After reading one of my recent posts on the headwinds faced by those who are thinking of starting a new (de novo) bank, David Rice, the Senior Editor of the Federal Reserve Bank of Richmond's Econ Focus, kindly sent me links to a couple of recent articles from that publication that address the same issue. The first is "Who Wants to Start a Bank?," by Tim Sablik. Sablik explores the possible reasons for the dearth of de novos since 2008. Many of those reasons have been discussed here, but the article is an excellent compilation of the potential reasons and research (especially Federal Reserve Bank research) on the issues. Although I'd recommend that any interested reader review the actual article, here's a bullet point list of the reasons cited by Sablik:
- Regulatory burden on banks of all sizes that has grown like marigolds since Franken-Dodd was hatched by Barney, Chris, and Those Who Only Lizzie Loves.
- FDIC roadblocks to the formation of de novos during the period following the Great Recession's onset in 2008 until very recently (more on that in a future post).
- Low interest rates since 2008, and the resulting narrow interest rate spread, which makes it tough to make a buck in the banking business, especially when you're the new kid on the block.
- Competition form nonbanks.
Although regulatory burden is often given top billing by the biased, it's only part of the story. As the research cited by Sablik demonstrates, and as is the case with most things in life, problems are often more complex than those who like their story lines simple might like to acknowledge, including those who blog. Whatever the various causes, the article ends on a chipper note via Chip Mahan, who has started two de novos, the last one in 2007, when he had to have a face-to-face meeting with Shiela Bair, then FDIC Chairman, to sell her on why his proposed bank should receive insurance of its deposit accounts from the FDIC. Although Mahan does not disclose it in the article, our investigative reporters have informed us that he attended the meeting with The Care Bair armed with five cloves of garlic, a portable flame thrower, a mirror, and a Vampira® model hammer-and-stake combo he picked up at Walmart (gratis, given Walmart's love affair with Bair).
Mahan thinks the future is bright for new banks — if they're willing to adapt to changing consumer demands. "You've got to be focused on technology and deliver products and services with a beautiful user experience," he says. "Because at the end of the day, who wakes up and thinks about their bank?"
At the end of the day, I don't wake up. That's usually what I do at the beginning of the day. On the other hand, when I do wake up, I wake up thinking about my bank. Maybe that's because they pay me obscene amounts of moola to do so. May be it's because I've always been what my elderly neighbor, Mrs. Scooter, characterized as "such an odd boy." Maybe its because I confuse "my bank" with "Tyra Banks." Maybe it's all of the above.
At any rate, whatever Mahan's smoking, I want a toke, because the second article by Mr. Sablik to which Mr. Price linked discusses the practical challenges of steering your new bank barque through the storm-tossed shoals off the FDIC's shoreline. Among the eye-popping (to the uninitiated) obstacles are the length of time (6 months to a year) and cost ($1 million is not an outrageous estimate), as well as the necessity to prove to people who don't currently, and likely never have, run banks that the community in which you'll locate the bank is not already adequately served by the banks operating in the community, and the fact that you'll have to raise and keep in place enough capital to fund a year's worth of cross-border smuggling activities for the Sinaloa Cartel ($15 million to $30 million). I recall when $2 million might allow you to blow and go with a de novo, but then, that was when folks thought bell bottom pants, Nehru jackets, and Madras shirts were cool.
This article ends with a less rosy view of de novo prospects from Fred Green, CEO of the South Carolina Bankers Association.
It can be challenging to recruit executives and directors for a new bank. "Historically," Green says, "a lot of folks aspired to be on a bank board and be part of a founding group. Serving on a bank board was an honor." Today, the hurdles to starting a new bank seem higher and the rewards less enticing. From 2006 to 2010, the average return on assets for community banks less than five years old was negative, according to a 2012 FDIC report. Older and larger banks managed to earn positive returns on average during that period, though they too suffered a hit.
"It’s harder to find people that would have the energy and desire to be involved in a startup today," says Green.
Following November's election results, you might have a better chance of finding them in Belize than in the U.S., because whichever of the two front runners for the Oval Office wins, the dearth of de novos will not be the only cause of community bankers seeking a warmer clime, especially one where English is the first language, taxes are extremely low, Cuban cigars are duty-free, and you're upwind from air currents that might carry nuclear fallout from D.C.