Banking Law

Not Feelin' The De Novo Love

For the sake of those trying to organize new banks, we wish we could say we've been surprised by this recent article from the newspaper itself (paid subscriptiton required)  that confirmed what we recently speculated upon: the FDIC is putting a lid on the approval of new bank charters. Unfortunately, we're not.

Though the ban is not official, several industry sources said groups looking to start banks in Florida, Georgia, California, Nevada, or Arizona have been told by FDIC officials that applications for deposit insurance will not be considered for up to a year ? even if organizers have already raised capital and their charter applications have been approved by their primary regulator.

The reason, they say, is that the FDIC is wary of creating more competition for loans and deposits in markets where many banks are already struggling, because it wants to limit the number of potential failures.

It is also worth noting, they said, that seven of the 25 banks that failed last year were less than eight years old and most were done in by overaggressive lending and relying too heavily on brokered deposits.

Needless to say, the organizers of new banks are upset. One organizing group in Georgia claims that it received approval from the OTS for a new federal thrift charter in April and was informed bu the FDIC that its application for insurance of new accounts would be approved. After spending $2 million dollars, the FDIC rejected the application on December 18. The group included the former CEO of the Federal Home Loan Bank of Atlanta and it raised $20.5 million in capital. No reason was given by the FDIC for the rejection. This is what those of us who are in the business of advising banks as "not cool."

Last year it rejected 33% of the applications it received, up from 21% in 2007 and 20% in 2006. And the 15 banks that opened in the fourth quarter were the fewest for any quarter in at least 12 years, according to FDIC data.

Nine of those banks were in Florida, Georgia, California, or Arizona ? though observers were quick to point out that the charters had probably been approved last summer or earlier, before the pace of bank failures accelerated.

Although consultants are quoted in the story as stating that they do not expect problems in other areas of the country, I'm not optimistic. Last week, an attorney in Colorado told me the sad story of a de novo bank application rejected by the FDIC for a new bank in Colorado Springs, with the supposed warning that the FDIC wasn't in the current business of granting new charters, it was in the business of reducing the number of existing charters. The handwriting is on the wall? You be the judge.

Full post as published by Bank Lawyers Blog on January 14, 2009 (boomark / email).