By Hugh Carney and Steven Hubbard
ABA Viewpoint
New, or “de novo,” banks have long been an important source of competition and innovation in community banking. But since the 2008 financial crisis, new bank formation has slowed dramatically in the U.S., as entrepreneurs have been hesitant to undertake the increasingly costly and uncertain process of starting a bank.
Hugh Carney is EVP of financial institution policy and regulatory affairs at ABA, and Steven Hubbard is vice president of policy, prudential regulatory and asset management.
The FDIC took an important step toward reversing that trend last month announcing significant changes to the way it processes applications for federal deposit insurance. The reforms should make the process faster, more predictable and easier to navigate, while preserving the FDIC’s ability to ensure that new institutions begin operations safely and soundly.
That is exactly the balance policymakers should be seeking.
Putting a clock on the process
Perhaps the most important change is a new two-phase review process.
For applications received after Aug. 15, the FDIC intends to provide applicants that satisfy the relevant requirements with a contingent authorization within 120 days. Applicants will then have up to 12 months to complete remaining organizational steps and provide any additional information necessary for final approval and issuance of a deposit insurance order. That second phase can be completed sooner when circumstances permit.
Those deadlines matter.
Starting a bank requires organizers to assemble a management team, develop a detailed business plan, line up investors, select technology and vendors, build risk and compliance systems and controls and make numerous other commitments long before the institution earns its first dollar. Regulatory uncertainty therefore has a very real cost.
Under an open-ended process, organizers and investors can spend substantial time and money without knowing whether the institution will ever receive the regulatory stamp of approval. This uncertainty can spook investors, and some otherwise viable organizing groups may understandably decide that the risk is simply too great.
Contingent authorization changes that dynamic. It allows regulators to make the fundamental decision earlier in the process, while using clearly defined conditions and pre-opening requirements to address issues that can appropriately be resolved during the organizational period.
Importantly, faster does not have to mean less rigorous. A chartering authority’s conditional approval and the FDIC’s contingent authorization can establish capital, liquidity, growth, governance and other requirements tailored to the de novo institution’s size, complexity and risk profile before it opens. The difference is that regulators can identify those requirements rather than leaving applicants in an extended period of uncertainty.
Ending unnecessary sequencing
The FDIC is also addressing another longstanding source of delay: the sequencing of applications among different banking regulators.
Forming a bank involves the signoff of a chartering authority, the FDIC, and, depending on the structure, the Federal Reserve for a holding company. When those reviews occur sequentially, applicants can find themselves providing much of the same information multiple times, while waiting for one agency to act before another begins its work.
Under the revised procedures, the FDIC expects that, with some exceptions, organizers will generally be able to file applications concurrently with the FDIC and the appropriate chartering authority. The FDIC also plans to coordinate with the chartering authority throughout the application process.
That may sound like a procedural change, but for a group trying to organize a new community bank, it can be significant.
The agencies are frequently evaluating many of the same underlying questions, including the proposed business plan, management, capital and the institution’s prospects for operating safely. Coordinating those reviews and running them concurrently should reduce duplication, surface issues earlier and allow applicants to address regulatory concerns without restarting the clock at each agency.
The revised procedures also emphasize early engagement with applicants. The FDIC encourages organizers to hold a pre-filing meeting and provides a dedicated FDIC case manager to serve as their primary point of contact during the process. That kind of accountability can be just as important as a formal deadline. Applicants should know whom to call, what information regulators need, and where their application stands.
Why de novos matter
These reforms are not simply about making life easier for bank organizers. New banks are an important part of a healthy banking system. They introduce new competitors, provide career opportunities for both experienced and new bankers and bring locally based financial institutions into markets where consolidation or branch closures may have reduced options.
The decline in de novo formation over the past two decades, therefore, deserves attention. The solution is not to simply rubber-stamp every bank application, but instead to provide qualified organizers with viable business plans through a clear process that uses transparent standards and runs on time.
As FDIC Chairman Travis Hill put it in announcing the reforms, a healthy pipeline of new entrants is critical to the long-term vitality of the banking sector, particularly community banking. That principle should guide the broader regulatory approach.
An important beginning
There is more that policymakers can do to encourage responsible new bank formation.
Regulators should continue looking for opportunities to make expectations more consistent across regions, eliminate unnecessary duplication, tailor requirements to the actual risks and complexity of proposed institutions and provide prospective organizers with clear feedback early enough that they can act on it.
There is also merit in exploring a “simple bank, simple application” approach in which a de novo with a straightforward and well-understood business model can move through a streamlined process while remaining subject to appropriate capital, liquidity, growth and other safeguards. (This approach would also help the FDIC and chartering authorities to provide sufficient scrutiny to novel business models.)
But the FDIC’s new procedures address some of the most immediate obstacles.
A 120-day target for a meaningful regulatory decision provides organizers with greater certainty. Conditional authorization allows remaining issues to be handled transparently during the organizational phase. Concurrent filing eliminates avoidable sequencing. Better coordination between the FDIC and chartering authorities reduces duplication.
None of these changes eliminates safety and soundness standards. They simply recognize that regulatory rigor and regulatory efficiency are not opposing goals.
For prospective community banks, that matters. And for communities that benefit from having more locally based banks competing to serve them, it matters even more. The FDIC deserves credit for taking a meaningful step toward making new bank formation a realistic possibility again.
