Low Interest Rates to Blame for Few Bank Startups, FDIC Says

By Jeff Bater

July 13 — Low interest rates are discouraging bank creation, a U.S. regulator told lawmakers examining a veritable drought in applications since the financial crisis.

The Federal Deposit Insurance Corp. has received 49 de novo applications, with only three approvals, since the beginning of 2009 until this year. By contrast, FDIC figures show that in 2007, there were 223 applications and 161 approvals.

FDIC Chairman Martin Gruenberg told the House Oversight and Government Reform Committee the agency supports the formation of banks, but he blamed economic factors for a lack of interest.

Net Interest Margins Slim

“Even with the recovery in community bank earnings following the recent financial crisis, low interest rates and narrow net interest margins have kept bank profitability ratios (return on assets and return on equity) well below pre-crisis levels, making it relatively unattractive to start new banks,” he said in prepared remarks.

The FDIC does not charter financial institutions. Banks are chartered by the individual states or, in the case of national banks, by the Office of the Comptroller of the Currency (OCC). The FDIC decides whether to grant newly chartered banks federal deposit insurance, a requirement for any institution that collects deposits from individuals. The FDIC also serves as federal regulator for state-chartered banks, exercising further supervisory authority over those institutions.

In April, the FDIC took a step to encourage de novo applications, announcing it would shorten the period of heightened supervisory monitoring for new banks to three years from seven years (67 BBD, 4/7/16). The longer span had been established during the financial crisis because of the disproportionate number of new banks that were failing or experiencing difficulties.

Chaffetz Questions FDIC Process

Rep. Jason Chaffetz (R-Utah), the committee's chairman, expressed concern over the drastic decline in applications for new banks. “The FDIC doesn't appear to want consumers to have any new banks,” he said in his opening statement.

The banking industry has been improving in the years since the crisis. In fact, FDIC-insured institutions posted record earnings of nearly $164 billion in 2015.

Chaffetz questioned Gruenberg and said he had a hard time accepting that 94 percent of applications had not been approved. “Do you really believe all those bank applications don't meet the needs of the communities?,” he said.

Gruenberg said the current economic environment makes it difficult for an institution to demonstrate a viable business plan. “For new institutions to get over the hurdle, they not only have to be able to generate revenue, but they also have to get over the fixed costs of establishing the institution and in a near-zero interest rate environment that becomes particularly challenging.”

“But they're posting record profits,” Chaffetz said. “So you can't have it both ways. My fundamental challenge is, you've only approved three. That's highly suspicious.”

‘No-Growth Policy.'

A witness at the hearing, Mark Browning, testifying on behalf of the National Association of Industrial Bankers (NAIB) and the Utah Bankers Association (UBA), said potential applicants view the FDIC applications process as “a black hole.”

“I am not here to criticize the practice of requiring an application to be complete before the FDIC acts on it,” Browning said. “Our concern is that the FDIC has unilaterally adopted a no-growth policy without acknowledging it, justifying it to Congress, and reviewing it through a healthy public debate.”

Regulatory Burden

Guy Williams, president of Gulf Coast Bank and Trust Company in New Orleans, urged Congress to pass legislation to help turn the tide of community bank consolidation and create an economic environment that encourages new bank charters. Williams, testifying on behalf of the American Bankers Association, also took the opportunity to blame regulatory burden for inhibiting bank growth.

“The lack of de novo activity is concerning to our industry and sadly reflects the same forces that are driving consolidation — excessive and complex regulations that are not tailored to the risks of specific institutions,” he said. “This — not the local economic conditions — is often the tipping point that drives small banks to merge with banks typically many times larger. It is also a barrier to entry for new banks.”

Counties Without Banks

Rep. Earl Carter (R-Ga.) said 48 of 159 counties in his state don't have a locally chartered bank and pressed Gruenberg on what the FDIC is doing to encourage bank startups.

“We can't change the interest-rate environment,” Gruenberg said. “What we can try to do that within our authority is at least make the application process user-friendly.”

Carter said if small community banks disappear, small business goes away. “What I'm hearing is, there's no transparency, the process is difficult, it's hard to navigate,” he told Gruenberg.

To contact the reporter on this story: Jeff Bater in Washington at jbater@bna.com

To contact the editor responsible for this story: Mike Ferullo in Washington at mferullo@bna.com

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