CSBS Issue Briefings - August 2020

De Novo Banks

CSBS Official Public Position

The entry of new financial institutions helps preserve the vitality of the community banking sector and fills important economic gaps in local banking markets. State regulators support the formation of new financial institutions and welcomes the applications for de novo banks.

Summary

Recent Federal Deposit Insurance Corporation (FDIC) research on new bank formation since 2000 highlights both the economic benefits of de novo banks and their vulnerability to economic shocks. Community and de novo banking institutions typically carry out the banking core functions of gathering core deposits and making loans to individuals and small businesses. New bank formations have historically been cyclical in nature, as evidenced during economic upswings in the early 1960s, early 1970s and early 1980s. Even with the recovery in community bank earnings following the most recent economic recession, low interest rates, narrow net interest margins and intense regulatory scrutiny have made new bank formations relatively unattractive. Thankfully, the regulatory and economic environment for de novo banks has begun to improve. The U.S. economy has long been characterized by a high degree of entrepreneurial activity; de novo banks typically serve entrepreneurs and small businesses, which still account for the majority of new jobs. As a matter of fact, de novo banks invest a larger share of their assets in small business loans (Goldberg and White, 1997) and can help fill the gap in reduction in small business loans resulting from bank mergers or the increasing trend in bank size. In addition, de novo entry can curb the exercise of market power and make banking markets more competitive. Why It Matters to State Regulators • A study presented at eh CSBS-Federal Reserve-FDIC Community Bank Research Conference found that much of the recent decline in the number of banks is due to a collapse of entry: If the current pace of consolidation continues with limited new bank entrants, there could be 1,000 fewer banks in 10 years compared to 500 fewer banks based on historical trends. • In April 2016, the FDIC rescinded FIL 50-2009, which had extended the de novo period for newly organized, state nonmember institutions from three to seven years for examinations, capital maintenance and other requirements. • Under Chairman Jelena McWilliams, the FDIC has taken additional steps to encourage de novo applications by both stablishing a new procedure through which new bank organizers can request feedback on their draft deposit insurance applications before filing the official application and announcing the agency would act on all deposit insurance applications within 120 days. • Trends in de novo chartering: 1,042 community de novo banks from 2000-2008; most are FDIC regulated (76.5%). • From year end 2009 to year end 2017, only 11 de novo charters were approved. Talking Points

FOR STATE REGULATOR USE ONLY