Dalrymple column: Few new banks since 2008 Financial Crisis | PostIndependent.com

Dalrymple column: Few new banks since 2008 Financial Crisis

Pat Dalrymple

There have been very few new bank charters since the 2008 Financial Crisis. Intuitive reasoning would indicate that the regulatory agencies believe that there are almost as many bank facilities as there are Starbucks, and new institutions would only exacerbate the depositary saturation.

But, as often is the case, it appears that intuition is wrong, and regulators, actually, would like to see more charters, even given the current competitive environment. Which isn’t so strange, when you realize that regulators, by definition, need something to regulate. Big banks are constantly branching, but at the same time, they’re acquiring smaller banks and often closing those institution’s branch offices.

State bank regulators have especially been hard hit regarding the number of banks supervised because a high percentage of failures in the wake of the Great Meltdown involved state chartered operations. Consequently, all things considered, the supervisory cadre, both state and federal, are supportive of new blood in banking.

I was put straight on this by a friend who also happens to be the CEO of a bank started in the early years of this century, just before the financial crisis.

He explained to me that the FDIC, Office of the Comptroller of the Currency (OCC) and the Federal Reserve do, indeed, want to see new banks chartered, and, occasionally, sponsor conclaves of bankers, attorneys and others to discuss why and how to do it.

So the dearth of startups isn’t then a result of government constriction, but rather a perfect storm of factors that make it very difficult to get a new bank off the ground.

CAPITAL: This is the amount of money that’s required to have adequate net worth to sustain a startup to reach profitability. It takes a while to get a bank in the black, since staffing a financial institution, and creating the infrastructure to support a complex business model, is both time consuming and costly.

Some $20 million is a round number that seems to be oft quoted, but there’s no fixed amount. Rather, it has to be enough to absorb expenses until the bank can, hopefully, get its business plan ramped up. It could conceivably be less, and certainly be a lot more.

One problem is that it can take a while for investors in a new bank, called a de novo, to get any return on their money. And, because the capital requirement grows as the bank grows, it can soak up a lot of net income, which then can’t be paid back to stockholders in dividends.

TECHNOLOGY: A sophisticated tech structure to accommodate online/smartphone bank interfacing is essential today, and it’s expensive. Bank of America is reported to have spent $20 billion on systems to facilitate off-site transactions. This is an area where the big guys routinely clobber the little guys. In the last century, this was pretty much a level playing field. Not anymore.

REGULATION: Consumer protection and an uncertain, dangerous world have combined to create a major impediment to profitability, and one that a mega-bank is much better able to deal with than a new kid on the block.

The backlash of the Great Meltdown, and the banking law to end all banking laws (until the next time), the Dodd-Frank Act, mandated a labyrinth of consumer protection regulations. The expansion of international crime and terrorism has created a regulatory nightmare relative to opening and monitoring deposit accounts.

Compliance is expensive, and administrative headaches are at the classic “10” of the pain chart. But there’s another problem, much more deleterious than cost or angst.

A small business, which is what a new bank is, has a limited staff. If those people are spending a lot of time in regulatory compliance, they’re not spending time making money for the operation, bringing in deposits and originating loans.

ASSETS: These are what make money for a bank. The wholesale product comes to the business as deposits, i.e. checking accounts, savings deposits, or CDs. That wholesale stash is retailed in the form of loans, which are the most profitable asset group a bank can have.

A new operation has to compete in a very fierce game with well-established players to find quality loans. And quality is a key, because bad loans eat up that capital account very quickly. For example, say that a de novo, in its business plan, says that a major business line will be making construction loans on Colorado’s front range.

Sure, there’s a lot of building going on, and lending on it is profitable, but, if you’re new, you’re at the end of the line, which means you may end up with the bottom of the pot — loans of low quality.

BUSINESS PLAN: The startup has to have a good one, and the people that review it are very, very experienced. After all, the regulators have seen just about every bad thing that can happen actually happen, so the fluff gets scraped off a projection very quickly.

Consequently, to be successful, it may be that at least three elements have to be in place for a de novo: niche, market and opportunity.

The niche could be a certain kind of lending activity that the organizers may be quite good at, and if they have a market for that product, in the place where they’ll be doing business, they might get off the ground. The third factor, opportunity, could mean that, for some reason, the borrowers in the market area aren’t being served with the niche product they need. Maybe a lender, or lenders, have pulled out of that business line.

From experience, I can testify that this combination, although not unheard of, is quite rare.

The bottom line is the operative component. As always, economic laws determine the outcome, not the wishes of federal and state regulators, entrepreneurs or investors. The verities of supply and demand, asset quality, and profit margins always prevail.

I like to end these pieces with a flip turn of phrase, but this time the coda will be bittersweet. Attorney Tim Thulson recently left us. He had a great sense of humor, especially well-honed when it came to his profession. He’s the source of the funniest lawyer joke I’ve ever heard:

“It’s 98 percent of attorneys that give the other 2 percent a bad name.”

Pat Dalrymple is a western Colorado native and has spent more than 50 years in mortgage lending and banking in the Roaring Fork Valley. He’ll be happy to answer your questions or hear your comments. His e-mail is pdalrymple59@gmail.com.

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