WASHINGTON Bankers often blame regulatory severity for the recent freeze in new bank charters. But the Federal Deposit Insurance Corp. says it is to trying to grant an opening.
The agency's recent document clarifying chartering policy for bank organizers and investors is triggering hope that applications will start to rise. Among other things, the document spells out a three-year requirement for new banks to hold capital above industry norms, which contrasts with a belief inside the industry that the FDIC has been ordering a longer period of heightened capital.
"This was a victory for community banks," Christopher Cole, senior regulatory counsel at the Independent Community Bankers Association of America, said of the FDIC's "Questions and Answers" document released Thursday. Cole, whose group was among those that had asked for clarity, said organizing groups "were concerned that the policy was beginning to drift toward a seven-year period" but the document "makes it clear the process is more reasonable and will attract more people to apply to become a de novo bank."
Officials discussed the document at a meeting last week of the FDIC advisory committee on community banking. They also highlighted a change eliminating the requirement for FDIC-supervised state banks to seek approval to engage in activities through limited liability companies. Both are being carried out as part of a broader statutory review by regulators to weed out outdated rules. Meanwhile, the committee also heard about forthcoming FDIC research on community bank branching.
The Q&A document on new charters clarifies that an 8% Tier 1 leverage ratio is in effect for the first three years of operation, not seven years, although "the FDIC may seek a higher level of capital for those proposals displaying heightened risk profiles or complexity." The agency said applications will generally be ruled on "four to six months after being deemed substantially complete." The Q&A also spelled out that applicants only need to describe their business plan for the first three years, not a longer seven-year period.
The document also stated that the agency "strongly encourages" meetings between regulators and potential applicants before formal filings "to promote open communication regarding the application, regulatory expectations, and the application review process."
James Watkins, a senior official at the agency, told meeting attendees at the advisory committee that the Q&A document was intended to "demystify the application process," and the agency hopes added guidance will spur more activity.
"We very much are looking forward to getting more applications," said Watkins, senior deputy in the division of risk management supervision. "We've started to get some interest. It's been a difficult economic cycle for new bank formation."
The granting of charters has pretty much reached a standstill since the financial crisis. The one new bank formed in 2013, Bank of Bird-in-Hand in Lancaster, Pa., was the first to get approved since the fourth quarter of 2010. This year, there has only been one application, for the proposed Primary Bank in Bedford, N.H. While regulators cite sparse applications in the economic climate, industry insiders say the heightened supervisory environment has cooled activity.
Last year, the ICBA and the American Association of Bank Directors had asked the FDIC to issue a clarification on application procedures, and in particular on how long the 8% capital ratio is in effect for new institutions.
David Baris, the AABD's president and a partner at BuckleySandler, said a growing sense among potential applicants that the higher ratio was required for seven years was becoming a deal-breaker.
"That would make it prohibitive for many community bank organizers to get off the ground," he said. But he reacted positively to the clarification in the Q&A document. "It is a very good step and it is very encouraging," Baris said.
Yet the challenge for launching new bank ventures remains high, and some say the level of regulatory scrutiny following the crisis is still burdensome for applicants.
"The requirements to start up a bank are so high and more importantly the burden of regulations has gotten so great that it is difficult to have a profitable operation," said Robert Strand, senior economist at the American Bankers Association.
Meanwhile, the FDIC on Nov. 19 issued a financial institution letter for banks it supervises saying that activities operated by a state-chartered bank's LLC subsidiary do not require formal FDIC approval as long as the activity is permissible for a national bank. At the advisory committee, Watkins said the vast majority of the 2,200 applications processed by the agency in the past decade that related to a bank engaging in a new activity had to do with an LLC structure.
"In essence, institutions may establish a limited liability corporation without filing an application with the FDIC," he said.
The FDIC had received requests both to clarify the de novo process and eliminate the LLC-related filings as part of the decennial process required by the Economic Growth and Regulatory Paperwork Reduction Act. Under the law, the public submits comments to federal bank regulators on desired relief and the agencies must seek to streamline outdated and unnecessary rules.
Although the current EGRPRA review is expected to last well into 2016, FDIC officials said the agency is on the lookout for potential reforms that can be implemented quickly. On the decision to eliminate the LLC filing requirement, FDIC deputy general counsel Roberta McInerney said at the meeting, "We won't be able to do it in every case, but when we something like that where we can try to make a different right away, we'll try to do that."
The advisory committee also heard a presentation from FDIC chief economist Richard Brown on upcoming research by the agency on branch banking by smaller institutions. The study is one in a series conducted by the agency on trends in the community bank sector.
In previewing the study, Brown said while technology continues to affect the way consumers interact with banks, "the physical banking office still plays a very important role in the banking market today."
While the number of branches has declined to 2.9 per 10,000 people, from 3.4 in the late eighties, the per-capita figure is still higher than at any time before 1977, according to the research. Community banks have also opened more branches - and closed fewer branches - than larger institutions.
"Community banking is a relationship business; it is lending, it is deposit gathering. Those transactions happen at physical offices," Brown said.
Ian McKendry is a reporter at American Banker.
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