WASHINGTON — Burned by failures of newly chartered banks, the Federal Deposit Insurance Corp. extended on Friday the period of time a new institution is classified as "de novo" and subjected them to tougher supervisory requirements.
In a letter sent to its supervised banks, the FDIC said banks less than seven years old will now be considered de novos, raising the limit from three years.
The designation, which already subjects banks to shorter intervals between examinations and higher capital standards, now also requires that institutions seek the FDIC's permission before changing their business plan.
The FDIC justified the policy because recently chartered institutions were "over represented" among this year's failures. More than a quarter of this year's 81 collapses were chartered after 2000.
"A number of newly insured institutions have pursued changes in business plans during the first few years of operation, which, in some cases, have led to increased risk and financial problems where accompanying controls and risk management practices were inadequate," the agency said in its letter.
The agency said that failures of newer banks tend to occur "between the fourth and seventh years of operation."
But some bankers expressed frustration over the stricter policy, saying it may discourage de novo bankers from setting up shop.
"This is counterproductive towards having new banks introduced in the communities where they really may need the service," said Lynda Messick, the president and chief executive officer of the $91 million-asset Community Bank Delaware in Lewes, which was chartered May 2006.
Others were more accepting of the rules, saying too many new banks had deviated toward risky practices, and the policy should not pose problems for well-managed institutions.
"This means we will be monitored much more closely for up to seven years. I don't necessarily think that's a bad thing given all that's gone on in the industry," said Dawn Griffin, the president and chief executive of the $91 million-asset Liberty First Bank in Monroe, Ga., which was chartered in 2006. "We feel like we're a well-managed bank, and nothing that I'm reading through here is causing me a great deal of alarm."
She said regulators were right to worry about de novos abruptly changing course.
"I really do think that for a lot of the banks that do find themselves in trouble right now that it is because they did deviate from their original plan, probably trying to make up net income," Griffin said.
Before the new policy, institutions less than three years old had to be examined every 12 months. Older institutions could follow a lighter, 18-month exam schedule.
Under the new policy, all institutions less than seven years old will be subject to the 12-month exam intervals, even banks that had already qualified for a longer period.
In addition, the agency's guidelines established a stricter process if an institution wants to deviate from its business plan. Previously, de novo institutions only had to submit written notice if they changed certain practices.
But now newly chartered institutions will have to seek the FDIC's express approval before any deviation.
The new business-plan requirement will not apply to institutions that are currently older than three years. Newer institutions, however, must submit an updated business plan for years four through seven and get regulators to sign off on the changes. Stricter capital requirements — de novos must keep a minimum Tier 1 leverage ratio of 8% — that previously lasted for three years now are in effect for seven.
"This process will allow the FDIC to more closely monitor the activities and operations of de novo banks for a longer time," the agency said in its letter.
The FDIC is the only agency to have changed its policies for de novo institutions, though the Federal Reserve Board already has a longer period — of five years — during which a bank is considered de novo.
Timothy Telman, the president and CEO of the $86 million-asset Bank of Cape Cod in Hyannis, Mass., said he would have preferred if the agency had not created an across-the-board policy for all new institutions, even the less risky ones. His bank's three-year period had ended on Aug. 16.
"We're disappointed," he said. "It would have been nice if they could have categorized banks. In our case we send our financials to the FDIC and our state regulators every month. They know exactly what we look like."
Still, he said that regulatory scrutiny in all cases is "the cost of doing business. The reality is some of the regulatory environment is incredibly burdensome but it keeps us on track."
But Messick said the new policy puts too much emphasis on small banks that are not responsible for the industry's woes.
"Everyone has concerns that banks that are 'too big to fail' … are actually bigger now than they were before," she said. "The de novo bankers that I know … are in fairly good shape. This may be another example of overregulation in parts of the industry over which they can exert some control."
