Banking Law

Although the FDIC denies it, organizers and consultants who are trying to start new banks in certain areas of the country allege that the FDIC has put in place a de facto ban on all new bank charters.

???It is a de facto ban,??? said Stephen Johnson, CEO of Alpharetta-based consultant T. Stephen Johnson Associates Inc. ???I???ve never seen a time this difficult to get a charter.???

The FDIC's regional director in Atlanta, Mark Schmidt, denies that there is a formal or informal ban, then proceeds to all but make the opposite case.

Schmidt did acknowledge deposit insurance approval is harder to get, and the FDIC is becoming more discriminating in who it approves nationwide, including in metro Atlanta.

???We have had four failures in Georgia, three being relatively new institutions,??? he said. ???We are asking a lot of very hard questions. They have to convince us they can get off to a good start. The standards don???t change. From our perspective, the economy changed.???

In other words, We wish you luck, Mr. and Ms. New Bank Organizer, because you're going to need it.

The FDIC???s tougher guidelines broadly address three key issues, sources said.

First, the FDIC is requesting bank organizing groups have directors or executives with management experience dating to the Savings and Loan Crisis of the late 1980s and early 1990s.

Second, banks are required to present a plan to generate deposits from the wider community, beyond the so-called ???friends and family??? of the organizing group.

Finally, banks are now required to submit an economic assessment of their distressed geographic area, addressing how the bank plans to grow and survive when, in some areas, loan growth is nonexistent.

Have directors or management who went through the last big wave of bank failures, but preferably who didn't serve with a bank that actually failed. Have a plan to generate deposits from a wide market, but at the same time don't you dare use brokers! Submit a plan showing asset growth in an area we've already determined won't support asset growth, and don't you dare submit a plan that relies on out-of-assessment-area growth!

Are you familiar with the Internet term Epic Fail? If so, you'll understand what the FDIC is setting up your application to achieve.

The article cites specific areas where the crackdown is occurring, including Georgia (especially metro Atlanta), Florida, California, Arizona, Nevada, and Washington.

In June of 2007 we also discussed putting the brakes on new banks in Georgia, although at that time it was because capital was becoming harder to raise. The reluctance of investors then was due to the fact that they could better returns in the sexy, hot public stock market than they could in a private investment like a start-up commercial bank. Now, the stock market is wheezing and gyrating, and those with capital to invest are taking a second look, but since a number of the banks that have failed over the past year have been relatively new banks, the FDIC is reluctant to approve applications for insurance of deposits. Given the strain the FDIC fund is under, and the recent track record of new banks in the affected areas of the country, you understand their caution.

Two and one-half years ago, we discussed the fact that Texas was in a situation in the late 1980s where the FDIC believed that Texas had too many banks and set out to eliminate the excess, and how, in 1990, bank consultant Bill Ferguson predicted that by the end of that decade Texas would be under-banked, and that there would be a new wave of bank start-ups. How right he was. Odds are, the same thing will happen in those areas of the country that now constitute toxic waste zones for new bank charters. Eventually, the wheel will turn full circle.

Of course, that long-term view doesn't make it any easier to take if you've got an application for a new charter in Atlanta or Las Vegas sitting at te FDIC right now. Patience is a lot easier if you've got no skin in the game.