PHIILADELPHIA–A member of the Federal Reserve Board said the reason there have been so few de novo banks in recent years is the result of developments that include what are known as “charter-strip” banks, the shift to a “shadow banking” system, and the growth of “banking as a service.”
In remarks to the Wharton Financial Regulation Conference in Philadelphia, Fed Board Gov. Michelle W. Bowman told the meeting “right-sizing regulatory requirements, improving transparency, and supporting regulatory approaches that support new banks are important tools to promote healthy competition and reduce unintended consequences.”
Bowman made clear it is not her belief that bank mergers and acquisitions should be made more restrictive, saying both are critical to a healthy banking system. She does believe, however, the regulatory framework should at least be more accommodative toward the de novo process.
‘Viable Pipeline’
In addition, Bowman told the conference a “viable pipeline for the creation of new banks in the United States” is needed, adding there are “troubling” signs the United States is not creating the new banks it needs. She said the latter point is clear in the data showing a continued decline in the number of banks in the country, continued interest in charter strip applications, and the ongoing shift of traditional bank activities into shadow banks.
In her remarks, Bowman explained a charter strip acquisition occurs when a purchaser wants to open a bank with a new business model, but instead of applying for a de novo bank charter, the purchaser simply acquires an existing bank. Once the acquirer is approved to take over the charter, the bank effectively starts over with a new business model, new banking products, and new management. The replacement business model often emphasizes novel technologies and rapid growth, and if the existing, legacy banking business of the target is retained, it is often operated separately from the new business, Bowman said.
‘It Remains Important’
“While de novo bank formation may not be a top-of-mind issue for policymakers as we continue to deal with the recent bank failures, it remains an important issue,” Bowman stated. “As policymakers consider the regulatory and supervisory framework in the U.S. banking system and consider specific adjustments to address identified shortcomings, we should also take into account the impact of incremental additional regulatory changes not only on de novo bank formation, but also on credit availability, competition, and the financial system.”
The issue of de novo credit unions, and the lack thereof, is one all three members of the current NCUA board have also cited as an issue.
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