FDIC Absolutely Open For De Novo Business

In the article I discussed a couple of days ago, which was a report on public statements by FDIC supervisory personnel on issues of concern to banks of all sizes, one of the other topics that the FDIC discussed was de novo banks. Readers of this blog know that it's a topic that was near and dear to my heart from the days when The Care Bair first imposed a moratorium on FDIC insurance for new industrial bank charters.

Here's what Doreen Eberley, the FDIC's director of risk management supervision, had to say on the subject of new bank charters.

• De novo banks coming back? With one fairly recent exception, bank startups have been nil in recent years.

“We are absolutely open for business,” said Eberley, in terms of being willing to entertain new applications for deposit insurance. “There hasn’t been a lot of business, though, that we’ve heard about.” (FDIC grants deposit insurance coverage, but chartering is handled by state regulators and, for national banks, the Comptroller of the Currency.)

Eberley suggested that capital that might have gone to startups went into existing banks during the crisis and the post-crisis cleanup. She said that $40 billion in new capital came into banks under $1 billion—excepting some specialized institutions—between 2008 and 2012. It was simply cheaper for investors to buy into existing banks than to start from scratch. However, she suggested that as many community bank share prices are rising, de novo banking may appear attractive once more.

She also noted that most consolidation of community banks has involved mergers and acquisitions with other community banks.

The above is bureau-speak for "we are discouraging de novo bank charters, but refuse to admit it publicly." There have been only a very few de novo charter FDIC insurance applications approved since the economy tanked. As one state banking chief told me several years ago, the FDIC says that there are too many banks in this country, it's in the business of reducing the total number, and it's certainly not consistent with that plan to approve applications for insurance of accounts to new banks. That's what regulators tell one another over a couple of cool mugs of brew, but that's not anything any of them will cop to publicly. In fact, they'll deny it, if pressed.

The reason that "most consolidation of community banks has involved mergers and acquisitions with other community banks" is because of another worm hole in the FDIC time-space continuum: a distaste for private equity. Good luck assembling a group of private investors who look upon the investment in a community bank, or a group of community banks, as a great investment "play." Sure, a number of those groups grabbed some failed banks from the FDIC during the post-crash wave of bank failures, but the FDIC soured on private equity players and their nasty desire to make a return on their investment. If you exclude private equity players from the buying group, then, of course, what's left are other banks.

This is not to say that you cannot get a de novo bank started, nor that a group of investors who are interested in investing in community banks purely as a private equity investment "play" are never going to be able to obtain regulatory approval. It does mean, however, that it's going to be tough to accomplish, and the instances where they are approved are going much more rare than they used to be before the crash of 2008. Even those few that make it the finish line are going to take a lot more time, involve a lot more paperwork, and require a lot more expense than they did "in the good old days." The odds are , you'll be spending all that time and money and still die somewhere short of the home stretch.