The American Banker's Alan Kline wrote a very interesting article last week (paid subscription required) about a subject we've been focused on for the last several years: the incredible shrinking banking business.
Since mid-2010 the total number of banks has fallen by 11.4%, by far the largest three-year drop since the mid-to-late 1990s, according to data from the Federal Deposit Insurance Corp.'s most recent Quarterly Banking Profile.
Failures, mergers and charter consolidations have all played a role in the decline, but less so than in the prior three-year cycle. Twenty-three fewer banks failed between June 2010 and June 2013 than in the three years prior, and there were 107 fewer mergers in the most recent three-year span.
What's really driven down the numbers of late is the lack of startups. No new banks have opened for business since mid-2011 and only 23 have come online since 2008, according to the FDIC. Contrast that with the five years leading up to the financial crisis, when an average of 156 new banks opened each year — or roughly one bank for every two that failed or were merged out of existence.
The unacknowledged "war on de novos" by the FDIC and other federal banking regulators has been a hot topic on this blog for some time. The effects of the undeclared "moratorium" on de novo bank approvals are manifesting themselves. While many observers expected the number of banks to decline due to mergers, it turns out that the lack of de novos is as much, if not more, at fault.
Other experts interviewed by Kline state that the industry will continue to shrink for the oft-cited reasons of regulatory burden costs, a lousy yield curve, higher capital requirements, tepid loan demand, and the reluctance, or sheer inability, of smaller banks to invest in the technology needed to compete. None of those factors is exactly an incentive to start a new bank from a business perspective, even if the regulators were eager to grant new charters. Thus, there is nothing on the horizon to suggest that the number of banks will not continue to decline.
Which, according to those in love with the Canadian model, is a great prospect.