Bank Lawyer's Blog

Drilling Down On De Novos

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.

No Light At The End Of The Tunnel

Investment banker (and former OTS official) C.K. Lee has been keeping his finger on the pulse of the financial institution capital markets for years, and when it comes to the future of de novo banks, the outlook, to him, looks grim. It's not just due to the hostile attitude of the FDIC, FRB and OCC (although Lee notes that hostility as a factor), it's because of the difficulty of raising capital.

“The barriers to entry are high, not just on the regulatory side but with raising capital.”

It's not the big banks that are having trouble, it's the little guys. The results of those troubles are stark.

The firm estimates it’s raised about $700 million in investment capital for banks in the last six or seven years. Two investment groups they’ve put together recently are in North Texas.

Lee is a former official at the Federal Deposit Insurance Corp. and was regional director of the Office of Thrift Supervision’s Western region. He said in the past three years, about one-third of banks located in the Dallas-Fort Worth area with less than $5 billion in assets have been consolidated. But the biggest shift has been seen at the smallest end of the market, where the smallest businesses go if they can’t get a line of credit at the giant firms.

There were 3,255 banks with less than $100 million in assets in 2003, making up more than 43 percent of all community banks. By 2014, however, there were 1,919 of these firms, making up less than one third of community banks, according a report from the Brookings Institution published in December.

Before 2011, about 3 percent of all banks would merge or be acquired each year. But Lee said recently they are above a 4 percent clip.

So, not only are their many, many fewer little banks today than 13 years ago, but they are merging at a faster rate than even five years ago. As the big get bigger and the small disappear altogether, the consequences for the economy are troublesome.

“A big part of the decline in small business creation in this country over the last six or seven years is because smaller, community banks are going out of business, not necessarily through failure but consolidation,” Lee said. “We are shocked at the level of consolidation that we’ve seen.”

Small businesses have been the nation's biggest job creators and small community banks have been their biggest source of financing. Therefore, the rapid decline in the number of small community banks has hampered job creation. Perhaps that has contributed to the fact that the recovery of the economy from the 2008 recession has been the slowest recovery from a recession since 1949.

Like many of us who serve the community banking business, Lee ends with a common theme: the federal financial regulatory regime has not been helpful.

But Lee insists regulators need to allow banks to keep up with other industries that are seeing a boom in start-ups.

“I just think the regulatory machine is going to be 20 years behind,” Lee said. “I just think we are making a mistake as a country if we’re going to let a lot of really good banks walk off into the sunset.”

So do I, but I won't hold my breath that such a mistake will ever be admitted, much less corrected. On the other hand, geniuses like Lizzie Warren think the U.S. Post Office will pick up the slack.

Come November, I don't expect that the attitude of those with their hands on the levers of power will improve, whichever of the two eminently qualified candidates for the possessor of the nuclear codes grabs the grass crown.

De Novos: A Recipe For Success or Heartburn?

Long time community bank attorney (and former FDIC Regional Counsel) Jeff Gerrish created his recipe for cooking up a new bank charter.

The number one ingredient is cash, and plenty of it. Because FDIC policy is that de novos need meet an 8% leverage ratio by the end of the third year, "if your new bank is going to be $250 million in total assets at the end of its third year, you will need to raise about $20 million in order to obtain the charter. And that is the minimum. If FDIC determines there is some unique risk in your proposed charter, then the requirement could be higher."

My somewhat jaundiced take is that the FDIC will frequently find additional risk, so for planning purposes, count on 10%.

Jeff's second main ingredient is seasoned senior management and an impressive board of directors.

[Y]ou need to find a seasoned CEO of an existing community bank or previously healthy community bank that sold. You also need to find a couple of other seasoned senior officers, as well as a board of directors that, while not maintaining quite as much “seasoning,” still has some folks on it who have possibly been directors of community banks previously, or know something about the industry. The era of establishing a board of directors of a new bank, anywhere from 8 to 15 people typically, made up of individuals who are simply pillars of the community with no banking experience is over.

Jeff also observes that getting FDIC, as well as other regulatory, approvals is "daunting and time-consuming" (He thinks 12 to 18 months from the first meeting of the organizing group to discuss the concept among the members is "good; I'd call it "optimistic."). I think that he and I would agree that in addition to raising money for capital contributions, the organizers need to raise a decent chunk of cash to fund organization expenses, including expertise needed to prepare and shepherd the necessary applications through the FDIC and the state or federal chartering authority. Depending upon how the organizers intend to raise capital, additional expertise will be needed (and expense incurred) in those efforts.

I would throw a couple of additional ingredients into Jeff's recipe. One is a convincing argument that there is a need for a new bank in the community that it is intended to serve. The few de novo applications that have survived the "gauntlet" in the past half-dozen years have been intended to create a bank in a well-defined and targeted community that the organizers have argued convincingly is not being served by existing financial institutions. I'm not saying that that everyone has to have a "bird in hand" like serving the Amish community, but the applicants ought to have at least two-in-the-bush that can serve the same purpose. Unless you can show a need other than you'd just like to be in the community banking biz, I don't think that the regulators will see much upside in granting you a new charter.

A related ingredient is a combination of a well-thought-out and well-prepared business plan that is as close to conventional as it can be, and a feasibility study that demonstrates that, "By Gum, we can make money running this thing!" In other words, assume that you're a guard taking the rock to the iron for a thunder-dunk and the FDIC is Hakeem Olajuwon towering in the post screaming "Don't be bringing that internet-only, CRE-centric, lowering-our-payday-lending-conglomerate's-cost-of-funding-through-the-use-of-insured deposits garbage into my house!" right before he pile-drives you into the floor with a flagrant 2 foul. Moreover, spend some time and money securing help from folks who have actually carried water to the bench in this arena, so you have at least a fighting chance of surviving the initial hurdle in any such endeavor: the laugh test.

I remain skeptical about a "thaw" in this freeze. Others are more buoyant. I think a threshold question you have to ask yourself is how early in the "thaw" do you want to put out into open water. Is it better to let others blaze the trail and learn from their success (and/or failure), or is time "a wastin"? If you think you've got the necessary ingredients, including plenty of cash, patience, and persistence, then maybe the time is finally right to cast off. I would recommend that you initially paddle slowly and carefully, though.

FDIC: Bring Me Your Tired, Your Poor, Your Huddled De Novos, Yearing To Be Free

Last week, FDIC Chairman Martin Greunberg announced that the FDIC was rescinding a policy that it instituted during the depths of the last recession, of requiring heightened scrutiny of de novo banks during their first eight years of existence, and was returning to the policy of the "good old days," when new banks suffered life under an regulatory electron microscope for only three years. Gruenberg claims that "the FDIC welcomes applications for deposit insurance, and we clearly have a role to play in facilitating the establishment of new institutions." He also claimed that the reason that de novo applications have slowed to "a trickle" since the start of the Great Recession is because of economic factors, not a real or imagined FDIC moratorium on insurance of accounts for de novo banks.

I should note that establishing even a small community bank is a challenging endeavor. Developing a sound business plan, raising the needed financial resources and recruiting competent leadership and staff takes work and we want to ensure that every new institution that is established is in a position to succeed.

But we are very committed to working with and providing support to any group with an interest in starting a community bank. To that end, we are developing a handbook to guide applicants through the review process.

There is ample room for new community banks with sound funding and well conceived business plans to serve their local markets. It is essential that they have a clear path to approval.

This all sounds well and good on the surface. However, I'm with attorney Charles Horn who, writing in the National Law Journal, indicates that he is, like me, from Missouri on this matter.

That said, the dearth in new deposit insurance approvals in recent years has, to some extent, become a self-fulfilling prophecy in that a perceived FDIC reluctance to approve new deposit insurance applications has helped suppress industry interest in establishing new banks. Chairman Gruenberg is correct, in part, in attributing the decline in deposit insurance applications to post-financial crisis economic conditions. At the same time, experience has shown us that persons wanting to organize a new insured depository institution have been discouraged by the FDIC’s failure to approve more than a small handful of new deposit insurance applications in the past few years (none so far in 2016, two in 2015, none in 2014, three in 2011, and two in 2010, according to the FDIC’s website).

While we state the obvious in saying that the best way for the FDIC to encourage the formation of new banks is to approve more deposit insurance applications, the point here is that it is actions—not words—that will speak the loudest on this subject.

There is no question that these are still difficult times to make money in the community banking business, no matter how much lipstick Gruenberg paints on the lips of the community banking business in the course of his address (and he lathers it on in rosy red hues in the linked article). A good portion of that difficulty is due to the small interest rate spreads and low interest rates imposed by the Federal Reserve's policies over the past nine years, which, as of today, seem rooted in place. Nevertheless, as the Federal Reserve's own economists have noted, the dearth of de novos is also due to the regulatory burdens placed on the small banks by the FDIC, FRB, and OCC. Greunberg does state that a "gentler approach" and "tiered regulation" are on the way. If true, this relief will be welcome.

We'll have to wait and see whether this promise of more de novos is true or false. As we noted just a few months ago, even those applicants who have weathered the storm and made it over the finish line have painted a grim picture of the time and expense required, as well as of much higher capital requirements (which means reduced return on equity). If organizers expect to pay consultants and attorneys hundreds of thousands of dollars to assist them in raising capital, creating extensive business plans, and preparing detailed applications for insurance of accounts, I think that they want to feel more confident that they will have a decent shot at approval.

As Horn observes, in this area, actions will speak louder than words.

De Novo Deep Freeze Thawing? Not So Fast!

Although SNL's Nathan Stovall tantalizes readers with the headline "De novo market could be warming up," I think that--reading between the lines--the De Novo Deep Freeze of the past 8 years is not going to be thawing this year.

Stovall cites the recent de novo charter approval of California's Core Commercial Bank. However, that bank's investment adviser's CEO, Edward Carpenter, while stating his belief that "you can expect to see more applications in the relatively near future," warns that the path to approval of a de novo charter is a rocky one.

[T]he application process for de novos is "considerably more difficult" and requires much greater preparation now than before the credit crisis...

[...]

"We believe that a new bank requires more capital than it did in the past. It requires a stronger and deeper management team than it did in the past. And it needs to make a more persuasive case than was often made in the past about community need."

Core Commercial, like the two other most recent de novos, Pennsylvania's Bank of Bird-in-Hand and New Hampshire's Primary Bank, "plans to target a fairly narrow customer base as well, catering to small and medium-sized businesses that might feel disenfranchised by the nation's largest institutions." I assume that the geographic market area is also relatively focused, and that the applicants had to prove with more than lip service that the community was not being adequately served by existing financial institutions.

While Carpenter seems optimistic (and, I'm sure, stands ready to assist other potential clients with their de novo needs), others, including some regulators, are less pie-eyed.

Candace Franks, commissioner of the state banking department in Arkansas, acknowledged that de novo banking activity certainly slows during a recession, but said prior downturns have been followed by a "generous" era of de novo applications. She said that certainly hasn't been the case this time around. Franks, the immediate past chairman of the Conference of State Bank Supervisors, said the lack of de novo activity is "very concerning to us," particularly in rural areas like Arkansas, where community banks serve as the engine of small business activity.

Some observers have argued that regulators were hesitant to grant new charters since many banks that failed during the crisis were de novos formed in early 2000s. The Federal Reserve discussed the issue on a handful of occasions. Robert Mahalik, director of applications at the Federal Reserve Bank of Dallas, said at a conference in April 2014 that he saw no hint that new charter activity or approval would be on the near horizon.

Stoval also discusses other disincentives that may restrain a de novo deluge.

While regulators might be easy to blame for the dearth of de novos, Stevens noted that bankers have not painted a very attractive picture for parties considering entering the industry, often complaining about heightened regulatory burdens. Such rhetoric could serve as a deterrent to potential investors.

Some advisers say there simply are not many investors looking to form new banks. DD&F Consulting Group President Randy Dennis, who has helped launch a number of de novos in his career, said there is a whole new breed of investors that want to put money to work in the banking sector, but some are concerned they will not be able to receive regulatory approval. He further said the higher capital requirements facing de novo banks have limited investor interest.

[...]

...Tom Brown, longtime bank investor and CEO of Second Curve Capital LLC, said at a conference in mid-November that he understood why there is so little investor interest in forming a new bank charter. He believes the capital constraints on de novos make it difficult for investors to earn adequate returns on their capital.

"Who in their right mind would start a bank today? The FDIC requires $35 million in capital to start a bank. And no one can pencil out an annual rate of return on $35 million in the next five years, so you're not seeing new chartered banks," Brown said at the event.

Well, obviously the investors in Core Commercial, who we presume are not insane.

Noted bank attorney Walt Moeling of Bryan Cave also is cautiously optimistic. He thinks the prospects of additional de novo applications is "real," but that there numbers will be far less than in the past.

All the observers seem to agree that the application process will not be easy. The organizers will need to present a convincing case, based on hard data, of the need for the new institution. Capital will be king, and as Tom Brown asserts, the more capital required, the more difficult it is to earn a decent return on equity, especially when private investors have places to place their capital where the returns are larger, quicker. Management will also be critical, with both expertise and probity playing critical roles. Finally, the application process is likely top much more time-consuming and expensive than it ever has been.

And, of course, once the doors are opened, what you have is a community bank, trying to make money in a Post-Franken-Dodd world chock-full of Maxine Waters, Elizabeth Warrens, and other "progressive" ideologues who will look over your shoulder 24/7/365 to "guide" you on the path to righteousness, if not necessarily to profitability.

Yes, Virginia, There Is A Regulatory Burden On Small Banks

Preston Ash of the Federal Reserve Bank of Dallas, sent me (on New Years Eve, no less) an article co-authored by Preston and Christoffer Koch and Thoma F. Siems of the Dallas Fed, entitled "Too Small to Succeed?--Community Banks in a New Regulatory Environment." Notwithstanding my semi-inebriated initial misunderstanding as to whether or not Ash was calling me out for stealing his idea for an article, it quickly was made clear to me that the authors wanted to share their thoughts with me because we all are thinking along the same lines (as evidenced by my blog post of December 27, 2015) to wit: the regulatory burden on community banks is reducing their number.

An excerpt from their article:

In 1992, community banks accounted for 64 percent of $4.6 trillion in total banking assets. By 2015, their market share had dropped to 19 percent of $15.9 trillion in total assets (Chart 1). Despite this decrease, community banks still account for the largest share of small-business loans. Currently, small- and medium-sized banks hold 55 percent of small-business loans and 75 percent of agricultural loans.

In twenty-three years, total assets of financial institutions in the U.S. have nearly quadrupled, yet community banks share of that total has shrunk from nearly two-thirds to less than one-fifth. At the same time that the big banks were getting bigger, they were leaving it to the incredibly shrinking community banking segment to make the majority of small business loans and three-quarters of all agricultural loans. The large banks are growing ever larger, yet are failing to serve the majority of the nation's main job creators, small businesses, leaving that task to the ever-decreasing number of remaining community banks.

After noting what we (and many others) have observed, that the lack of new charters since 2008 is an "alarming" contributing factor to decreasing the total number of community banks, the authors state that from their own conversations with bankers in their district, bankers seem to believe that the top reason for the shrinkage is "regulatory burden." The authors ask, "Are their concerns justified?" Among the factors that lead them to conclude in the affirmative are the following:

• Call reports have grown from 30 pages in the 1980s to 84 pages today.
• "At the end of 1970, Call Reports contained 53 items that banks filled out; this past quarter's filing included 2,379 items, with recent additions of more off-balance sheet and memoranda items."
• "From 2001-10, 10 major banking acts became law, totaling 1858 pages."
• "Feldman, Schmidt and Heinecke (2013) at the Federal Reserve Bank of Minneapolis find that the median reduction in profitability (return on assets) for the smallest banks—those banks with assets less than $50 million—is 14 basis points if they have to increase staff by one-half of a person and 45 basis points if they increase staff by two people." In other words, the smaller the bank, the more of a proportionate burden it is to hire the staff to comply with increased regulatory compliance and reporting requirements.

The authors conclude that community bankers have a legitimate beef.

[S]maller community banks appear to have a valid concern that their compliance burden is rising and the playing field is becoming more uneven. Regulatory oversight should match the level of risk an institution poses to the financial system and economy at large. Otherwise, more banks may become too small to succeed.

It's not just bloviating bloggers who are sounding the trumpet for regulatory relief. Some actually responsible regulators are also playing the same tune. Of course, it's a presidential election year and the masters of gridlock in D.C. are not likely to cooperate on much until the grass crown is awarded to the next Cynic-in-Chief. Still, bank lobbyists need to use this ammunition to fire away at their senators and congresspersons, because this is a trend that will not likely reverse itself of its own accord.

A Generation Later Rapidly Approaches

My last post, on small banks and credit unions doing "good works" for the communities they serve, prompted this email from the CEO of a community bank in the Midwest:

I recently read a quote from Margaret Thatcher where she said that if all the Good Samaritan had was good intentions he would not be remembered. He also had money. When privately owned banks go away, taking prosperous small businesses with them, who will remember a generation later? Very sad.

That post also prompted a credit union executive to unsubscribe from the blog, on the basis, I presume, that I ended mu post with "Merry Christmas" as opposed to "Happy Festivus."

While I didn't intend to anger or depress anyone, my community banking correspondent is correct to be pessimistic. The number of banks is decreasing rapidly, and the evidence is coming from all quarters.

Minnesota Business Magazine asks if the regulatory burden is "killing small banks" and answers itself in the affirmative.

In banking, numbers tell the story. If so, these numbers have the making of a tragedy: In 2000 there were 513 community banks in Minnesota. Now we have 332, a drop of 35% in just 15 years. What’s going on?  There are two factors at play according to Joe Witt, president of the Minnesota Bankers Association. One is increased competition from large players like Wal-Mart entering the financial services industry and from tax-exempt organizations like credit unions. “Right off the top they’ve got a 30% or 40% operating cost advantage,” says Witt.

But the dominant factor that is causing small banks to sell out or close shop is what Witt calls the “cumulative effect” of government regulations.

[...]

The problem with adding regulation isn’t that small banks can’t adhere to the standards, it’s that they simply can’t keep up.

“We are getting paddled and beaten in terms of additional compliance responsibilities,” says Bill Patient, vice president of compliance at BankCherokee in St. Paul. “Everyone is in the same playing field and working with the same regulations.”

Patient says that beyond just the sheer pages of new documents, the hardest part for small banks is spending time to understand new rules and regulations. Compliance officers must sort through the new laws to figure out what they mean, how the rules work with current regulations and which rules apply to their institution. Many small banks have no compliance officers on staff, and the increased workload can be devastating for small institutions.

The article also notes other factors, like the difficulty of making a buck in banking with narrow interest rate margins and the Fed's artificially low rates, as well as the dearth of new charters since 2008 to replace banks failing or merging. Nevertheless, bankers believe its the regulatory burden that is the major factor driving the trend, a trend that has seen the annual rate of decrease in the number of banks in Minnesota double post-Dodd-Frank from 2% to 4%.

Several years ago Witt sent a letter outlining his concerns to the Federal Deposit Insurance Corporation. In the letter he quoted a banker who said, ”We used to do banking in compliance with the laws and regulations. Now we do compliance and hope that it allows us to do some banking.”

The magazine echoes my correspondent in its view of the collateral damage from this incredibly shrinking universe of community banking.

Losing community banks isn’t simply about less choice for consumers. In rural communities, the local bank can be the lifeblood of the town, and being a small town bank might not be worthwhile anymore, says David Reiling, president of Sunrise Banks in Minneapolis. “There’s a lot more risk and the return may be uncertain at best.”

Banking Blues On The Border

In a world filled with unintended consequences, a perfect storm of unintended consequences for the banking business is sweeping the US-Mexico border.

Nearly half the bank branches in San Ysidro have closed in the last two years, mirroring a trend along the entire Mexican border that’s creating headaches for small businesses and forcing some residents to go without bank accounts.

Bank officials say branch closures along the border are the result of a recent federal crackdown on drug-related money-laundering and an inevitable reduction in brick-and-mortar locations as more banking gets conducted online.

No one disputes that those are factors, but some question whether the banks are using such things as excuses for closing less lucrative branches in relatively low-income border areas.

Whatever the cause, politicians and community leaders say the closures are stifling business along the border, where cash remains crucial to commerce, and threatening long-term prosperity by leaving a trail of empty storefronts and making loans harder to secure.

Another factor cited is the paucity of new bank charters since the collapse of 2008. No new community banks are being formed by local business leaders to meet the needs of the border communities not being met by big banks.

"Most communities along borders like San Ysidro don’t have community banks — we’re at the mercy of the national chains," [San Ysidro Chamber of Commerce CEO Jason] Wells said.

The national chains are closing, not opening, branches, not only in San Ysidro, but all along the Mexican border.

As of Oct. 1, 80 percent of bank branches had closed in Calexico, 29 percent had closed in Nogales, Ariz., and in Texas 13 percent had closed in El Paso and 17 percent in Laredo.

In San Ysidro, six of the community’s 13 branches have closed.

"Derisking" a bank can be bad for business, obviously.

Among the proposed solutions being urged by business leaders are a softening of money-laundering penalties. The $1.9 billion hit that HSBC took not long ago is cited in the article as a prime motivator for the acceleration of border branch closings. Don't hold your breath on that happening. The US Justice Department and federal regulators are too busy pursuing "hate speech," payday lenders, and online dating services to seriously consider lifting its jackboot off the neck of banks in the area of BSA/AML compliance, unless your a bank that services a state-legal, federally-illegal recreational pot business, in which case, as long as you file a Cheech-and-Chong SAR, you'll likely get a wink-wink/nudge-nudge from General Lynch.

Frankly, I don't see any short-term reversal of the trend. Perhaps, if and when de novo bank charter approvals become more common, a few local banks eventually might be created to serve some of these areas. Or, Princess Fauxcohontas may eventually exhale her pipe dream of a US Post Office "Bank of the People's Republic" and morph border post office branches into border bank branches that specialize in turning cash deposits into money orders. Otherwise, I don't see an end to the trend.

Community Banking: Back To The Motherland

A man who spent his working life successfully building a de novo community bank into a powerhouse that made himself and his fellow shareholders wealthy has started over using the same scheme. Unfortunately, this time around, he's not doing it in the United States.

You might call Vernon Hill a reverse Paul Revere. Most Americans like to believe that the U.S. is still a land of opportunity, the place where anyone can start a business and make a profit. But Mr. Hill issues a warning that rings loud and clear: The British—and others—are more inviting than we are.

“The regulatory environment has become so onerous in America that it is now easier to start a business in England than in the U.S.,” Mr. Hill says—and he would know.

That's right: the U.K. a nation that, 70 years ago, embraced the welfare state with open arms, is a better place to start and build a community bank than the land of the overregulated and the home of the Franken-Dodd Monster.

“When I went to Britain I thought the regulatory environment would be much worse,” he says. “It’s infinitely better there.”

The problem in the U.S. starts with towering federal regulations, such as the voluminous reporting and compliance rules in Dodd-Frank, the financial reform act that recently celebrated its fifth birthday. “Regulators are making it impossible for the medium and small banks to comply with the rules,” he says. “The burdens get so intense that it is destroying the small and medium-size banks in America.”

The result is that Dodd-Frank, a law intended to take on the systemic risk of “too-big-to-fail” banks, is multiplying the problem. “The big banks that are too big to fail are bigger now than ever, but the regulations have trickled down to the smaller banks that didn’t cause the financial crisis” Mr. Hill says. As a result, community banks are disappearing. “When I started my first bank in the 1970s there were 24,000 banks in America,” he says. “There are now 7,000 banks. It may soon be 500 or even fewer.”

According to Hill, Dodd-Frank is not the only spewer of regulatory offal. The BSA and the CRA get equal billing as soul crushers.

“The feds have taken anti-money-laundering rules to the extreme,” Mr. Hill says. “We have to monitor every deposit account every 24 hours. Somebody’s monitoring your account every day.” That’s invasive and expensive.

He laments that the Community Reinvestment Act, a catalyst of the 2008 subprime mortgage crisis, still hasn’t been repealed. “We are literally required to make loans that we know are going to fail,” he says.

Finally, the little guys are also being beaten down by the Mini Me's of red tape.

Then there’s the tangle of local regulations that every American small business must cut through. “You don’t need a building permit in Britain. Here [the U.S.] you have to get permits and you have to get inspections,” he says. All that can eat up months and months. “I can build 100 branch banks in Britain before I can get one built in the U.S., thanks to regulators.”

The linked article gives details on how Hill personally made hundreds of millions for himself (and billions for all of the shareholders) in the U.S. and how he's on the path to do the same thing in the U.K. It also gives his parting advice for US regulators.

What to do with banks that are too big to fail? Mr. Hill doesn’t hesitate. “You have to make them smaller,” he says. “You break them up.” He says that at one point there was a rule that barred any one bank from holding more than 10% of the country’s deposits, but that some institutions, such as Bank of America, have now edged above that figure. He views that as dangerous.

And how much should we be worried about overregulation—or competition from abroad? “Here’s my story in a nutshell and I hope Washington is paying close attention,” Mr. Hill says. “A very successful American business model has been transferred to Britain, where it’s even more successful because it doesn’t have to deal with the same burdens of government.”

He continues: “The politicians keep talking about fairness and helping the little guy. But it’s the little startup businesses that get hurt the most from the heavy hand of excessive government regulation. How is that fair?"

It's not fair. That's why Hill's "outta here" and "over there." He may be starting a trend.

Parsons Parses Franken-Dodd

Richard J. Parsons, who, prior to becoming an author on all things banking, was a career executive with Bank of America, is expressing his pessimism (sub. required) about the possibility of regulatory reform making it through Congress this year. The reason Parsons's pessimism: "ideology."

Two clashing worldviews dominate the conversation about bank regulation today. The first espouses the self-correcting power of the invisible hand of free markets. This ideology prevailed in the era of Ronald Reagan and Margaret Thatcher. But in the aftermath of the financial crisis, it seems to be losing steam.

The other ideology, backed by President Obama and Sen. Elizabeth Warren, fashions banking as a public utility to be controlled by elite central planners who are unsullied by self-interest.

Politicians compromise. Ideologists don't — even when they are confronted with "inconvenient facts.''

Today, there are 1,524 fewer banks with assets under $1 billion than there were on June 30, 2010 — just a few days before Dodd-Frank was signed into law.

Dodd-Frank = fewer banks is a popular mantra. Personally, I think the trickle-down burden of Franken-Dodd and the swing of the regulatory pendulum from lax-to-overbearing in the wake of the 2008 financial system meltdown have both played in a role in the incredibly shrinking community banking industry. However, as one of the anonymous commenters to linked article points out, economies of scale have also played a role. So have artificially low interest rates for the last seven years and the difficulty of making money on the interest rate spread. As we've also discussed, the paucity of de novo banks in the current economic cycle has played a role.

That said, Parsons point about the desire of Elizabeth Warren and her tribe of like-minded leftists (Parsons accuses FDIC Voice Chairman Thoma Hoenig of being in her camp, which may come as news to Hoenig) to make the banking business a "public utility" falls on open ears. We agree that many on the left would love the US to adopt the Canadian model of only a handful of banks, all micromanaged by the federal regulators-with Congressional input, of course-to serve the overridng social engineering goals of those who always exit stage left. The fewer the number of banks, the better able their regulators will be to "manage" them.