Editor’s note: This column was included in the July 11 version of The Pulse, a weekly BankBeat newsletter sent to subscribers.
We all know the number of banks in this country is declining. There were some 18,000 banks in the United States when I first started writing about the industry in the mid-1980s. Today the number is just over 4,000.
The reason for the decline is the diminishing number of new banks that are being started. Mergers and acquisitions contribute to the decline in total charters but the number of deals, historically, has been relatively constant; and, in recent years the number of deals has been lower than historical norms. So it isn’t the deals that are causing the problem;, it is the small number of new charters being formed.
Last year, there were nine new bank charters insured by the FDIC. There have been 65 new charters in the last 10 years. Keep in mind that prior to the financial crisis of 2008, we frequently saw more than 100 new banks formed per year. A lot has changed in the last 16 years that makes it much more challenging to start a bank today. The challenges all equate to more money.
Obviously, the large number of regulations imposed on all banks — including new ones — requires more money to address. My hunch is, however, that newer banks might be able to operate soundly without tending to all the mandates well-established banks face. This might reduce the need for exorbitant startup capital and lower the cost of starting a bank. With three or four years of “reg light” treatment, a new bank might be more prepared to take on additional rules at year five or so, and be more likely to have the earnings to staff up in the name of compliance.
The question of what can be done to lower the cost of a new bank startup is very important. Please give this question some serious thought, especially if you have been through the bank startup process. Think about what it was like and what could be done to make the process easier and less costly, without adding undue risk to the bank’s operations. If you have thoughts on this topic, please contact me and let’s have a conversation. This is a long-term challenge that, I believe, is worth our energy. For the sake of our country’s well being, we need to figure out a way to maintain a robust pipeline of new banks.