WASHINGTON — In the midst of a public feud between federal regulators on the right process for chartering de novo banks, a leading analyst is arguing that they should instead focus on loosening capital standards for newcomers.

“As long as there is a ‘sin tax’ on new banks in the form of punitive capital requirements that force realized return well below other comparably prudent investment options, new charters will be few [and] far between,” Karen Shaw Petrou, managing partner of Federal Financial Analytics, said in a paper released Wednesday.

The paper noted that the Federal Deposit Insurance Corp. holds new banks to high capital requirement standards for several years after they first apply, a restriction that could be one of the key reasons investors are reluctant to apply.

Karen Shaw Petrou, managing director of Federal Financial Analytics
“The FDIC’s sin tax presumes it’s the bank that’s the problem,” said Karen Shaw Petrou, managing partner of Federal Financial Analytics. “Why else capital-tax a new $150 million bank more than a $2 trillion” global systemically important bank?

“Regulatory-capital requirements lie at the heart of each new bank’s strategic dilemma,” Petrou said. They are "essentially a sin tax levied against new charters for the sins of old ones before the crisis and, perhaps, those of the FDIC and other regulators that chartered them."

The FDIC has said that the chief culprit for the slow uptick in de novo applications is low interest rates, making banks less appealing to investors.

But in recent remarks, acting Comptroller of the Currency Keith Noreika has argued that the FDIC was slowing down the application process and should be essentially stripped of its role in the chartering process.

The reality could be more complicated than both sides claim.

In the process of helping investors apply for a new bank charter, Federal Financial Analytics found the FDIC required new banks to maintain an 8% leverage ratio for a certain amount of years. (That period was recently reduced by the agency from seven years to its pre-crisis length of three years.)

“The FDIC’s sin tax presumes it’s the bank that’s the problem,” Petrou said in the brief. “Why else capital-tax a new $150 million bank more than a $2 trillion” global systemically important bank?

To attract more investors while protecting the economy, Petrou argued, regulators should be focusing instead on closer supervision of new banks, whether through stress testing or quicker intervention at any sign of trouble.

“Right-size capital requirements based on an applicant’s business model,” she said. But “keep new charters on the aforesaid tight leash.”

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Lalita Clozel

Lalita Clozel covers fintech regulation, anti-money-laundering, cybersecurity and the Federal Deposit Insurance Corp. in American Banker's Washington bureau.