Category Archives: FDIC

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.

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.”

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.

Smaller banks, smaller stress. Bigger banks….
(Randal K. Quarles, call your office)

THREE CHEERS for the U.S. Federal Reserve for its recent study, “The Differential Impact of Bank Size on Systemic Risk, by Amy G. Lorenc and Jeffery Y. Zhang.

The study couldn’t come at a more critical time, as the Fed, Federal Deposit Insurance Corporation, and others immerse themselves in implementing the new requirements of the Crapo bank-regulation reform act.

   “Our empirical results,” the authors write, “show that stress experienced by banks in the top 1 percent of the size distribution leads to a statistically significant and negative impact on the real economy. This impact increases with the size of the bank. The negative impact on quarterly real GDP growth caused by stress at banks in the top 0.15 percent of the size distribution is more than twice as large as the impact caused by stress at banks in the top 0.75 percent, and more than three times as large as the impact caused by stress at banks in the top 1 percent.

These results,” they conclude, “support the idea that the largest banks should be subject to the most stringent requirements while smaller banks should be subject to successively less stringent requirements.”

Banking systems systems dominated by large banks are like a majestic ship — they can do many things; they move fast; they have big guns. But if one or two of these great vessels is hit, and sinks…

Community banks, by contrast, function like a network of rafts. They can’t move as swiftly. They don’t have huge guns. Water comes over the side and people get wet… but like a raft, the system doesn’t sink as readily.

Though the passage of the Crapo act in May was a valuable step, the fact remains, as we wrote at the time in “Fed, you’re up next, “it will take well beyond that for the Federal Reserve, FDIC, and other institutions to implement many of the new law’s provisions via regulation — and longer still for their impact to be felt in the real world.”

Note: the Fed acted in late August to implement an important increase in the threshhold level for small bank holding company policy statements to $3 billion — another step forward.

Here’s hoping the rule-writers at the Fed (att: Randal K. Quarles, pictured nearby) take the time to familiarize themselves with the Fed’s own important research contribution.

Fed: one step forward, two steps… well, yet to come

Late Friday (July 6), the Federal Reserve issued a joint statment on implementation of “the Crapo Act,” or, as its principal authors christened it, the “Economic Growth, Regulatory Relief, and Consumer Protection Act.”

The statement itself was written in regulationese — though perhaps this befits any comment on a piece of legislation that infelicitously acronyms out to “EGRRCPA.” The Fed was joined in the statement by the Federal Deposit Insurance Corporation and the Comptroller of the Currency. The regulators outlined which provisions of the Crapo At will take immediate effect, and which will require further regulatory action.

After reassuring the public (read: themselves) that their agencies “will continue” to enjoy vast discretion in oversight of the financial system, the

Good news: modification of the Volcker Rule will take effect immediately, freeing most institutions with total assets of less than $10 billion from the constraints of the Volcker Rule. The regulators way of expressing this was to say that their institutions “will not enforce the final rule implementing section 13 of the BHC Act in a manner inconsistent with the amendments made by EGRRCPA to section 13 of the BHC Act.”

Less good news: two of the more significant areas of regulatory relief for community banks — the respective increases in thresholds for the small bank holding company policy statement, and the off-ramp regarding mortgages and mortgage-backed securities — will await regulation re-writes.

That said, the statement doesn’t constitute a proverbial “two steps back.” Just, “two steps yet to come.”

Trump signs Crapo Act.
Fed: you’re up next.

On May 24, President Donald Trump signed the Crapo Bill — longer disignation, S-2155, Economic Growth, Regulatory Relief, and Consumer Protection Act — into law…

Bringing at least some relief to the beleaguered small and community bank sector.

We’ll know a bit more when the FDIC releases its quarterly banking profile in June.

But it will take well beyond that for the Federal Reserve, FDIC, and other regulatory institutions to implement many of the new law’s provisions — and longer still for their impact to be felt in the real world.

Here are three sign-posts to watch for:

1. One of the stated purposes of Crapo is to reduce the economic burden of compliance on community banks — which because of their size, must spend disproportionate resources on meeting its fixed costs. Will Crapo’s changes reach the bottom line as we head into 2019 and 2020?

2. Will community banks continue to go out of business, and banking industry concentration continue apace — or will these trends, finally, be reversed?

3. It has been nearly a decade since a new community bank was started. Will we see some new market entrants in 2019? 2020?

Community bank squeeze continues

    THE TABLE NEARBY illustrates the declinle of small and community banks since 2008 as reporter by the Federal Deposit Insurance Corporation, or “FDIC”

    (Note: March, 2018 figures will be released in a few weeks; the chart reflects a Freedman’s Foundation estimate based on public filings.)

    The falloff is italicized by the fact that large banks (which can more easily bear the fixed cost of regulation) continue to surge.

Indeed, a quick glance at the FDIC‘s estimates for the capitalization — see table below — show the increasing concentration of banking assets into the hands of a few institutions.

Concentration renders an industrty less competitive, less diverse, and more vulnerable to systemic shocks.

There’s also rich irony in this trend, given that one of the main goals of “banking reform” embodied in Dodd-Frank was to bring large financial institutions — those “too big to fail” — under control.

Legislative and oversight changes over the last 20 years definitely succeeded in adding regulations. They produced, however, not only unintended consequences — but in the case of large banks and the banking sector, virtually the opposite of their stated goals.