Fed governor Michelle W. Bowman has called for continued study of a sharp drop in community bank startups as a potential cause of an “unhealthy level of similarity” in the U.S. banking system.
Low interest rates, increased regulatory costs and competition from unregulated financial technology companies have all led to only a handful of new community bank launches in the U.S. in recent years, she said.
Speaking at the 2021 Community Bankers Symposium: Banking on the Future event last week, Bowman said she has asked Federal Reserve staff to continue to study trends in community banking to more fully understand the economic and regulatory factors that “constrain the ability of community banks to form.”
Bowman, who represents community banks on the U.S. Federal Reserve’s board of governors, did not propose any specific fixes to the current banking system. She pointed out statutory capital requirements as one of many impediments facing new banks, or de novo banks.
In the last decade, only 44 new banks have been established, compared with 2,000 new banks formed between 1990 and 2008. Only seven new banks were formed between 2009 and 2013.
Community banks provide critical financial services to their communities and to many customers who might have limited geographic access to banking services, Bowman said.
These local bankers typically know their customers and their needs better than a banker at a branch of a larger institution.
“Community banks are more willing to underwrite loans to creditworthy customers based on an assessment of qualitative factors that automated models do not consider,” Bowman said. “Since community bankers are part of the fabric of their communities, they better understand the local market and economic conditions in the area.”
As an example of their relevancy, community banks made 4.7 million Paycheck Protection Program (PPP) loans, totaling $429 billion, during the COVID-19 lockdown, which accounted for nearly 60% of the federal government program’s total loan amount.
From 2011 to 2019, there has been a 30% decline in the number of community banks, while the number of larger banks has declined by more than 36%, amid brisk merger and acquisition activity by banks.
“CEOs have expressed frustrations with ever-increasing compliance burden, which distracts their attention from prudent revenue generating activities,” Bowman said. “Public policy makers must avoid adding regulatory burden on the smallest banks, particularly on those that maintain a more traditional business model.”
A 2014 banking study noted that the states’ statutory capital requirements for a new state-chartered bank could be as low as $10 million, but in practice could be as high as $30 million, she said.
“Given the high initial capital requirement, a de novo bank has a small margin of error in implementing its business strategy and meeting profit projections,” Bowman said.
The Federal Reserve and the other banking agencies generally require a new bank to maintain a Tier 1 leverage ratio of at least 8% for the first three years of its existence.
Difficulty in finding skilled workers is an issue more broadly in the economy, but it’s particularly difficult for community bankers, especially in the area of compliance and internal controls.
“As large institutions and non-regulated financial companies expand their reach into markets traditionally served by community banks, policy makers need to ensure that the regulatory and supervisory framework does not exacerbate this competitive disadvantage,” she said.