It’s been a long road, but regulatory conditions are finally more receptive to bank startups than at any time since the financial crisis struck a decade ago. Only 11 new bank charters have been approved since the 2008 financial crisis, but in 2019, confidence in de novo banks is picking up steam. Experienced banking executives are ready to take advantage of a strong economy — and those professionals who have been holding off for the right time to start a de novo bank? Their time is now.
Before the global financial crisis, more than 1,000 de novo banks were formed between 2000 to 2007. In the 10 years prior to 2008, de novo bank charters averaged more than 100 per year. But then the crisis hit, and applications dried up as de novo banks were subjected to bolstered regulatory oversight and the resultant higher compliance costs. At the same time, abnormally low interest rates and tight margins meant reduced profits.
The Federal Deposit Insurance Corporation (FDIC) is an independent federal agency insuring deposits in U.S. banks and thrifts in the event of bank failures. Its task is to protect public confidence and encourage stability in the financial system through the promotion of sound banking practices. So, it is significant that the FDIC is now helping investors in their quest to form new banks.
The FDIC took the following action in December 2018:
Issued a request for information seeking comments on how to improve the deposit insurance application process
Issued an update to its publication entitled “Applying for Deposit Insurance – A Handbook for Organizers of De Novo Institutions”
Issued its “Deposit Insurance Applications Procedures Manual” in final form
Established a process to allow prospective organizers the option to request FDIC review of a draft deposit insurance proposal prior to filing an official application
Republished its timeframe guidelines for processing deposit insurance applications for de novo banks
The fact that the FDIC took significant action to promote the formation of de novo banks provides much of the reassurance investors should need. Since 1933, the FDIC has maintained that de novo banks are important because they preserve the vitality of communities, fill important gaps in local banking markets, and provide credit services to communities that may be overlooked by other financial institutions. This philosophy is in keeping with the types of applications that were submitted in 2018.
The FDIC has been criticized in the past for disillusioning potential investors with its notoriously difficult deposit investment approval process. Former Acting Comptroller of the Currency Keith Noreika claimed the FDIC “just let (applications) hang out there forever, so that the organizers [of proposed new banks] wasted all their money trying to get insurance, and then they gave up.” But at the time the December announcement about new reforms was made, FDIC Chair Jelena McWilliams wrote in “American Banker” that a pipeline of new banks was critical to the long-term health of the industry and communities across the country. She said the application process should not be overly burdensome or deter prospective banks from applying. “I recognize that, like many competitive industries, a dynamic banking sector needs new startups entering the marketplace,” she said. “De novo banks are a key source of new capital, talent, ideas, and ways to serve customers.” Applications in 2019 are not approved without meeting strict guidelines and considerations.
Executives planning to form banks will need to outline and prove:
The soundness of the proposed institution’s business plan
The qualifications of the proposed board of directors and senior management
The adequacy of the proposed capital
McWilliams also said the FDIC was seeking public comment on how to improve the de novo application process. “We will engage in roundtable discussions across the country to seek feedback,” she said. “We are also improving the pre-filing process to assist applicants prior to a formal submission.”
Creating a de novo bank these days promises to be a more streamlined, inviting process than it was at the time of the financial crisis. It still involves intensive work and patience — approval can come up to eight months after filing the application, with a further three months of pre-filing and preparation — but current conditions for bank startup investment are finally conducive to lasting success.