western, which paid $77 million in deposit insurance premiums last year, a rate of 4.5 cents per $100 would have meant fees of only $13.3 million.

The banks-only price break “would place thrifts at a substantial competitive disadvantage,” said James F. Montgomery, Great Western chairman and chief executive.

Great Western’s solution--establishing new commercial banks in California and Florida--is essentially a back-door means of converting itself from a thrift institution into a bank holding company while avoiding some legal obstacles and tax problems that a full-fledged conversion would entail.

If successful, it would be the largest such conversion in U.S. banking history, analysts said.

Great Western believes the move is legal and should be approved, though it requires approval by three regulators: the FDIC, the comptroller of the currency and the Federal Reserve Board.

“There is ample precedent for this kind of structure,” said Ian Campbell, senior vice president for Great Western.

He noted, for example, that Citicorp, the nation’s largest bank holding company, also owns a savings and loan.

Although the bank and savings funds are separate by law, since 1989 both have been under the regulatory umbrella of the FDIC. Congress has mandated that both funds boost their reserves to 1.25% of insured deposits, but the bank fund is much closer to that target than the savings and loan fund.

Part of the reason the thrift fund has lagged is that about $780 million a year in premiums is being diverted to make interest payments on bonds issued to help resolve the savings and loan crisis of the 1980s.

Great Western and other savings and loans complain that the bond payments are an unfair tax on their industry. They say the two funds should be merged and that responsibility for cleaning up the thrift mess should be shared by banks and thrifts--a position strongly opposed by the American Bankers Assn.

“Great Western is no more responsible for the thrift debacle than Bank of America,” Campbell said.

Paul A. Schosberg, president of America’s Community Bankers, the top thrift industry group, said that other savings and loans are plotting moves that may not be as dramatic as Great Western’s but will still result in draining deposits from the more expensive thrift fund.

“Lambs may stand still to be sheared,” he said, “but not to be slaughtered.”

Jonathan Fiechter, acting director of the U.S. Office of Thrift Supervision, released a statement Wednesday saying that while he does not believe that the current funding mechanism for the bank and thrift funds works, “I think that a restructuring of the thrift industry driven by the premium differential is an unfortunate use of resources.”

Great Western plans to operate its banking and thrift units in the same branches, making it clear to customers which products are offered by which institution. Current products and services will not be affected, it said.

It is expected that the bank, with its lower fees, could offer higher interest rates and gradually attract deposits away from the thrift, Campbell said. However, federal regulations prevent Great Western from directly transferring thrift accounts to the bank.

Another expected advantage of the bank holding company structure is that Great Western would be able to take advantage of any new powers Congress offers banks, Campbell said.

Legislators are considering tearing down the walls between the commercial banking and investment banking industries and expanding banks’ authority to sell insurance and offer other services.

Great Western’s shares were unchanged in trading Wednesday on the New York Stock Exchange, closing at $18.75.