Invest1 publisher3 min readPublished
Fifteen years of new US bank charters add up to seven months of the pre-2007 rate
The Kansas City Fed counts fewer than seven de novo banks a year since 2010 against 185 a year before 2007, and its researchers put most of the fall down to technological change. Applications are rising anyway.
The Investor · Invest desk
What happened
- American Banker reports that de novo bank applications are up after years of decline in the number of new charters regulators approved, while cautioning that chartering will not return to pre-crisis levels.
- A Kansas City Fed paper counts fewer than seven de novo banks chartered per year on average from 2010 through 2024, the lowest rate in half a century.
- Regulators granted an average of 185 new charters a year from 1960 through 2006, a run in which formations rose and fell with the business cycle.
- The Consumer Bankers Association's Michael Emancipator said more than $25 million in upfront capital makes the math harder when a new bank generally will not turn a profit for three to five years.
Compiled by The InvestorSomething wrong?How this is made
Why it matters
- constraint Judging an entry policy by charters granted will make almost any policy look like a failure, because the Kansas City Fed expects the count to stay depressed whatever the agencies and Congress do.
- decision With entry priced this way, capital that wants to be in banking buys an existing institution, and the Consumer Bankers Association ties that consolidation to cumulative post-crisis rules.
- contradiction Kaufman Rossin's Jason Chorlins would judge entry by whether it produces viable institutions, so the same year of data can support both a recovery reading and a stagnation reading depending on which measure a supervisor picks.
Fewer than seven charters a year from 2010 through 2024 comes to fewer than about 105 new banks in fifteen years, and at the earlier pace of 185 a year the system produced that many in roughly seven months [17]. The annual rate is down at least 96 percent [18].
The May paper puts the cause in technology [6]. "Technological changes appear to have primarily driven the recent decline in de novo bank formation," the researchers wrote [4], and they dated the erosion to long before the crisis: "Since 1983 ... the number of de novo banks has rebounded to successively smaller peaks, suggesting new bank charters had begun to wane long before the current charter decline began in 2009" [5]. The article does not describe which technologies they identify [20].
The industry's account is about capital. Michael Emancipator, senior vice president and regulatory counsel at the Consumer Bankers Association, said "Banking agencies have required so much capital for de novo applicants that the value proposition is now far less alluring" [10]. Hold his figure against the old rate: 185 banks a year at more than $25 million each is upward of $4.6 billion of founding equity annually, before anyone funds the loss years [19]. The comparison is rough, because the capital bar is current and the 185 is an average across forty-seven years [22].
Nathan Ross, vice president of policy at the Conference of State Bank Supervisors, said "since the 2008 crisis, exits have far outpaced new entrants," pointing in part to startup costs [12]. In June the Federal Financial Institutions Examination Council listed the post-crisis environment, high startup costs and regulatory sluggishness among the factors slowing applications, and noted that the banking system has kept growing in asset size [7]. "Since the financial crisis of 2008, the number of de novo formations has stagnated, which contributes to the declining number of depository institutions," the council said [8].
Comptroller of the Currency Jonathan Gould said "De novo chartering helps ensure that the banking system continues to keep pace with the evolution of finance and supports our modern economy" [15]. He is the one official here with a lever to pull.
There are two ways this runs. If capital and processing time are the binding constraints, easing them shows up as openings within three to five years and the yearly count climbs into the dozens. If the Kansas City Fed has it right, applications rise, a few banks open, and the number stays in single digits [3]. I lean to the second, mainly because the peaks were already shrinking from 1983 [5]; a stretch of twenty or more openings a year with the capital bar unchanged would settle it the other way.
What to watch
- Whether the rise in applications converts into openings, and how many banks actually open in a year.
- Whether the OCC under Jonathan Gould lowers the initial capital expectation or shortens application processing.
- Which technologies the Kansas City Fed researchers identify, since the diagnosis decides whether a policy lever exists at all.