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Could Now be the Time for De Novo Banks?
Proposed Legislation and Bank Trade Groups Aim to Change Trajectory of Declining Formations

Investor confidence in bank stocks and a governmental push to increase bank access in rural communities could be the one-two punch needed for more de novo bank formations.

Formation of de novo banks has been in the doldrums for years.

Fifteen de novo banks or savings institutions were formed in 2020, nine in 2019 and 15 in 2018, according to Federal Deposit Insurance Corp. (FDIC) statistics that track the number of institutions seeking new deposit insurance. For comparison’s sake, even amid the savings and loan crisis of the 1980s, an average of 196 de novo banks and savings institutions were being formed annually from 1984 through 1992, according to the Independent Community Bankers of America (ICBA).

As of March 31, 2021, the United States had 4,978 FDIC-insured institutions, a precipitous decline from 2006, the year prior to the Great Recession, when there were more than 8,600 FDIC-insured institutions.

The American Bankers Association (ABA) and the ICBA support more de novo bank formations and regulatory changes or legislative action that would promote new formations.

The ICBA proposes more flexible and tailored supervisory policy in which capital standards, exam schedules and other supervisory requirements are based on the pro forma risk profile and business plan, rather than a standard one-size-fits all policy.

The ABA similarly supports a timely regulatory approval process, reasonable expectations for business plans and required capital levels, compliance guidance, and certainty, and tailored regulatory requirements. 

Legislative Effort

Both trade groups support a Kentucky congressman’s effort to encourage the formation of new banks in rural areas. 

U.S. Representative Andy Barr, R-KY, introduced the Promoting Access to Capital in Underbanked Communities Act of 2021 this spring in response to concerns about the decline of community banks in rural communities across the United States.

It would:
  • Set the capital requirement at 8 percent for de novos
  • Allow a three-year phase-in of capital requirements for rural banks
  • Allow changes to the business plan in the first three years by making a request to the appropriate federal regulatory agency and a 30-day window for approval, denial or to suggest changes 
  • Prohibit limits on the concentration of agriculture loans
The upward trend of bank stocks combined with Representative Barr’s legislative effort is good news for de novo banking, according to national law firm Troutman Pepper.

“As the country reopens, people are investing, and investors are focusing on one of the few industries that will benefit from rising rates — banks. Additionally, investors are looking for a safe, stable investment, and banks exhibited caution over last year's financial instability,” the firm wrote in a May article on first quarter de novo banking trends.

Several years ago, FDIC revamped the application process by publishing new guidelines and handbooks leading to an uptick in de novo bank formations, Troutman Pepper said. Additionally, a recent governmental push to promote banking access in low-income communities has made de novo banks a prime benefactor.

Representative Barr’s legislation would establish a three-year phase-in period for new banks to comply with federal capital standards, thus making de novo bank formation more accessible in smaller communities, according to a Banking Exchange article about the proposed legislation.

Still, Representative Barr introduced similar legislation in 2020 that failed to advance to a vote.

“The key to economic growth and recovery throughout the country is having access to capital for individuals, families and small business entrepreneurs,” Representative Barr said in press release. “My proposal rolls back government onerous regulations and paves the way for investment to flood into underserved communities to make sure that the economic recovery is not uneven.”

The decline in community banks, which has left some small communities without any banking access, has been an ongoing trend for a long time. However, the coronavirus pandemic has accelerated the trend.

Even more banking consolidation is on the way. Banking experts have said interest in mergers and acquisitions is on the rise this year . 

Eric Haar is a vice president and director of Government and Industry Relations for FHLB Dallas.