Is Dodd-Frank to Blame for De Novo Dearth?

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WASHINGTON — The investigation into the dearth of new bank charter applications has turned into a proxy battle over the Dodd-Frank Act, with Republicans and many industry players blaming the 2010 law for the scarcity of de novos.

That was clear during a House Oversight Committee hearing on the issue Wednesday, where many pointed fingers at the regulatory environment for chilling demand for new banks.

"Investors have options. If the impediments of starting a new bank are too great they will go elsewhere," said Guy Williams, president and chief executive of Gulf Coast Bank and Trust Co. in New Orleans, who testified on behalf of the American Bankers Association. "When you fix the underlying problems, new charters will result."

Williams cited high capital requirements, compliance costs and an "inflexible regulatory infrastructure" for low demand in de novos, and said it was having a big impact on local communities.

"How do you measure the things that don't occur when you don't charter banks?" Williams said. "We're missing on a lot of success because we want to prevent potential failure."

He was countered by Federal Deposit Insurance Corp. Chairman Martin Gruenberg, who said the economic environment, rather than Dodd-Frank, was to blame. Gruenberg pointed to the low interest rate environment that has prevailed since the 2008 crisis.

"It's been the longest prolonged period of near zero interest rates in our country's history," he said.

He emphasized that the agency was committed to helping educate financial institutions interested in applying for a charter.

"We are prepared to do everything we can to lower the process and procedure hurdle of getting through the application," said Gruenberg.

The FDIC has received an average of three applications per year between 2011 and 2015; in comparison, between 2004 and 2005 it received 219 applications annually on average.

Republican lawmakers, however, pointed to overall positive bank profits as proof that regulatory obstacles were blocking the creation of new banks more than economic conditions.

"It's clear that somebody's making money" with banks, said Rep. Mick Mulvaney, R-S.C. "Typically," he added, "what we would see is a flow of new entrants."

Gruenberg maintained that because of the role banks play in the economy, low interest rates still clouded the viability of many banks' business models.

"We have an environment where it is difficult for an institution to demonstrate a viable business plan," he said.

At the request of Mulvaney, Gruenberg promised to deliver recommendations for three Dodd-Frank measures that legislators should modify to ease requirements on community banks.

But one lawmaker accused the FDIC of using "retaliatory" tactics against applicants. "I'm aware of communication [from FDIC staff] that says 'We're going to teach them a lesson, we're going to go after them, we're going to make them sweat,' " said Rep. Mark Meadows, R-N.C.

Meadows called on whistleblowers to come out and tell the committee about any similar interactions with FDIC staff. "We're not going to tolerate this kind of chilling effect on this industry," he said.

Simon Johnson, a professor at the Massachusetts Institute of Technology's Sloan School of management and frequent advocate of tighter regulations for large banks, argued the problem stemmed from the failure to end "too big to fail."

"How could we possibly create a level playing field for community banks before and until we really ensure that no bank or bank holding company in the United States is too big to fail?" he asked.

Ultimately, lowering the barrier for new bank entrants would increase the FDIC's risk profile and could ultimately lead to an increase in premiums for currently insured banks, Johnson said.

"Do the established bankers want to pay a higher premium to run their existing businesses?" he asked.

Rep. Stephen Lynch, D-Mass., said that he and his Republican colleagues have been in conversations with FDIC Vice Chairman Thomas Hoenig on how to address the issue.

"We think that we can come up with a good regulatory relief bill for community banks," Lynch said.

During the hearing, Gruenberg also provided new details on a regulatory handbook for de novo applications that the FDIC plans to roll out by the end of this year.

The publication will "address topics such as developing a sound business plan, raising financial resources, and recruiting competent leadership," Gruenberg said in his prepared statement to lawmakers.

Gruenberg announced the handbook initiative in April, along with the decision to shorten the regulatory scrutiny period for de novo banks from six to its pre-crisis level of three years.

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