September 11, 2015

Why aren't people opening new banks?

In the quarter-century before the financial crisis began in 2008, about 164 new banks opened in the United States every year. Since 2011? Roughly four. Total.

The actual number depends on how you count them, and could range as high as 20 if you include credit unions. But the point remains the same: new bank openings are exceedingly rare as compared to before the meltdown. They're uncommon enough that The Economist actually bothered to cover the opening of a tiny bank in rural New Hampshire this summer.

GOP presidential candidate Jeb Bush, on meeting the man who started the aforementioned Granite State bank, called it "the first and only bank since Dodd-Frank passed" by way of criticizing the sweeping regulations. Bush was wrong on the facts but right in that business people are starting precious few banks these days.

Dodd-Frank isn't the only factor
Just what role Dodd-Frank plays in the dearth of so-called "de novo" bank formations is a matter of debate. But no one seems to deny it's a factor. New regulatory burdens make it difficult for banks with less than $1 billion in assets to profitably navigate the new landscape.

There are more variables than simply the changing regulator framework, however. American Banker, citing Federal Deposit Insurance Corp. data, pointed out that the number of U.S. banks has been on the decline since the 1980s. Thirty years ago, the nation had more than 18,000 financial institutions. By this year, that number had winnowed to a mere 6,400 or so. The takeaway: Banks have been consolidating at a steady pace long before the signing into law of Dodd-Frank in 2010.

The low interest rate environment certainly hasn't encouraged new bank charters. As The Economist points out, small banks mostly make their money on the difference between the interest rates they pay out on deposits and take in from loans. That gap has been tiny for an eternity, given the Federal Reserve's policy of pegging benchmark rates at practically zero.

People are also part of the equation
One observer, payments industry expert Glen Sarvady, nominates personnel as a factor in the near-total lack of new banks. He contrasts the banking mergers and acquisitions climate of the late 1990s, where cost-cutting was king, with the current dynamic.

"The mergers still taking place tend to be among smaller banks looking to expand reach more than to wring out costs," Sarvady wrote. "These deals are less likely to jettison entire management teams, and the unfortunate bankers who do lose their jobs are less likely to possess the experience and breadth of market knowledge necessary to lead a startup."

But more "de novos" could be in the U.S. banking system's future. The long-expected interest rate hikes are bound to begin soon, even if they don't start when the Fed's Open Market Committee meets in September. Higher interest rates could well spur interest in would-be bank entrepreneurs who have thus far stayed on the sidelines or at their current institutions. 

The banking landscape is always changing, and deft decisions on which loan portfolios to keep and which to sell are of course a key part of improving one's own bank's performance. Any questions or concerns can be discussed with loan sale advisory firm Garnet Capital Advisors.