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.