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OCC Takes Aggressive Position
Acting Comptroller Keith Noreika, in a “Bankthink” article in the November 1 edition of American Banker, reaffirmed his aggressive position on new bank formations. The gist of the article was that the new bank formation process currently is too long and burdensome. The process is fueled by the need for the FDIC to separately grant deposit insurance on an application also approved by either a state bank regulator or the OCC, depending on whether it is a state or federal charter. Let’s not further complicate this point by adding the Federal Reserve for member bank applicants.

Straight Talk on Why So Few Applications
While I agree with Mr. Noreika on his position that new bank formations are too time consuming and unduly inefficient, it goes well beyond having dual regulatory approval. The reality is that it is a confluence of factors. Low interest rates (and hence skinny margins), relatively slow growth, and the disproportionately burdensome regulatory compliance scheme all add to the equation. Our firm helped form over 20 community banks in five states during the 1990s and early 2000s. The process, for the most part, was pretty straightforward and relatively efficient. Most states would accept the FDIC application for their approval process. However, forming a new bank was near impossible post-recession, as the regulators felt they had enough to deal with all the troubled banks.

The Current Obstacles to Forming a New Bank
While the regulatory environment has eased in the past few years and the “seven year rule” imposed for oversight of new banks post-recession has been lifted, several obstacles still remain to forming a new bank:

Capital - Minimum capital expectations have increased. While there is no magic number, too much capital can be a real deterrent. First, it may incent bankers to grow too rapidly to successfully deploy “excess capital.” Second, it allows new banks to make larger, potentially risky loans. Third, investors need to see a reasonable return on their investment. Idle capital is a negative.

Management - There is a bias for “been there, done that management” at the CEO, CCO, and CFO positions. While this all sounds good, it actually encourages recruiting of mediocre talent, who are safe rather than dynamic. There is no opportunity for a developing star banker who is an “assistant coach” to be named the “head coach.” In my opinion, the regulators have taken the “safe” approach rather than the “best available player” approach.

Board of Directors - Having a few experienced board directors is healthy. I believe encouraging younger, creative, and enthusiastic talent to join bank boards is a healthy dynamic for the industry. Having the right mix of talent, experience, and energy is key.

Skinny Margins - With interest rate margins hovering near 4%, compared to 5%+ in the 1990s and early 2000s, it simply takes 20% more growth to make the same net interest margin.

Burdensome Regulatory Compliance
The disproportionately high regulatory compliance costs really cut into a small bank’s profitability. Somehow this burden needs to be scaled down.

Let’s Agree There is a Need and Place for Community Banks
Given the ongoing significant consolidation in the banking industry, there is an increasing void of community banks to provide the personalized service most bigger banks no longer offer. Community banks provide a big chunk of small business lending in this country and, in many communities, are integral to their success. If there is agreement on this premise, appropriate steps should be taken to facilitate new bank formations.

Next Steps
The FDIC has held outreach programs promoting new bank formations and Mr. Noreika has espoused his agency’s support for new charters. However, the proof is in the pudding and so far the dessert bar is sparse. So, what can and should be done?

  • Treat each organizing group and charter application individually and examine on its own merits.
  • Set minimum capital levels at more reasonable and attainable levels.
  • Allow talented emerging bankers the opportunity to be successful—having the right balance of experience, talent and exuberance on the management team is an admirable goal.
  • Require a limited number of experienced bank board members, provided the remainder of the board is talented, dedicated, and engaged. To that end, make quarterly board education for the first three years a mandatory condition of charter approval.

Streamline the Regulatory Process
No doubt the regulators have a difficult job to do, but the new bank process can be streamlined and shortened and the various state and federal banking agencies should be encouraged to work together.

The Future
I am hopeful that the bank regulators can take the next steps to meaningfully support and encourage new bank formations. Future new charters will be the ultimate evidence of their commitment to making this happen.