The decentralized banking model, which has been losing favor for years, may be killed off by regulatory reform.
Leaving decisions to local executives who knew their markets, the thinking went, would allow big lenders to be nimble and small ones to grow. But a stricter, more streamlined regulatory system and second-guessing of the credit-granting processes are forcing change.
Executives at companies such as Fulton Financial Corp. and Synovus Financial Corp. say they have not given up on their longtime models, but many say the strategy of using lots of charters and letting front-line managers make tough decisions might become another casualty of the financial crisis.
"The future of decentralized banking is a legitimate question," said Kevin Fitzsimmons, an analyst at Sandler O'Neill & Partners LP. "I don't think the model is dead, but it has been dealt a harsh blow. It will be harder to justify due to new regulatory and capital burdens."
Government responses to the crisis present the biggest challenge to decentralized models, especially legislation that would create a single bank regulator.
"If we have one monstrous regulator, there would be no point to having separate banks," Fitzsimmons said. "It raises the question of whether such a structure would be allowed."
Daniel Cardenas, an analyst at Howe Barnes Hoefer & Arnett Inc., agreed.
"The biggest challenge will be on the regulatory side," he said. "It is more expensive to run a decentralized footprint."
Another strike against the model is the perception that decentralized banking may have exposed companies to more problems leading up to the financial crisis partly because of inconsistent and at times lax lending standards. Likewise, some are concerned that the model may have prevented banking companies from reacting swiftly to tackle problems.
The former GB&T Bancshares Inc. in Gainesville, Ga., reported in early 2007 that one of its bank presidents had failed to comply with a number of company policies and procedures, including collateral requirements. The president was fired and within a year GB&T sold itself to SunTrust Banks Inc.
Another mounting concern is that undercapitalized banks could offset gains at healthier affiliates, forcing companies to shift capital around or weakening the overall strength of the parent.
The model received its darkest black eye earlier this month when the Federal Deposit Insurance Corp. seized the $19 billion-asset FBOP Corp. Several of the Oak Park, Ill., company's nine banks were undercapitalized, including its biggest subsidiary, California National Bank, which weighed heavily against its healthier banks. U.S. Bancorp bought all nine banks Nov. 2.
Richard Anthony, the chairman and CEO at Synovus,, has acknowledged the Columbus, Ga., company's model may have contributed to credit problems.
"Some of the growth we had in construction and development [lending] that was more than we really wanted … has been because of the decentralized model," he said during an August 2008 conference hosted by Keefe, Bruyette & Woods Inc.
Still, Anthony disagrees that the model kept Synovus from taking prompt action to confront issues. Local CEOs have been critical to helping Synovus identify and vet local investors interested in buying distressed real estate. Selling to local buyers has yielded pricing that on average is 30% higher than bulk sales to outsiders, according to company data.
"In some ways we did act pretty quickly," Anthony said in an interview. "Particularly in Florida, we did take some decisive action."
Capitol Bancorp Ltd. of Lansing, Mich., may be the most noticeable convert.
In March, Capitol combined nine banks in Michigan as part of a plan to spin them off into a new company, Michigan Bancorp Ltd. The move, which is still under regulatory review, would relegate about a third of Capitol's nonperforming assets to the new entity, while also slightly raising Capitol's capital levels.
Capitol has eliminated 13 charters since mid-2008, slimming to 51 charters by consolidating banks or selling them. Last week the $5.3 billion-asset company sold Bank of Santa Barbara to investors.
Synovus has shrunk to 30 charters from more than 40 in 2005. It also tightened up in recent years, implementing consistent standards and placing credit administration and senior credit officers in its worst-hit regions.
Executives who still embrace the model feel it fulfills two key objectives of banking: empowering employees and developing strong relationships with clients. "When they retain their bank's name, it sends a message from corporate that they are still in charge," said R. Scott Smith Jr., Fulton's chairman, president and CEO. "It brings responsibility and accountability."
Fulton Financial, of Lancaster, Pa., merged three of its Maryland banks this summer, leaving the $16.6 billion-asset company with eight banks.
Decentralized models can boost deposit gathering and liquidity because they can offer the $250,000 deposit insurance limit across multiple banks.
Wintrust Financial Corp. of Lake Forest, Ill., has promoted a MaxSafe money market product that allows customers to have account balances across the $12.1 billion-asset company's 15 bank charters. Anthony at Synovus said his company holds about $2 billion in pooled deposits that are held at multiple banks.
Smith said Fulton's ability to offer more deposit insurance to individual clients proved beneficial during last year's financial crisis. "It was a nice way to hold on to customers' deposits and keep them from going somewhere else," he said.