Mechanics Cooperative Bank opened a new branch in Taunton in March of last year, one of eight new bank branches opened in the state in 2014.
No longer can you count on one hand the years that have elapsed since the Great Recession, and now the Fed is wondering: Where are all the new bank charters?
In a recent paper – titled “Where Are All The New Banks? The Role of Regulatory Burden in New Charter Creation” – researchers for the Federal Reserve Board of Governors set out to determine whether regulatory burden was impeding the formation of new banks in the post-recession landscape.
Between 1990 and 2008, more than 2,000 new banks were formed, at a rate of over 100 per year, but between 2009 and 2013, the United States saw the formation of just seven new banks – fewer than two per year, the Fed’s researchers said in their analysis.
But perhaps unsurprisingly, the Fed found that, with or without regulatory burden, less-than-ideal economic conditions, depressed demand for banking services and a low interest environment would have tamped down new bank charters by about 75 to 80 percent anyway.
While it’s mighty convenient that the Fed’s own research would absolve regulators of any part in quashing new bank applications, observers say that conclusion may not be too far off the mark.
“It’s never one thing. It’s always a variety of reasons. Regulatory costs are definitely a consideration, but it also depends on your business model,” said Pedro Arce, vice president of Eastern Bank’s business banking group.
“If you look at a de novo bank in a poor community that’s barely raising the minimum … Any additional cost to your business plan pushes off your profitability, maybe a year, maybe two years … So it does make an impact on a de novo in a poor community,” he said.
And Arce, of all people, should know. In recent history, he attempted to launch Veritas Bank, which would have been the first community bank headquartered in the city of Lawrence. Although he raised $13.5 million in capital and gained an initial regulatory approval from the state Division of Banks and a preliminary approval from the FDIC, the FDIC ultimately shot down his application for insurance as the economy crashed and the agency imposed an unofficial moratorium on new bank charters.
Michael Goodman, executive director of the public policy center at UMass Dartmouth, doesn’t question the cost of compliance, particularly for smaller banks, but he adds, “I think the Fed paper makes a pretty compelling case that most of the reason for that has to do with prevailing interest rate levels and net interest margins as opposed to regulatory obstacles.”
That’s already driving consolidation in the industry. The state Division of Banks approved 6 bank mergers last year alone.
“I think in this environment where the competitive pressures are very high and the interest margin is so tight, there are institutions that can be had that already have charters and reputations and facilities,” he said.
Sharing The Burden – Or Not
“Regulatory burden is a factor, but the way it shakes out in my estimation is that it’s not a shared burden,” said Cornelius Hurley, director of the Boston University Center for Finance, Law and Policy.
Yes, big money-center mega-banks may be subject to more regulatory scrutiny, but at the same time, they can also spread that burden over a greater revenue base, he said. The big banks effectively still have a competitive advantage over the smaller guys, in other words.
While it’s not the primary focus of the Fed’s paper, Hurley pointed out those same environmental factors that have dampened the formation of new bank charters have also crimped branch expansion in recent years.
Not that that’s been an issue in Massachusetts, which is already pretty well saturated with banks of all sizes. The Bay State’s banks added eight new branches last year, according to FDIC data cited in a recent American Banker article.
Citing a recent bulletin from the Office of the Comptroller of the Currency, Hurley said, “The future isn’t necessarily in new charters, but in the existing banks that are cluttering the landscape cooperating with one another.”
Another interesting question might be why the Fed has chosen to investigate this matter now. On that question, the paper itself offers few clues to the answer.
“I think there has been a general consensus that regulatory costs are affecting banks’ bottom lines, whether it’s a large bank or a small bank,” Arce said. “I think it’s one thing to say there are a variety of reasons why de novos aren’t starting … It’s another to say the regulatory environment has nothing to do with it.”
