In this final installment of my response to the St. Louis Fed's study of "thriving" banks, I want to make two common-sense points:
- The banking industry needs higher barriers of entry
- Bankers need to protect themselves from bad bankers
States experiencing a rapid growth in new banks risks face several risks. Common sense suggests that a surge in new bank formation requires a commensurate growth in the number of skilled bankers, directors and regulators to manage, govern and supervise these banks. In the absence of a reliable pipeline of new, skilled talent, states that allow rapid new bank formation experience a serious dilution of talent.
My book, "Broke: America's Banking System Common Sense Ideas to Fix Banking in America," has a table of data showing new bank formation rates for the states from 1996-2010. The 10 states with the lowest new bank formation rates a group, by the way, that closely resembles the Fed's list of states with the most thriving banks experienced a modest growth in new banks from 1996 to 2010: 132 banks, which equaled 11% of the total number of banks doing business in those states as of 1995.
In contrast, the 10 states with the highest percentage of new bank formation from 1996 to 2010 a list that nearly mirrors the Fed's list of states with the lowest percentage of thriving banks added 781 new banks for the time period, a total equal to 70% of the banks doing business in those states in 1995.
Returning to a point made in my previous post, the NFL and Major League Baseball clearly understand the potential new teams have to dilute the overall talent in their businesses. Not everyone loves sports analogies, but this one is too good to pass up.
Go back to 1960. Since then the NFL added 10 new teams and Major League Baseball added 14. In the case of the NFL, the new teams won a total of only 19% of their games during the teams' first three years in existence. For baseball, the record is better at 38%, but to give some perspective, these teams collectively lost 1,632 more games than they won in their first three years.
Professional baseball and football teams are highly unlikely to win a lot of games in their startup years. In contrast, in U.S. banking, until the crisis hit full-blast, it appeared that the startup banks were all the 1927 New York Yankees starring the Babe Ruths of banking. The states that allowed the most new banks to form experienced far and away greater growth in statewide loans and, for a while, growth in profits, than the states that did not experience rapid expansion. Yet consider the tragic annihilation of Georgia banks over the past five years.
Just to be clear, the banks that suffer when new banks are formed too rapidly are not just the new ones. My heart breaks for the stakeholders in banks like Community Bank and Trust and the Bank of Hiawassee, two Georgia banks each over 100 years of age that failed during the recent debacle.
The real crisis in American banking today is a severe talent shortage that will only get worse as the industry's most experienced practitioners retire. The Fed study missed the forest through the trees. Yes, our nation's best bankers are top-notch. But, contrary to the Fed's findings, these great bankers are not only located in states like Texas and Iowa.
Our reality is that even great bankers cannot succeed when forced to compete in markets where rapid new bank formation rates dilute the pool of skilled bankers, wise directors and experienced regulators.
Richard J. Parsons is the author of "Broke: America's Banking System Common Sense Ideas to Fix Banking in America," published in 2013 by the Risk Management Association. He worked for 31 years at Bank of America.