Category Archives: community banks

Small business loan approval rises —
community banks lead the way

MORE GOOD NEWS from the Biz2Credit Small Business Lending Index:

Small business loans were approved at an overall rate of about 38 percent (from banks of all size). This was the post-recession high for loan approval by banks as a whole.

Community banks continue to lead the way — approving more than 50 percent of loans. Larger banks approved loans at a higher rate in January than they did a month before, but the approval rate of 28.3 percent pales against that of smaller lenders:

“If you have an idea for a new small business or if you want to buy an existing business, you will probably think of talking to your commercial bank about a small business loan first,” writes rosemary Carlson for The Balance Small Business.

But “the approval rates for small business loans are low from [large] commercial banks. In 2004, before the Great Recession, loan approval rates for small business loans from commercial banks were twice what they were in 2017.”

As we noted in “Happy Days are Here Again,” however, there may be a robust small-bank alternative close to home.

The de novo comeback…
McWilliams and the new FDIC paradigm

Thanks in large part to regulatory reform and legislative action, 2018 was a banner year for application approvals by the Federal Deposit Insurance Corporation — with 14 new institutions making it over the bar.

2019 has shaped up as the potential start of a “de novo comeback,” as at least 12 of those banks began operation, and another 17 banks received FDIC approval in 2019 — some are already operating, and some hope to in 2020.

(Between January 2012 and January 2017, by contrast, a total of five new banks received FDIC approval — an average of one per year.)

Several of the new banks that began operating this year are based on distinctive business models, such as Washington, DC’s MOXY Bank, which plans to rely heavily on technology and financial literacy programs for low- and moderate-income customers. Joining MOXY were Nevada’s Lexicon Bank, New York’s Generations Commercial Bank, and Virginia’s Trustar Bank.

As we’ve noted before, regulators, including FDIC Chairman Jelena McWilliams, appear to have undergone a paradigm shift when it comes to regulatory approaches to new banks.

“I do not profess to know what the right number of banks in the U.S. is, but I recognize that, like many competitive industries, a dynamic banking sector needs new startups entering the marketplace,” McWilliams wrote for American Banker a year ago.

Happy days are here again:
A post-Dodd-Frank small bank growth strategy

As small and community banks struggle to rebuild their business analyst David Smith offers an eminently intuitive solution: focus on small businesses in their community.

Historically, this is what community banks did. (And still do, as a recent SBA report points out.)

Then came the out-of-control monetary policy by the Fed in the early 2000s; the housing bubble and crash; and the Dodd-Frank “cure” (read: worse than the disease).

Thanks to policy changes, small banks need no longer be hampered from exercising their greatest strength: personal relationships with clients.

According to most surveys, “personal relationship” and “chance of being funded” are the two strongest reasons business borrowers select a particular lender. In both categories, small banks out-perform large ones in customer satisfaction. And, of course, the categories reinforce one another.

Small knows small:
A community bank comeback strategy

   A FACT-SHEET STUDY by the Small Business Administration suggests an up-from-here strategy for community banks — what you might call a “small on small” strategy.

   Small businesses, the SBA notes, generate most of the new jobs in the U.S. economy — critical engines of growth. Yet they’re often strapped for capital.

Small banks, on the other hand, are, well, small — and local. They also provide much higher rates of borrower satisfaction on loans compared to other lenders, as the table above shows.

The obvious answer for both parties is to marry supply with demand.

For 20 years, the decline of community banks has made this arrangement ever more tenuous. But with the passage of the Crapo Act, followed by a year of generally intelligent regulatory re-write by Randal Quarles at the Fed, the ” supply” side of this equation may be improving.

Here comes the sun:
New banks in DC, Georgia, Florida, Virginia…

   GEORGIA’s NEW TANDEM BANK received FDIC approval back in May.

   When it opens, it will join Virginia’s Trustar Bank (pictured nearby), American Bank & Trust in North Carolina and others as the first community banks to appear in their states in at least a decade.

Regulator attitudes seem to be shifting as well, as we’ve noted in “Paragdim change… at the FDIC?,” and “Fed’s Gaffney on regulatory reform.”

Indded, FDIC Chairman Jelena McWilliams elaborated on the importance of new banks in American Banker, “We can do better on de novos.”

Fed implementation of Crapo reforms — Atlanta weighs in

The Federal Reserve of Atlanta recently became the latest Fed branch to weigh in on the implementation of the Crapo Act, or “ERRCPA” —

joining the Minneapolis, San Francisco, New York, and Dallas Feds as well, in analyzing the work still to be done implementing bank regulatory reform and plowing ahead to build the intellectual framework for a more rational financial order.

After another year of decline…
Turning point for community banks?

“The industry has been shrinking for more than a decade and many community banks have gradually disappeared,” writes

“But conditions are ripe for a comeback. Though challenges lie ahead, the newest entrants believe there’s a place for them and customers to serve who aren’t getting their needs for loans, checking or savings accounts met elsewhere.”

Sensible observers always knew a sector recovery would take some time — regulations to be written, capital to be organized. (See our May, 2018 piece, “…Fed: you’re up next.”)

Still, with US economy entering its 10th year of recovery, the continued decline of local banking and financial institutions is worrisome.

A hand for Quarles:
Improved thinking, regulation at the Fed

   LAST FALL, WE URGED the Federal Reserve’s Vice Chair for Supervision, Randal K. Quarles, to “call your office” in impelementing the provisions of 2018’s regulatory-reform-minded Crapo bill, especially as applied to small and community banks.

   In particular, we encouraged hmi to take note of the growing mountain of evidence — much of it at the Fed, the Federal Deposit Insurance Corporation, and the Comptroller of the Currency — that large financial institutions should be the primary focus of regulation… whereas, the health of smaller banks, if relieved of some of the regulatory burden, would actually contribute not only to competive diversity, but financial stability.

Judging from his May 15 testimony before the Senate Committe on Banking, Housing, and Urban development, Quarles made that call.

The Fed, Quarles explained, approached the Crapo Act (a.k.a. “ERRCPA”) as a call on regulators to “to focus our energy and attention on both the institutions that pose the greatest risks to financial stability and the activities that are most likely to challenge safety and soundness.”

In addition to noting the Fed’s effort to relieve small institutions from most of the burdens of the Volcker rule — which happend last summer — Quarles reviewed the main tiers of Crapo Act implementation:

“We also have been providing targeted regulatory relief, especially for community banks and other less complex organizations.

• “We proposed a new interagency Community Bank Leverage Ratio to give community banking organizations a more straightforward approach to satisfying their capital requirements. State bank supervisors and others have provided thoughtful comments on our work, which we are taking into account.

• “We expanded community banking organizations’ eligibility for both longer examination cycles and exemptions from holding company capital requirements, and we have proposed more limited regulatory reporting requirements for community banks.

• “We provided smaller regional bank holding companies immediate relief from annual holding company assessments and fees, stress testing requirements, and other prudential measures designed for larger institutions.”

The shift in conceptual approach that appears to be in progress is heartening — even if better regulation, compared to monetary reform, as a second-best solution. The breadth of paradigm shift is event in the detailed Federal Reserve Supervision and Regulation Report of May 14.

More on that report to come. In the meantime, we’re offering polite applause for the prudent “regulatory hand” to Mr. Quarles.

Paradigm change? New FDIC approach focuses on GSIBs

In a joint press release with other regulators, the FDIC on April 2 indicated it plans to focus rules protecting against system failures on large institutions —

“Global systemically important bank holding companies, or GSIBs, are the largest and most complex banking organizations and are required to issue debt with certain features under the Board’s ‘total loss-absorbing capacity,’ or TLAC, rule. That debt would be used to recapitalize the holding company during bankruptcy or resolution if it were to fail.

“To discourage GSIBs and “advanced approaches” banking organizations—generally, firms that have $250 billion or more in total consolidated assets or $10 billion or more in on-balance sheet foreign exposure from purchasing large amounts of TLAC debt, the proposal would require such banking organizations to hold additional capital against substantial holdings of TLAC debt. This would reduce interconnectedness between large banking organizations and, if a GSIB were to fail, reduce the impact on the financial system from that failure.”

It’s taken awhile, but federal regulators seem to be catching up with the work of economists and other scholars who realize the dangers of industry concentration — and the benefits of a healthy community banking sector. See, for example, last year’s important Federal Reserve study on the impact of bank size on system risk.

Spring break: Small banks near premium-relief threshold

   AFTER PAYING HIGHER deposit insurance assessment fees since the 2008-2009 big=bank bailout and Dodd-Frank legislation, community banks may soon be getting a break.

   The FDIC’s Deposit Insurance Fund ratio of reserves to insured deposits is nearing a threshold that wouldtrigger a reprieve from paying assessment fees for institutions with less than $10 billion of assets.

It’s unclear how many banks will find the result financially material enough to improve earnings. For most banks, the premiums constitute less than 5 percent of revenues. But for others, they exceed that level.

Moreover, each bank gets a chance to decide how it will use the extra funds — so even if the reduction doesn’t go immediately to the bottom line, it may be used for capital expenditures such as improved technological services.