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Regulators, like most of the rest of us, are adept at fighting the last war. Friday's release of Financial Institutions Letter 50-2009 is a classic case of slamming the barn door after the horses are loose.
The policy outlined in the Letter applies only to FDIC-inured institutions that are newly chartered or are less than 3 years old, and are non-member, state-chartered institutions. Currently, newly chartered banks and thrifts are subject to a three-year de novo period of higher capital requirements and heightened supervision and examination. FIL-5-2009 will extend this period to seven years. It will also increase the frequency of examinations, subjecting each such institution to a limited risk management examination during its first six months and full scope risk management and compliance exams and a CRA evaluation during the first 12 months. Thereafter risk management exams will be annual (not on an 18-month cycle) and compliance examinations and CRA evaluations will alternate on an annual basis.Of course, more frequent examinations mean greater expense to the institutions.
The FDIC is also going to tighten up deviations from business plans. Currently, the FDIC requires prior written notice of any material deviations from the approved business plan during the first three years of a de novo bank's existence. In the future, prior approval of the FDIC will be required for any material deviation from or change to the business plan during the first seven years. Currently, a de novo bank has to provide pro forma financial statements for its first three years of operation at the time its application is submitted. Going forward, such institutions will have to provide revised business plans and financial statements for years four through seven prior to the end of the third year of existence. Existing institutions that are less than three years old will have to submit such pro forma financial statements and business plans for years four through seven, and all existing institutions that are less than seven years old will be subject to the 12-month examination cycle through the seventh year.
The stated reason for this revised policy is the FDIC's contention that "troubled or failed de novo institutions have demonstrated" the following "common elements during the first seven years of operation:"
- rapid growth
- over-reliance on volatile funding, including brokered deposits
- concentrations without compensatory management controls
- significant deviations from approved business plans
- noncompliance with conditions in the deposit insurance orders
- weak risk management practices
- unseasoned loan portfolios, which masked potential deterioration during an economic downturn
- weak compliance management systems leading to significant consumer protection problems
- involvement in certain third-party relationships with little or no oversight
The fact that the FDIC is not granting many, if any, new FDIC insurance applications to any applicants for a de novo institution, (notwithstanding the FDIC's denial of the existence of an informal new charter "moratorium") makes the new policy of more immediate interest to people other than those cock-eyed optimists who still hope to start a brand new community bank from scratch in these most difficult of times. For example, those private equity players who may decide that they can live with the most recent policy statement of the FDIC issued last Wednesday regarding the purchase of deposits and assets of failed institutions from the FDIC by private equity investors ought to take note. If those private equity players aren't already owners of an FDIC-insured bank or thrift, they should expect these these new policies to apply to any de novo charter they use to "get in the game," even a shelf charter. In addition, I would not be surprised if the policies embodied in FIL-50-2009 are extended to types of charters other than the state, non-member bank charter that is technicaally covered by the policy statement. If the FDIC's rationale for the adoption of the latest policy is correct, there is no reason that the policy should not extend to de novo FRB-member, state-chartered banks, as well as to national banks and federal savings banks. Also, I would not drop in my tracks with shock if some or all of the restrictions embodied in this policy are eventually applied in situations where acquirers from outside of the banking system apply to acquire control of an FDIC-insured institution and the FDIC (and/or other federal regulator) has "concerns" about how well the acquirer will "oversee" the institution after the acquisition is completed.
There's absolutely no doubt that starting a new bank has gone from very difficult to extremely difficult. Of course, if you've got scads of money and plenty of time, there will be no shortage of "experts" who will tell a potential organizing group or acquirer, "Well, it will be difficult, expensive and time-consuming, but we think we can get it done."
