New bank formation has “fallen off a cliff,” Federal Deposit Insurance Corp. Acting Chair Travis Hill said Tuesday in a speech to the American Bankers Association’s Washington Summit.
The number of active bank charters today – around 4,500 – is just more than half the roughly 8,500 from 2008, Hill said. However, that figure says less about merger activity than it does about the launching of new banks.
In 1984, 412 new banks formed, Hill said. The lowest number of new banks established in any year between 1995 and 2007 was 93, he said. By comparison, just 86 new banks have formed in the decade and a half since 2010, Hill noted.
More than half of those came between 2019 and 2022, Hill added, citing revamps and a more open “mindset” from Trump-era FDIC Chair Jelena McWilliams, for whom Hill served as deputy chair for policy.
Here are three ways Hill suggested the FDIC could encourage new bank formation – though, the acting chair noted he does “not expect we will get anywhere close to the 100-plus new banks per year of the pre-2008 era.”
1. Changing capital expectations
Some applicants – namely, “noncomplex community banks” in areas where there are none – may be subject to adjusted standards, such as less upfront capital, Hill suggested Tuesday.
“It might be the case that the benefit a new community bank provides to the ‘convenience and needs of the community to be served’ in regions that lack a community bank presence justifies a more flexible approach to the other statutory factors the FDIC is required to consider,” Hill said, noting that 68 million Americans live in counties that have no community bank headquarters.
2. Reevaluating the application process for innovative banks
A fintech with a high number of deposit accounts may present less risk to the Deposit Insurance Fund if it becomes a regulated bank than it would by placing deposits at multiple banks through a web of partnerships, Hill said.
“While applicants will still need to meet the full suite of regulatory obligations of being a bank, we will, in collaboration with the chartering authorities, approach these types of applications with an open mind,” he said.
3. ILCs
The FDIC is working to issue a request for information to address issues connected to industrial loan corporation charter applications.
“I continue to believe this would be useful,” Hill said, noting the issue draws “strong opinions” from “a wide range of stakeholders across the financial services industry.”
“Deposit insurance remains a special government privilege, and we will maintain rigorous standards for approval in line with our statutory requirements,” Hill said. “But we will do so with an eye toward reestablishing a meaningful pipeline of new entrants into the banking sector.”
