Banking Law

Over at the Bank Safety & Soundness Advisor (paid subscription required), the experts confirm what the wingnuts at Bank Lawyer's Blog have been blabbing about regarding de novo banks: holding your breath until the FDIC approves your application for insurance of accounts for your de novo bank is a great way to ensure that you pass out.

"Indeed, regulators have been so loathe to approve new charters that most folks stopped applying."

The article quotes D.C. lawyer Robert Freedman, a long-time de novo banking expert, to the effect that he's completely stopped doing de novo applications because he's sick and tired of having been "beaten up" by the regulators. Instead, he's turned to helping investors try to buy failed banks, on the quite reasonable assumption that until the FDIC "clears out the inventory" of failed banks, new charters will be likely a rare sight. Unfortunately, it appears to me that the inventory of failures will be steadily replenished over the near term, so the "clearing" burden is going to be a heavy one.

Peter Weinstock of Hunton & Williams' Dallas office claims that the FDIC has taken the "internal position" that it will approve a new bank charter only "if it won't destabilize any of the other banks in the market." As Weinstock correctly notes, that is a test that is hard to pass.

The example of Lakeside Bank, discussed in a previous post on this blog that is linked above, appears to be a "one-off" situation. That bank had "a good local economy and strong banking competition" that could survive its entry into the local market. The organizers also had the patience of Job, since it took them 2.5 years to make it through the application process. That's too long for most investors, especially when prospects for approval appear so dicey and the costs of the applications, lawyers, consultants, and investment bankers/advisors can be substantial.

Not that the shelf charter route that a number of investment groups have pursued as an alternative appears to be much more promising. Notwithstanding a couple of high profile exceptions, Weinstock claims that the approval process for such charters has turned into a "quasi de novo process," which means the imposition of exacting and difficult-to-meet conditions and covenants on applicants. Other lawyers, like Venable's Ron Glancz, claim that all this is evidence that the regulators really want "qualified investors" (which yesterday's post discussed) to buy an existing bank or buy a failed one rather than start a brand new one. Like a number of us who toil in these fields, Ron thinks the regulators changed the rules without admitting they'd changed the rules, and definitely without going through the rule-making process.

The bottom line: until things loosen up (again, don't hold your breath), the only viable way into the banking game is to find an existing bank and buy it.