Bankers Tell Congress Regulation Hinders M&A and ‘De Novo’ Formation

The path to creating a bank — from submitting a business plan to hitting the ground running — is a long and winding road, with tough regulations in the form of high capital requirements and mountains of paperwork, banking executives told lawmakers Wednesday (May 14). In addition, they added, merger policies are restrictive.

The net impact is that communities don’t get the benefit of innovative new firms and competition that expands financial services into markets that need those offerings.

The hearing before the House Financial Services Committee’s subcommittee on financial institutions included executives who had navigated the process of applying for and launching smaller banks over the last few years.

“In every business sector, new entrants are essential to the functioning of a competitive, free-market economy,” John Berlau, senior fellow and director of finance policy, Competitive Enterprise Institute, said. But in recent years there’s been a chilling effect on new bank formation: Berlau observed that in some of the years following the financial crisis, no new banks were approved. But by contrast, in the decades before the crisis, the Federal Deposit Insurance Commission approved more than 100 new banks in years going back to the early 1960s. In each of the last two years, only six de novo banks had been approved.

ReShonda Young, who founded Iowa-based Bank of Jabez, focused on lower income and minority communities, told the subcommittee in a statement that in meeting with banking consultants and regulators, a pre-opening checklist involved 74 items.

“Pair that with average pre-opening expenses of $800,000 to $1.5 million and post-charter capital needs of at least $20 million, and most people would abort the mission,” she said.

During the hearing, Rep. Tim Moore, R-N.C., said: “The current regulatory framework, instead of promoting competition, entrenches incumbency and discourages innovation and natural and organic growth.”

See also: Treasury Department Takes Lead in Efforts to Ease Banking Regulation

Regulatory Barriers ‘Higher than They Need to Be’

Keith Costello, CEO, president and co-founder of Florida-based Locality Bank, said in his remarks that for de novo banks, “the barriers are higher than they need to be, and addressing unnecessary regulatory hurdles could make a significant difference in enhancing healthy competition.”

Costello noted that in 2015, there were 11 banks headquartered in Broward County, Florida — five years later, there were only three. Locality was launched in the wake of the pandemic in 2022, and Costello asserted that starting a new bank can face challenges in the bid to become financially viable.

The regulatory environment, he added, has added pressures through the fact that banks must stick to the business models inherent in the applications themselves. Locality, for its part, has been focused on small business lending.

The business plan, he told lawmakers, “has to endure from submission to the regulators through opening to three years of operations. Any deviation from that plan creates significant work because regulators perceive a change as all risk rather than the strength of an adaptable, resilient team responding to market conditions and feedback.”

Mary Usategui, CEO and president of BankMiami, said that her bank opened for business in March of this year.

She stated in her testimony that the process took months longer than anticipated, in part due to high capital requirements.

In addition, per her remarks, “the Federal Reserve no longer reviews applications to establish operational accounts until the charter is officially issued and FDIC insurance is received. This means that despite having a charter and federal deposit insurance, banks cannot operate independently for weeks awaiting account access, or they need to find a workaround, such as settlement through a correspondent bank.”

Costello, Usategui and Berlau, voiced support for the House legislation sponsored by subcommittee Chairman Rep. Andy Barr, R-Ky. The potential regulation has passed committee and is titled the “Promoting New Bank Formation Act.” The act would establish a three-year phase in period for new banks to comply with federal capital standards.

Amanda Allexon, a partner of Simpson Thacher’s Financial Institutions Practice, said that bank merger and de novo applications are hampered by long processing periods, and are reviewed by multiple agencies.

“There are many times when the review is merely duplicative and serves no regulatory purpose,” Allexon said in her testimony. “The Federal Reserve could take steps to standardize and make more predictable its current process for waiving applications at the holding company level if there is an underlying Bank Merger Act filing and certain other factors are met.”