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CPBJ Extra Blog

Community banks lobbying to make start-ups less regulated

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It took Bank of Bird-in-Hand in Leacock Township about 11 months to receive federal approval to open today, and it's the first start-up bank in the country given that approval in three years.

For two national community banking organizations, that's just not enough new banks.

The Independent Community Bankers of America and the American Association of Bank Directors this week jointly sent a letter to Martin Gruenberg, chairman of the Federal Deposit Insurance Corporation, urging the group to ease its regulations on the approval of community bank charters.

"As the number of community banks dwindles and more communities lose their local bank, it is of concern to us that the FDIC has only approved (deposit) insurance for one 'de novo' bank since 2011," starts the letter signed by David Baris, executive director of the American Association of Bank Directors, and Camden R. Fine, Independent Community Bankers of America's president and CEO.

A bank cannot open without that approval.

And it wasn't easy to get for Bank of Bird-in-Hand. It submitted the application in January, raised the necessary capital by the fall and was hoping for a soft opening Nov. 22.

But the FDIC hadn't approved the deposit insurance by then, and the opening was delayed. Another soft opening date of Nov. 26 went by without approval. On Nov. 27, the approval finally came, and the bank had its soft opening Monday. The grand opening to the public is at 9 a.m. today (Dec. 7), with a ceremony preceding it at 8:30.

Bank of Bird-in-Hand's struggle is exactly what Baris and Fine are trying to prevent.

Their letter notes the FDIC isn't the only hurdle start-up community banks face in the opening process. The recession likely has stopped potential banks in the planning process, as has the difficulty in the overall business of community banking.

"The burdens on bank directors and management have increased substantially over a number of years, and there is no end in sight," the letter states.

That's not exactly the quote Baris or Fine want to see stripped across the top of the next organizational newsletter, tentatively titled, "No End in Sight."

And for its part, the FDIC hasn't had that many applications to decide on. Greg Hernandez, spokesman for the FDIC, said there have been "very few" applications for de novo banks in the last three years. The majority of the applications the group has received have been from private investors looking for deposit insurance to acquire a failed bank, he said.

"It takes great resources to start up a bank," Hernandez wrote in an email. "Private investors are looking for properties already established in the markets of interest."

But, the letter goes on, Baris and Fine believe there are more factors at play than a slow market. Regulations passed in 2009 in reaction to the severity of the recession and the banking industry's role in it called for business plan requirements from the FDIC to rise from three years of projections to seven years.

Also, the FDIC called for banks to raise capital prior to opening that would maintain its leverage ratio at 8 percent for the full seven years instead of three. If a hypothetical bank expects to be at $100 million in assets managed at three years, it conservatively may expect to grow to about $200 million by the seventh year.

At the former Year 3 requirement, the necessary upfront capital for that hypothetical bank would be $8 million raised before opening. With the seven-year requirement, now it's $16 million. If a bank would project to be at $300 million in assets managed, it would need to raise at least $24 million.

In today's world of hard-to-come-by capital, that's a $16 million headache most people wouldn't want.

"We believe that there are less restrictive policies that will provide comfort to the FDIC and other bank regulators that de novo banks will not become a material risk to the (bank's deposits)," the letter states.

It's impossible to blame the FDIC if it doesn't want to lighten the regulations now or for a good, long while. The stink of the bank failures of 2009 is still pretty pungent, and the new regulations are there to guard against something like that ever happening again.

At the same time, there are consumers scared of big banks or others insistent on sticking with community banks out of habit, principle or convenience. If larger banks buy out smaller banks, and there are no start-up approvals, there won't be anything but mid-size regional or large, nationwide banks left in a couple of decades.

That doesn't mean there isn't some middle ground somewhere. The FDIC doesn't have to approve an average of 159 banks a year like Baris and Fine said happened between 1984 to 2008, and I don't know anyone who would argue it should. Although this guy seems pretty comfy at zero.

Governmental red tape is thick enough as it is. At some point, we're all going to have to stop being skittish and allow business to grow if we ever want to see our way back to financial stability.

Perhaps some middle ground on this issue is a good starting point.

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