WASHINGTON — Keith Noreika’s public feud with the Federal Deposit Insurance Corp. over its de novo chartering process is outdated and unnecessary, according to several industry professionals familiar with the process.
The acting comptroller of the currency has accused the FDIC of purposely delaying deposit insurance applications in order to keep new banks from forming, arguing that the approach is hampering the growth of the banking industry.
While some of Noreika’s criticisms were legitimate in the past, those close to the process say, the FDIC has recently made improvements.
“He's a year behind the times,” said Donald Musso, the president and CEO of FinPro, a consultancy that helps financial institutions apply for bank charters. “The FDIC has fixed the de novo process.”
Noreika said in recent congressional testimony that the OCC should become the sole authority to grant federal bank charters. In a statement to American Banker for this story, Noreika clarified that he would recommend that the FDIC retain veto power.
"If some fear that state or federal chartering authorities may be too liberal in granting charters and others feel the FDIC has been too conservative in granting de novo insurance, the answer is to presume banks that earn new charters from the primary chartering authority will receive FDIC insurance unless the FDIC objects with reason during a limited period," Noreika said.
"This approach prevents wasting capital and time," he added.
In April 2016, FDIC Chairman Martin Gruenberg announced to community bankers that the agency would slash the period of heightened scrutiny for newly chartered institutions to three years from seven, the same level it was before the financial crisis.
And since then, it has published a handbook for prospective de novo applicants and held outreach meetings on the topic in six cities across the U.S.
Those changes have had a real impact, according to banking industry representatives.
The change in the heightened scrutiny period “improved things a great deal,” said Chris Cole, the executive vice president and senior regulatory counsel for the Independent Community Bankers of America. “They've been moving in the right direction.”
There has been a demonstrated uptick in interest for new bank charters since those changes were enacted. The FDIC received eight applications in 2016, more than the four prior years combined. There are currently five pending applicants, including highly publicized ones from the mobile-only bank Varo Money and the online lender SoFi.
Some even argue that the FDIC is more interested in the formation of traditional new community banks than the OCC, which has sought to expand the reach of its national charter to various types of fintech companies.
“I think that the comments from the acting comptroller are more about the OCC wanting to be able to issue FDIC insurance,” Musso said. “It's a political thing more than it is a realistic process thing.”
To be sure, there is little doubt that the FDIC is widely viewed as the more conservative of the two agencies in the chartering process.
“The differences between the OCC and the FDIC on de novos [is that] the FDIC, because they are the insurance agency here, they are more cautious,” said David H. Baris, a partner at Buckley Sandler.
And applying for a new bank charter is still far from easy. But many in the industry feel the FDIC’s perspective is valuable. “It's good that the FDIC is reviewing the applications from the standpoint of what's good for the Deposit Insurance Fund,” Cole said. “That has its merits.”
He added, however, that “the process is too long. It needs to be streamlined. And the capital requirements are still pretty onerous.”
Until 1991, the chartering of banks was left to the primary state or federal regulator. But the savings and loan crisis prompted lawmakers to include the FDIC in the process for all bank applications, fearing that supervising agencies, some of which rely on exam fees from institutions, were too eager to give approvals.
The rate of de novo applications plummeted dramatically during the financial crisis. In 2005, the FDIC approved 237 deposit insurance applications. In 2016, it signed off on just six.
That fueled widespread accusations from the industry that the FDIC was deliberately dragging its heels, an allegation the agency has denied. Despite the changes made last year, Noreika has repeatedly raised the issue since taking office in May.
“Since 2001, we’ve had 14 organizers of national banks that we’ve approved for a charter that have not gotten an answer, a yes or a no, from the FDIC,” Noreika told reporters after a speech at the Exchequer Club last month. “To me that’s unconscionable.”
However, of those 14 conditional approvals, seven were thrift approvals issued by the now-defunct Office of Thrift Supervision, before its merger into the OCC under the Dodd-Frank Act. And all 14 lacking an FDIC response received OCC approval prior to 2010, including years when de novo applications were being approved more steadily.
The 14 institutions ultimately withdrew their applications without a formal rejection from the FDIC. That doesn’t mean the FDIC never evaluated those applications, experts said.
Oftentimes, agencies including the FDIC, OCC and Federal Reserve communicate to institutions that they are unlikely to get approved, thus allowing them to withdraw without risking damage to their reputations.
“It's just a polite ‘Hey, you're getting fired. Would you like to resign?’ ” said Neil Grayson, a partner at Nelson Mullins Riley & Scarborough who also advises financial institutions on the de novo process. “All the regulators do that.”
Yet an OCC spokesperson said the federal chartering agency's process is relatively formal even when there is a withdrawal.
"It is not the case that applicants for a national bank charter withdraw their applications with the OCC after not hearing back at all. Each case is worked to decision in accordance with the process and time frames in the published Comptroller's Licensing Manual, typically 120 days," the OCC spokesperson said. "Applicants are informed of the pending decision. At that point, the applicant may opt to withdraw the application, and if they do not do so within 48 hours, the application is denied and the decision becomes subject to judicial review under the Administrative Procedures Act, if the applicant wishes to challenge that decision."
Still, the FDIC and Fed have argued that the de novo drought has more to do with factors other than the application process at the agencies, including the low level of interest rates.
“Interest rates are known drivers of banking profitability,” said a 2014 Fed analysis on the factors contributing to the decline in de novos. “These rates — plus other non‐regulatory influences such as weak banking demand — are likely to have caused 75‐80% (or perhaps even more) of the current decline in new charters.”
Bankers, meanwhile, said the biggest obstacle is neither the de novo application process nor interest rates, but the high capital requirements for institutions.
“Imagine yourself in a small town in upstate New York,” Baris said. “There may be 5,000 people there. Are you going to be able to find $20 million in a small town to start a bank? Very unlikely.”