One group's plea to move mutuals off endangered list: Relax de novo standards

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A handful of bankers and industry observers are leading a drive to encourage the formation of new mutuals.

As de novo activity regains momentum, proponents of the beleaguered banking model argue that the Federal Deposit Insurance Corp. should alter its deposit insurance application process to entice more groups to form mutual banks to serve unbanked groups.

Others believe the market has changed too much since the heyday of the mutual model.

“It would take a truly altruistic individual to start a mutual as they would, in essence, be giving away their investment,” said Donald Musso, president and CEO of FinPro, which works with de novo banks.

Mutuals, which have been in steady decline in recent years, make up less than a tenth of all banks. Most of the roughly 480 mutuals that exist are concentrated in Massachusetts, Ohio and Pennsylvania. The last new mutual was formed in the 1960s, according to America’s Mutual Banks, a trade group that supports the model.

Mutual banks make up 70% of the banks in Massachusetts, said Daniel Forte, president and CEO of the Massachusetts Bankers Association. Most of the state's mutuals were formed in the late 1800s and early 1900s, when commercial banks did little consumer banking.

Modern investors are more likely to invest in a stock-owned bank where they can see returns on their investments. The only realistic scenario for a new mutual would involve a credit union conversion, industry observers said.

Anyone looking to form a mutual would struggle to raise the $25 million in initial capital that the FDIC typically requires, said Stanley Ragalevsky, a banking lawyer at K&L Gates in Boston.

“There's no one willing to put his money up unless he gets an ownership interest," Ragalevsky added. "But there's no ownership interest with a mutual charter.”

America’s Mutual Banks, for its part, submitted a comment letter to the FDIC this week that included recommendations the group says could help spur the formation of mutual banks.

“It is clear that agency rules, policies, practices and perhaps laws have not kept pace with the changes in the business of banking as they [a]ffect mutual banks,” the letter stated. “AMB believes as a matter of public policy the FDIC should welcome new approaches to the consideration of insurance of accounts for mutual banks.”

The group asked the FDIC to form a task force with the Office of the Comptroller of the Currency and state regulators to develop rules and policies that would encourage new mutual banks. The organization also wants the FDIC to create an outreach program to contact potential sponsors and affinity groups that would have an interest in serving the unbanked through a mutual bank.

America's Mutual Banks also recommended that the FDIC provide guidance with reduced minimum capital requirements for de novo mutual groups seeking to serve rural or limited geographies.

There is still time for other groups or individuals to weigh in.

The FDIC, which began seeking comments in December for ways to improve the de novo process, extended its deadline to March 31.

The FDIC did not make a spokesperson available to comment for this story.

Doug Faucette, a lawyer at Locke Lord and the director of America's Mutual Banks, said that new mutuals could help underbanked segments and that he has been approached in recent years by a number of groups interested in starting mutuals. Those groups ultimately decided that the barriers to entry, including capital requirements, were too high.

The motives to start a mutual today “are partly altruistic but partly financial, in that the business community desires a more friendly source of financing," Faucette said. "Historically, charitable organizations sought to fund mutual banks that would serve underserved or unserved areas.”

Robert Rivers, chairman and CEO of Eastern Bank in Boston — the nation's oldest and largest mutual — expressed concern that lowering capital requirements for new mutuals could threaten the safety and soundness of the financial system. He said it is unlikely that more mutuals will be formed.

“I think it’s a part of the industry that was formed at one time under certain rules and for certain reasons that don’t exist anymore today,” Rivers said.

The largest strategic benefit of a mutual bank — the ability to take a long-term view rather than worrying about shareholder demands — is being put to use by privately owned banks, Rivers added.

“We love mutuals that do exist and we think the form has been very liberating for us," he said.

"We’ve chosen not to go public because we don’t want to lose all the benefits we have from this form,” he added. “But were we starting from scratch today? I can’t imagine we would ever be able to pull that off.”

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