"Travis Hill proposes enhancing de novo establishments via these three strategies: a climb towards success."
The Federal Deposit Insurance Corporation (FDIC), the US government agency that provides deposit insurance to depositors, has been exploring ways to encourage the formation of new banks, particularly in underserved communities. This move comes in response to a significant decrease in new bank formations since 2008, primarily due to stricter regulatory requirements, especially FDIC rules on upfront capital for de novo (new) banks [1].
The decline in new banks is a concern, as community banks play a vital role in local economies by providing tailored financial solutions, especially for small businesses, agriculture, and underserved markets. The lack of new banks can result in reduced credit availability, increased reliance on large banks or nonbank financial entities, and contribute to less competitive banking markets [1][3].
In 2021, the FDIC Acting Chair, Travis Hill, suggested three ways to encourage new bank formation. One of these ways is to change capital expectations for certain applicants, such as noncomplex community banks in areas where there are none. Hill also proposed reevaluating the application process for innovative banks, such as fintech companies, to reduce risk to the Deposit Insurance Fund [2].
The FDIC's current capital requirement for new bank applicants is to raise upfront capital equal to 8% of projected assets in year seven, a rule that has been criticised for being burdensome, particularly in rural or lower-income areas where capital is scarce [1]. Although this was somewhat eased in 2016 to require projections over three years instead of seven, the requirement still substantially hinders new bank formation.
To address this, the FDIC under Michelle Bowman has proposed reforms aimed at lowering these regulatory barriers. These proposals include revising the upfront capital requirements to be more manageable and better aligned with the realities of raising capital in underserved areas, thereby reducing the "insurmountable burden" on potential new banks. Bowman argues that increasing de novo bank formation is crucial for maintaining a diverse, resilient banking system that supports local economic growth and financial inclusion [1].
Since 2010, only 86 new banks have been formed. However, the FDIC is planning to issue a request for information regarding industrial loan corporation charter applications, which could potentially lead to an increase in new banks, especially those providing benefits to underserved communities [2]. Hill did not expect the FDIC to get anywhere close to the 100-plus new banks per year of the pre-2008 era.
Despite the challenges, the number of active bank charters currently stands at around 4,500, which is less than half the number (approximately 8,500) from 2008. More than half of these new banks were established between 2019 and 2022 [1]. The FDIC will maintain rigorous standards for approval while reestablishing a pipeline of new entrants into the banking sector.
Industrial loan corporations (ILCs), a type of bank charter, draw strong opinions from various stakeholders across the financial services industry. Hill suggested that these applicants might be subject to less upfront capital due to the benefits they provide to underserved communities [2].
Deposit insurance will continue to be a special government privilege under the FDIC's oversight, ensuring that depositors' funds are protected in the event of a bank failure.
References: [1] Federal Reserve Bank of St. Louis (2021). "The decline in new bank formation: causes, consequences, and solutions." [2] FDIC (2021). "FDIC Acting Chair Travis J. Hill's remarks at the American Bankers Association Annual Convention." [3] FDIC (2021). "Community banks: the backbone of local economies."
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