Rules Relax, Rates Rise and Some New Banks Start Up in the U.S.

  • Three banks opened this year, three more approved by the FDIC
  • Regulator says ‘we’re open for business’ as process relaxed

This year has brought something the U.S. financial industry hasn’t seen in a while: new banks.

The prospect of higher rates and an easier regulatory process has led to three government-insured banks opening their doors this year, while another three got approval to start in June. That’s already more lenders than have opened in the past six years combined.

“People ask me, ‘Are you calling for a rush of new banks?’ I say no, but I’m calling for the fact that we might have some when there used to be none,” said Keefe, Bruyette & Woods Chief Executive Officer Thomas Michaud. “It’s not a waterfall of new banks, but I do think it’s a positive sign, and it will be good for the economy to have new commercial banks started.”

Very few banks have opened since the financial crisis in the wake of low rates, heightened regulatory costs and tepid loan demand. Only nine applications for deposit insurance have been approved since 2011, compared with 175 new bank charters in 2007.

Now, three rate hikes in the past year by the Federal Reserve and improving profitability at the largest lenders have made founding a bank look more attractive. Five more banks are pending approval for their so-called de novo applications, according to the Federal Deposit Insurance Corp.

Startups see opportunities in geographic markets where banks have combined or closed since the crisis, Michaud said. There’s also more optimism around the regulatory burden, he said.

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President Donald Trump nominated Randal Quarles to be the Fed’s first vice chairman of supervision and Joseph Otting to run the Office of the Comptroller of the Currency, setting them up to play leading roles in the administration’s efforts to ease financial rules. “If regulatory costs are lessened, it could improve the chances you’d see more banks started,” Michaud said.

The OCC and individual states approve bank charters, but new banks must also obtain deposit insurance from the FDIC. Once approved, banks have 12 months to open their doors.

During the financial crisis, the FDIC extended its de novo supervisory period -- where banks face more frequent examinations and stricter capital requirements -- from three to seven years. The regulator reversed that timeframe back to three years in April 2016.

“We want to emphasize that we’re open for business and are welcoming de novo applications,” said Jim Watkins, senior deputy director for the division of risk management supervision at the FDIC.

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Since the regulatory rollback, the agency has also encouraged startup lenders to apply for de novo status. It hosted events to explain the application process to entrepreneurs, lawyers and consultants, and published a handbook and a manual for the effort.

Some fintech firms have taken note. Varo Money Inc., a mobile-banking startup backed by Warburg Pincus, filed with the OCC in July to form Varo Bank N.A. and applied for deposit insurance from the FDIC. Obtaining a national bank charter would allow the digital-banking platform to collect deposits, make loans and expand its offerings to credit cards, home equity loans and more savings products.

“We started to get some signals that the regulators actually were becoming much more interested in how to promote financial innovation and we kind of took the bold move of just walking through the front door and saying ‘Hey, we want to be a bank’,” said Colin Walsh, Varo’s chief executive officer.

More-established firms are also looking to expand their bank offerings. Charles Schwab Corp. filed an application in June to form Charles Schwab Trust Bank. While the firm already had a bank subsidiary, the new unit will focus on Schwab’s workplace benefit plan clients, such as employers who offer 401k plans, and the intermediaries who serve them.

Despite the signs of hope for new lenders, the number of banks in the U.S. has dropped by more than a quarter in the last decade and looks likely to fall further.

“Even if all pending approval get to the finish line, the nation will still have fewer banks,” Michaud said. “Over the next 5 to 10 years, regulators and public officials are going to want to think about is this a good or bad thing?”

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