Bowman: Regulatory Framework Must Not Constrain New Bank Formation

In a speech today at the Federal Reserve Bank of Chicago, Fed Governor Michelle Bowman, who holds the designated community bank seat on the board of governors, focused on the lack of new bank formations over the last decade and what can be done to encourage more de novo banks.

While community banks play a significant and valued role in local communities, Bowman noted with concern that their numbers have declined in both rural and urban areas. She said this could lead to “unhealthy similarity” in the banking system, limiting household and small-business access to credit and other financial services, which makes it more difficult “for people to fully participate in the economy or manage finances when times are tough.”

In the past decade, only 44 de novo banks have been established. Among the possible challenges Bowman cited: low interest rates and depressed banking services demand; raising capital; developing a business plan and risk-management framework; providing adequate return to shareholders; pressure to grow quickly; and hiring experienced staff to establish the bank and show progress toward operating goals and profit projections. She added that nonregulated financial entities have a competitive advantage, creating another barrier to entry.

“Policymakers need to ensure that the regulatory and supervisory framework does not exacerbate this competitive disadvantage,” Bowman said, adding the need to minimize “unnecessary compliance costs for smaller banks and address impediments to bank formations.” Fed staff will continue to study trends in community banking, she said, to fully understand the factors that constrain community banks’ ability to “form, compete and thrive,” she said.