ABA Banking Journal - July/August 2016 - (Page 22)
> ECONOMIC OUTLOOK
The Welcome Sign Is Up for
De Novos-but Is it Enough?
BY JAMES CHESSEN
THE FdIC PUT out the neon welcome sign to de novos in early April. In addition
to cutting down the period of heightened supervision from seven to three years,
the FDIC refreshed its answers to key questions and is developing a guide to the
deposit insurance application process to increase transparency.
This is clearly a priority for Chairman
Martin Gruenberg, who told me
personally that any prospective de novo
would have a team of FDIC staff to help
it through every stage of the process.
This includes advising on the business
plan and, importantly, setting out the
regulatory expectations. Kudos to
Gruenberg for devoting the necessary
resources to help new banks navigate
this process. It's no small thing.
Unfortunately, in spite of the welcoming
gestures, the cost of admission
remains extraordinarily high. Bankers
I've talked to say the deck is still very
clearly stacked against de novos.
This is many multiples beyond what
(successful) banks needed in the
past. Can the bank today earn enough
to cover the cost of that capital?
Great investment options don't
exist in today's abnormally low-rate
environment. But even with more
normal rates and a steeper yield curve,
can a new bank grow fast enough
to cover investor expectations?
A de novo bank will
also need to make a
in technology to meet
customer demands, ...
Start with the business plan. What's the
gap that needs to be filled? Consumer
lending? Too many compliance pitfalls.
Business lending? More realistic, but
there's already plenty of competition
from other banks. Is the winning model
national in scope, relying on technology
for customer acquisition and retention,
and focusing on non-interest income
services? Is that a model regulators
would embrace? Regulators view
changing the business plan to be a
failure of unrealistic expectations, but
having no flexibility is a straightjacket
that can lead to failure, too.
Capital has to cover the large-and
growing-infrastructure needed to deal
with the regulatory and compliance
obligations. These costs burn through
capital and do little to generate the
revenue needed to become profitable.
A de novo bank will also need to make
a substantial investment in technology
to meet customer demands, requiring
even more upfront capital.
Then there's capital-a lot of it. The
bare minimum is $15 million, and
there's talk of $20-30 million needed.
Could the de novo fund itself? Small
dollar, local funding is ideal, but
is that possible? Regulators look
ABA BANKING JOURNAL | JULY/AUGUST 2016
askance at de novos using national
rate boards and brokered deposits,
and paying rates well beyond the
market always raises a regulatory
eyebrow or two. Bottom line: Unlike
most businesses that have to do more
to gain customers, new banks can't
easily fund themselves, and certainly
not by paying interest at a level
high enough to attract depositors.
Can the new bank compete? Capital
hurdles, funding constraints and
regulatory infrastructure are only part
of the picture. Every bank knows the
competition is tough among banks
but even harder against tax-favored
competitors like credit unions and
the Farm Credit System, or new
online marketplace lenders.
Sure, de novos are risky. They have
failed at twice the rate of other banks
historically. They create losses for
the FDIC (which banks fund). But
most bankers believe that failures are
part of a dynamic industry and that
de novos are where many new ideas
are born. The changes the FDIC has
made are a very good beginning, but
more can and needs to be done. It's
time to think differently to encourage
new banks-by requiring less capital,
reducing regulatory burden, permitting
greater flexibility in business plans,
and lifting funding restrictions.
JAMES CHESSEN is chief
economist at ABA.
Table of Contents for the Digital Edition of ABA Banking Journal - July/August 2016
HOW BANK STARTUPS BUILD LEADERS
LEADERSHIP LESSONS FROM THE WORST JOB I EVER HAD
BREAKING THROUGH $10 BILLION
PLATFORMS AND PARTNERS
EXCEEDING CUSTOMER EXPECTATIONS STARTS AT THE CORE
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ABA Banking Journal - July/August 2016