Banking Law

This past January we related the sad tale of a de novo bank charter applicant who spent $2 million in organizational costs before the FDIC finally got around to telling it what the FDIC should have told it to begin with: "No way, Jose." Today, The American Banker (paid subscription required) featured a story today about the similar trials and tribulations of non-bank commercial lenders who've been left at the alter by the FDIC in their pursuit to acquire or start a commercial bank.

Though the lenders are eager for cheap deposit funding, a few have called off plans to enter the retail banking business, after encountering extensive regulatory delays.

One frustrated commercial lender had been approved by the FDIC but after spending well over a year on the applications and over $1.8 million in expenses, the FDIC refused to approve the applicant for FDIC insurance, and likewise refused to provide a concrete reason for doing so.

"We had a conference call with an FDIC official out of Atlanta who basically said to us that we had been successful already with our current nonbank business model," [the applicant] said. "He made the comment, 'Why should we help you become a bank so you can take advantage of FDIC insurance on deposits? You're doing just fine now.' "

And you couldn't have told them that at the initial pre-application meeting? Of course, doing so would have required more than ounce of integrity and more than a thimbleful of testosterone. Silly me!

On the other hand, to determine whether or not a nonbank, monoline commercial lender has a snowball's chance of ever entering the banking business, all you have to do is make some telephone calls to a few regulators you know will be honest with you, and with former regulators and other sources who have contacts you may not possess. All that palaver can be "off the record." Getting the lay of the land should not take $1.8 million. Nevertheless, the regulators need to be honest at the outset on such transactions. It's bad enough that so much money was wasted, but think of the futile efforts and diversion of time and effort that could have been better spent in more productive endeavors. 

Tales like this do nothing to encourage anyone to try to enter the banking business. Perhaps that's the FDIC's plan. If so, it's doing a bang-up job.