Bank Lawyer's Blog

Rent Seeking "Reform"

In an opinion piece in the Wall Street Journal, Holman W. Jenkins, Jr. responds to a New York Times editorial that claimed that President Obama has been frustrated throughout his two terms by the "political dysfunction" caused by a recalcitrant Republican-led Congress. In his response, Jenkins touches upon a subject near and dear to community bankers and, not coincidentally, to the author of this rag sheet.

If Mr. Obama was “deeply frustrated,” the reason was the American people’s lack of support for his agenda. And what the Times calls his regulatory strategy would better be described as unbridled rent seeking.

That’s the term economists use for exercising government power to create private gains for political purposes. Consider:

Mr. Obama’s bank policy dramatically consolidated the banking industry, which the government routinely sues for billions of dollars, with the proceeds partly distributed to Democratic activist groups.

His consumer-finance agency manufactured fake evidence of racism against wholesale auto lenders in order to facilitate a billion-dollar shakedown.

His airline policy, urged by labor unions, led to a major-carrier oligopoly, with rising fares and profits.

His FDA is seeking to extinguish small e-cigarette makers for the benefit of Big Tobacco and Big Pharma (whose smoking-cessation franchise is threatened by cheap and relatively safe electronic cigarettes).

His National Labor Relations Board, by undermining the power of independent franchisees, is working to cartelize the fast-food industry for the benefit of organized labor.

We could go on. Mr. Obama’s own Council of Economic Advisers complains about the increasing cartelization of the U.S. economy—as if this were not a natural output of regulation. In a much-noted Harvard Business Review piece this spring, James Bessen, an economist, lawyer and software entrepreneur, cites increased “political rent seeking” to explain the puzzle of rising corporate profits in the absence of job creation and economic growth.

The truth is, government playing neutral arbiter over the private economy doesn’t produce rents. A stable and predictable regulatory system produces only mingy or non-existent rents.

Jenkins' allegation that "rent seeking" regulatory "reform" that has resulted in thousands of pages of new regulations that burden banks big and small, as well as pushing the envelope on "disparate impact" and other theories designed to squeeze blood and money out of banks through regulatory enforcement actions, is leading to the "caterlization" of the U.S. economy in general and the U.S. banking system in particular, strikes a chord in many ears It's not the only reason for the consolidation of the banking business, but it's one of them, and a not insignificant one.

As to the ideologues who deny any regulatory burden exists, or if does exist, isn't having a negative effect on community banks (based, I assume, upon Vladimr Lenin's assertion that "A lie told often enough becomes the truth"), the House Financial Services Committee recently published a raft of contrary opinions from the folks on the firing line. Read 'em and weep.

As to where the community banking business, and the country in general, are headed, I have to agree with the conclusion of the CEO of a Mid-Western community bank, communicated to me in an email this weekend: "This doesn't end well."

No, it doesn't. Unless, of course, you're a rent seeker.

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.

Credit Unions and Community Banks Both Face "Shrinkage"

In his recent email newsletter (email [email protected] for a subscription), credit union consultant Marvin Umholtz discusses the fact that credit unions face the same problem of "shrinkage" that we have discussed on this blog for some time with respect to the community banking industry. Not surprisingly, both segments of the financial services industry suffer from the same disease: crushing regulation.

On July 8^th the Editor In Chief for the Credit Union Journal, Lisa Freeman, launched an initiative exploring reader attitudes about the a serious question of whether 74% of the credit union industry is “too small to survive” www.cujournal.com/news/opinions/forget-about-too-big-to-fail-for-cus-its-too-small-to-survive-1026267-1.html. The massive regulatory burden, much of it sourced by the federal government, had been identified as the primary culprit. There are other reasons why credit unions merger or liquidate, however, the burgeoning compliance burden stands out.

 

According to the NCUA’s statistics at March 31, 2016 the number of federally insured credit unions dropped below 6,000 for the first time in history. This correspondent believes that by 2021 there will be fewer than 600 federally insured credit unions – and they all will be multi-billions in assets because they will have to be large enough to cope with the Dodd-Frank Act’s and the FFIEC’s compliance-driven culture that it is now too-late to stop. An advancing avalanche of costly and complex rules are already in the federal pipeline. Among the next to hit will be the Military Lending Act Rule on October 3, 2016 that will upend the way consumer loans are granted.

 

Just by itself, the rogue CFPB has been a rulemaking nightmare. In a July 13th letter to the Office of Management and Budget’s Office of Information and Regulatory Affairs (OIRA), the American Bankers Association (ABA) and the Consumer Bankers Association (CBA) urged OIRA to reform the “generic clearance process” in federal rulemaking so that the CFPB doesn’t end-run procedures to make policy without having to follow the rules. The CFPB intended to use this stealth approach to make policy-related data collections for overdraft rules www.aba.com/Advocacy/commentletters/Documents/cl-PRA-ConsumerEngage2016.pdf.

 

The CFPB also plans to add 37 new data collection fields for the Home Mortgage Disclosure Act (HMDA) data reporting by mortgage loan originating financial institutions. The CFPB and the other FFIEC-member agencies, including the NCUA, are expected to double-down on fair lending compliance; and the disputed and controversial disparate impact theory has been terribly abused by the CFPB, the Housing and Urban Development Department (HUD) and by the Department of Justice (DOJ) in recent years http://bankingjournal.aba.com/2016/07/associations-challenge-huds-disparate-impact-rule.

 

The credit unions should not expect any relief from the CFPB’s oppressive rulemaking. Regardless of which political party wins the White House, credit unions will not receive exemptions from the CFPB’s rules. Exemptions by charter or asset size are incompatible with the DNA of the agency.

 

The U.S. Treasury’s FinCEN has demonstrated its ever-expanding expectations for cybersecurity, as well as for the PATRIOT Act, the Bank Secrecy Act, and for the anti-money laundering compliance. The U.S. Treasury and its FinCEN unit are determined to cut off terrorist financing, and that would for the closing off of the weakest links – including smaller credit unions. The U.S. Treasury Department wants fewer open doors in which cyber-criminals and terrorist bad actors might enter and deploy the U.S financial system.

 

The Financial Accounting Standards Board’s current expected credit losses methodology (CECL) will be phased in over several years, but credit union leaders have been encouraged to start working on CECL compliance now because it is that complicated.

 

The awful economy, with its low interest rates and diminished interest rate margins, has been particularly stressful for leaders at smaller financial institutions. As was said in the July 16, 2016 edition of The Economist the “Buttonwood” opinion essay was entitled, “Slow Suffocation: The financial system isn’t designed to cope with low or negative rates.” The op-ed concluded, “The irony is that low rates were initially devised as a policy to save the financial sector, and through the mechanism of higher lending, the rest of the economy. Many voters protested about the bailing out of the very institutions that caused the crisis. Those protesters can take only cold comfort that the same policies are now slowly suffocating the industry.”

 

The NCUA’s and the state credit union supervisory authorities’ examiners will be scrutinizing credit risk management and interest rate risk management – translated by examiners to mean having appropriate policies, practices, technologies, modeling, and testing – that all must be upgraded. Examiners will be tougher on strategic planning and governance compliance. Capital planning and succession planning will also be on examiners’ “deep look” list.

 

Operational risks like resiliency and internal controls are a big compliance concern at smaller credit unions with fewer staff and uninvolved boards of directors. The credit union industry has experienced too many stories about fraud and criminality, especially at smaller credit unions. The Office of Financial Research (OFR) has huge plans to digitally “tag” every financial service provider and every financial transaction such that both the provider and the transaction can be tracked globally.

 

The National Credit Union Share Insurance Fund (NCUSIF) is “double-counted” as an asset by the credit union and by the NCUA. The NCUA has the actual possession of the credit union’s 1% deposit. The NCUSIF structure and funding needs to more closely resemble that of the Federal deposit Insurance Corporation (FDIC). Congress is unlikely to allow credit unions to continue paying a fraction of the cost compared to banks for the “full faith and credit of the U.S. Government.” That will have costs associated with it, as well. Plus, it is a political dilemma of great magnitude for both the NCUA Board and for credit unions of all sizes.

 

Small credit unions might not be directly involve in taxi medallion loans, however, do the math. The drop in loan values in those taxi medallion loans and related participation loans add up to large numbers. The NCUA will seek out large credit unions to “buy” those bad loans via mergers and purchase and assumptions, but the costs to the NCUSIF could be substantial. And the actual financial status of the Temporary Corporate Credit Union Stabilization Fund (TCCUSF) won’t be known until 2021. The TCCUSF’s health is very dependent upon the health of the U.S. economy. Many smaller credit unions won’t be around in 2021 to find out the TCCUSF’s ultimate fate.

 

And for leaders at credit unions of all sizes the challenges listed by this correspondent should be viewed as merely the tip of the iceberg. There has existed a dynamic since before the financial crisis that favored larger organizations. The federal government is making it impossible to be small. And the asset sized definition of “small” will grow every year between now and 2021, and it will grow ever more rapidly. Is $100 million small? Is $1 billion small? Is $10 billion in assets small? The federally-mandated regulatory compliance burden is crushing Main Street’s credit unions while the compliance hurdles to jump are being set ever-higher. Strategically speaking, the time to plan for it and act on the emerging situation is now.

Some short-sighted community bankers might think that dwindling numbers of their tax-exempt competitors is good news. Unfortunately, this isn't a case of "I don't need to run faster than the bear, I just need to run faster than you." While the old adage that "some day you eat the bear, and some day the bear eats you" might hold true in some areas of life, in the case of regulatory burden, the bear is coming to claim both credit unions and community banks. It's an equal opportunity exterminator.

I've been harping about community banks and credit unions making common cause for some time. While some efforts in that direction have been, and are continuing to be, made, thus far, I don't see the results. Time's a wastin'.

Enhanced Recordkeeping Proposal: Kill It Before It Multiplies

One of BLB's favorite gadflies, Bert Ely, was at it again last week (paid subscription required). This time, his incredulity was focused on an FDIC proposal to require the country's largest banks (those with over two million deposit accounts) to implement more "robust" (and expensive) systems for determining more quickly, upon failure of the bank, whether a deposit is inured, uninsured, or partially insured. While Bert concedes that the proposed rule initially burdens only 36 banks, "one could imagine a scenario when this regulation could easily be extended to all banks." "One" could. It's called "trickle down" regulation. The CFPB's "race to the overbearing bottom" is a classic example. Therefore, argues Bert, "all banks" should oppose it.

While Bert criticizes the difficulty and expense (FDIC estimates the 36 banks will have to spend $328 million in system upgrades) of the proposal, his real criticism is that, based on recent history, the "proposed rule bears no relationship to reality."

Inasmuch as the FDIC has had the power (since the enactment of FIDICA in 1991) to protect the uninsured deposits of a failed bank if that was a less costly alternative to letting the uninsured depositors "eat cake," and since the panicked lines of depositors at IndyMac in 2008 encouraged The Care Bair and her successor to favor to overwhelmingly favor protecting all depositors in subsequent failures (in 482 of 512 post-IndyMac failures, Ely asserts), there is little likelihood that the FDIC would not protect all depositors from a public relations standpoint. Moreover, Ely argues, because protecting all depositors usually protects the "franchise value" of the failed bank, acquiring institutions are usually motivated to pay enough for the deposits and non-mortally wounded assets of the failed bank that liquidation and "stiffing" the uninsured depositors is not likely to ever be the least costly alternative.

Bert also argues that liquidation "can be very disruptive to the failed bank's lending and other nondeposit relationships. He cites the 2009 liquidation of New Frontier in Greeley, Colorado, as one instance in which local businesses were negatively impacted. Being familiar with that specific example, I can vouch for the veracity of Ely's opinion. Finally, Bert argues that the FDIC's recent concern with the continuing liquidity of banks (especially large banks) in crisis situations would be hampered by liquidations in which uninsured depositors were not paid, and might induce uninsured (and even insured) depositors in other banks to stage runs (ala IndyMac).

All-in-all, says Bert, this proposal is a bad idea and "the FDIC should kill it."

Amen.

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.

Stressing Stress Testing

A recent White Paper from the consulting firm Invictus discusses what those of us who represent community banks have been aware of for some time now: the requirements for "stress tests" that were supposed to apply only to those "Too Big To Fail" banks are "trickling down" to community banks. The buzzwords that apply to banks both large and small are "forward-looking risk analytics." While Invictus notes that bank regulators initially publicly stated that stress testing was only for the Big Guys, their actions belied their words (or, they simply changed their minds).

Regulatory actions in the waning months of 2015 should serve as notice that ignoring forward-looking analytics will lead to lower CAMELS scores, more examiner scrutiny and higher regulatory capital requirements. The new current expected credit loss model (CECL), which is expected early in 2016, is also a forward-looking tool.

Behind the scenes, however, regulators began changing their own methods for examining community banks, relying more and more on forward-looking analytics. In recent months, with signs that community banks are again accumulating higher concentrations of risky commercial real estate loans, regulators are reminding community banks that stress testing is indeed required to manage concentration risk in their portfolios and to develop realistic scenarios for interest rate risk management.
Regulatory actions in the waning months of 2015 should serve as notice that ignoring forward-looking analytics will lead to lower CAMELS scores, more examiner scrutiny and higher regulatory capital requirements. The new current expected credit loss model (CECL), which is expected early in 2016, is also a forward-looking tool.
The large banks have already adopted forward-looking risk analytics and are using the results with regulators. Although community banks are not subjected to the same stress testing requirements as the large banks, the regulatory trend is in the same direction. Those community banks that fail to incorporate new analytics into their risk management systems will find it difficult to communicate effectively with regulators.

The White Paper traces recent public issuances by the FDIC, FRB, and OCC in this direction. A specific red flag is the December 2015 joint agency guidance on CRE concentrations. Those of us who represented community banks and their directors in the aftermath of the last meltdown, when commercial real estate brought a number of community banks to grief, took special note of that guidance. It's "guidance" in the same way vendor management guidance is merely "guidance." Try violating it and see how "sticky" the wicket gets. You'll be up to your eyeballs in MRAs on the your next report of examination...or worse.

Even if you thinkl your CRE isn't all that "concentrated," Invictus thinks that you ought to seriously consider hoping on this forward-looking train.

Even if your bank doesn’t have CRE concentrations, use forward-looking risk analytics to stress test your capital, your strategic plans and any potential acquisition you might be considering. Present the results to regulators. Invictus’ clients that have used stress testing results with examiners have seen their capital requirements decrease, their management piece of their CAMELS composite increase, and their strategic plans win fast regulatory approval.

At the very least, it's worth pausing for a moment and, while you stoop to smell the roses, thinking about whether you might benefit from this approach (if you haven't already adopted it).

Activist Investors Betting On Bank Mergers

It appears that "activist" investors are turning to banks because they, like many of the rest of us close to the banking sector, think that there will be continued consolidation of the banking industry in the U.S., and what better way to make yourself some hard-earned profits than buying shares in a business and then pushing its board to sell the family farm so you can cash out. Some of you may remember that this model business plan was why the FDIC apparently soured on relying on "private equity" investors to help it clean up the mess after the last banking meltdown.

According to reporters in the St. Louis Post-Dispatch, "[a]ctivist investors are putting the U.S. banking sector in their crosshairs, betting that headwinds whipping through the industry will accelerate consolidation among lenders." The authors cite the rapid uptick in such "activist campaigns" in the financial sector last year, and observe that the "activists" are turning their attention from insurance companies and other non-bank financial businesses to commercial banks.

Hedge funds such as Ancora Advisors, Clover Partners and Seidman & Associates are buying up stakes in lenders across the U.S., from community banks to large regional lenders.

Driving these investments is the view that ultra-low interest rates, lagging returns on equity and tough regulations will push more banks to merge, with buyers willing to pay a hefty multiple to a bank’s tangible book value. Activist investors interviewed by Reuters say another factor is exposure to energy-related loans, which is driving down the valuations of certain banks and making them all the more vulnerable to a takeover.

“Bigger banks are back in the market doing deals,” said Ralph MacDonald, a partner at law firm Jones Day, who specializes in mergers and acquisitions.

U.S. bank mergers and acquisitions volume rose 58 percent last year to $34.5 billion, according to Thomson Reuters data.

The authors think that Zions and Comerica are likely targets. Both "Systemically Important Financial Institutions" had under performing returns on equity last year. That alone makes them prime targets for "activists."

The firm believes that any bank earning a 12 percent or less return on tangible common equity needs to consider whether it can prosper as an independent institution, PL Capital co-founder Richard Lashley said in an interview.

A bank’s exposure to falling energy prices makes it even more vulnerable, he noted. But another key factor is a bank’s ability to maneuver through a climate where low rates are compressing net interest margins, and stricter regulations are increasing costs.

“Management teams and boards are just exhausted,” said Lashley, who is based in New Jersey. “It’s not fun to run a bank anymore.”

However, the article also contains a quote from a community bank chief that indicates that the trend to consolidate is not just for SIFIs.

“My phones are ringing off the hook with calls coming in from banks wanting to sell,” said Pat Hickman, the CEO of Happy State Bank, a lender in the Texas panhandle. “And one of the primary reasons is regulation.”

Yes, it's not fun to run ANY bank anymore, not just the large ones. Whether your a big bank or a small one, publicly traded or privately held, pressured by "activist" investors or simply by the facts of life: as we said a few weeks ago, 2016 will very likely be the year of the bank merger.

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.

2016: Year Of The Merger

Respected bank analyst Dick Bove told CNBC last week that the United states is in for a tsunami of bank meregers in the coming year.

"In the United States, I think you will see a huge wave of mergers in banking in 2016," Bove, who is the vice-president of equity research at Rafferty Capital, told CNBC.

"The regional banks are going to be buying each other and I would expect to see 2016 being one of the biggest years for bank mergers that we have seen in the last decade," he later added.

If the activity that I have seen thus far in my little corner of the universe is any indication, you can take Bove's prediction to the bank. Community and regional bank M&A lawyers are going to be plenty busy in 2016.

In addition to customary reasons for consolidation that we've talked about over the past few years, including the crushing regulatory environment post-Franken-Dodd, there's another that I haven't heard discussed, but that ought to be thrown in the hopper of any bank owner who has been fantasizing about cashing out and sipping Margaritas in Mazatlan.

Bove was also bloviating last week (this time to CNN) about how problems in the oil patch spell trouble for banks that bank the "Awl Bidness," and that those kinds of problems have, in the not-so-distant past, spread beyond the oil states and caused a wider economic recession. There are differences this time around from the 1980s on Texas, but Bove is still "concerned" that even big banks outside of Houston and Dallas could feel the pinch. Chase's Jamie Dimon disagrees.

Even Wall Street banks are facing questions about the impact of falling oil prices.

While just a small fraction of their total loan portfolio is directly tied to energy lending, Bove estimates around 20% of their investment banking revenue comes from energy.

JPMorgan Chase(JPM) CEO Jamie Dimon, in a call with analysts this week, acknowledged there may be "slight negatives" for the bank related to commercial and real estate trouble in Dallas, Denver and Houston.

Yet the big banks are well diversified. That means they should benefit from the anticipated boost to consumer spending caused by lower oil prices.

The oil price slide is "not going to be a big deal" for JPMorgan, Dimon said.

Dimon did such a good job of calling the last recession in advance that I think that we all can rest easy based solely on his judgment, right? Yeah, that's what I thought, too.

Even if it's unlikely that oil-related industry woes will, alone, take the US economy down another black hole, you have to wonder whether, coupled with the global stock market retreat caused by China's reckless debt-funded economic expansion finally grinding to a halt and sliding backward, and what the ripple effects of that might be, if now might be the time to pull the plug, while the US economy, while not partying like it's 1999, sure as heck isn't slumbering like it's 2009. It's at least worth more than a passing thought.