Last year, for the first time in anyone's recollection, there were no new bank charters approved, with the exception of three specifically blessed to acquire failed banks.
This wasn't earth shattering news as most bankers were aware that the FDIC was specifically denying approval for any charter applicant. More than likely the regulators felt overwhelmed by the number of troubled banks that were under critical watch and control. Leading securities analysts say that no one is making application and cite the challenging environment, slumping revenues and profits and the fact it has been easier to purchase a failed bank than to start from scratch. This would lead to the conclusion that no one really sees the opportunity of a new bank today.
Any newly formed community bank has a difficult time satisfying investors expectation primarily because the weak economy and current regulatory environment. Washington wants lots of capital, extensive control, intense regulatory oversight, skilled management and just about everything that will insure survival. This is well meaning, but not helpful in attracting capital or producing a reasonable return in the near term. Investors will easily choose to avoid investing in banking, particularly start-ups until the situation is corrected and a better outlook can be expected.
Federal Reserve Board Chairman Bernanke has recently talked about the importance of community banks and noted their recent progress in working through the hard economic times. What he fails to recognize is that while many small banks are making progress, the ones at the very bottom, the most recent charters or those with limited growth potential due to geography or a troubled local economy, still struggle to just break even. Much of this is the result of a pattern of new legislation and intense regulatory oversight necessitating a critical mass far in excess of past standards. Many say that assets in excess of $500 million are required to reach any scale of operation.
Look at the statistics and see what has happening to the community banks over the past 25 years. The total number of community banks has declined 4.0% per year as the result of mergers and FDIC assisted consolidations. Until recently about half of this number was offset by new bank charters but this long decline will most likely continue at an even faster pace. Added to this downward slide are outright bank failures which accounted for an additional 6% decline of community banks just over the past three years.
These continuing trends result in fewer and fewer community banks serving local businesses and individuals. The local banks are increasingly being replaced or merged into larger banks or their former customers are being attracted to shadow banks, retailers, brokers and remote technology based service providers.
A lot is being lost in the process as community banks decline in number and importance and small cities, towns or communities lose the traditional opportunity to have a resident bank president with local understanding and decision making power.
The question is what can be done, if anything, to change this disturbing pattern? Unless there is a hidden Washington agenda to eliminate community banks as trouble-prone or hard to regulate, it is time to rethink the limitations and criteria required for new applicants.
The lack of new charter applications is also an important flag of a larger problem. Much has been said and discussed about a developing a more equitable two tiered regulatory system, but it is now essential that such a change be conceived and implemented. It is impossible for a small bank to financially justify the costs associated with meeting regulatory compliance and controls at the level expected. There are a growing list of new regulations, expanded requirements and interpretations, the expectation of broader reports and analysis, more restrictive capital and reserve expectations all of which are adversely impacting the potential of the community bank.
Community banks are an important part of our economy. Their continuing decline will negatively impact many small cities, towns and communities. Washington needs to develop means to encourage new community banking capital and reenergize applications for new charter.
Robert H. Smith, the former chairman and chief executive of Security Pacific Corp., is a founder and director of Commerce National Bank in Newport Beach, Calif.