Make it easier to start new banks, lawmakers urge

Al Drago/Bloomberg

Lawmakers are again pushing for regulatory reforms to encourage the creation of new banks. In a House Financial Services hearing Wednesday, several influential members of the panel repeated calls for relaxing regulatory requirements they say have curbed the formation of de novo banks — institutions established from scratch rather than through consolidation. 

Committee Chairman French Hill, R-Ark., pointed to the sharp decline in the number of community banks in his home state, from 251 in 1995 to just 77 today, as evidence of the regulatory barriers hindering small financial institutions.

"Small community banks and credit unions have suffered immensely under the regulatory requirements," Hill said, "forcing them to devote more and more resources to lawyers and check-the-box compliance programs instead of serving their customers."

Many GOP lawmakers on the committee blamed reforms passed under the Dodd-Frank Act following the 2008 financial crisis for stifling new bank formation.

Hill argued that regulators currently burden smaller banks with rules meant to prevent another crisis, even though they played no role in the market turmoil of 15 years ago. Despite their crucial role in local economies, he says, these banks must navigate a regulatory framework not much different from the largest financial institutions.

Despite growth in the level of assets held in the wider banking system over the last couple decades, the number of individually chartered banks has decreased. According to the Federal Deposit Insurance Corp., there were 9,943 banks in 1995, while that number has shrunk to 4,036 as of 2023. De novo banks have become increasingly rare, a fact which has sparked debate in Congress for some time, given the competition and community focus many of these banks provide to the system. 

To apply for a new bank charter, firm organizers must apply for a charter from state banking agencies or a national charter with the Office of the Comptroller of the Currency. Regulators consider the banks' business strategy, potential board members' credentials and proposed capital levels when evaluating applications. New banks also need to apply for deposit insurance with the FDIC. As de novo banks have historically failed at higher rates than established firms, the OCC has said it may adjust initial capital requirements on a case-by-case basis, but generally a bank that proposes a straightforward plan would not face such scrutiny. 

"The OCC may determine that higher amounts of capital than those the organizers proposed are warranted based on local market conditions or the proposed business plan," OCC guidance notes. "Conversely, a charter application for a community bank that would offer traditional products and services, operate within a small geographic area lacking intense competition, and have a management team implementing a proven business strategy would be noncomplex and, generally, would not require higher capital."

Regulators in the Trump administration have also made encouraging de novo banks a priority. Travis Hill, the FDIC's acting chairman, listed encouraging new banks as one of his priorities in a January speech.

During Wednesday's hearing, Rep. Hill argued current capital requirements, which require bankers to commit certain levels of unborrowed funds before issuing loans, make it nearly impossible for smaller lenders to secure approval to lend and accept deposits.

"Americans must submit to a multi-year high-cost endeavor with several different federal agencies just before they can be considered to open their door," he said. "Initial capital requirements can be as high as $30 million in practice, making it nearly impossible to get started as an entrepreneur banker today."

Witness Rebecca Romero Rainey, president and CEO of the Independent Community Bankers of America, a trade group, said one way to encourage new banks would be tailoring charters to new entrants. 

"The one size fits all charter for a community in Oklahoma does not look the same like it does in downtown New York City and we need to think about it differently in terms of what regulation should be required and how we appropriately give flexibility," she said. "As we serve unique communities of all sheets and sizes across this country, we need that flexibility."

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In November 2024, Rep. Hill announced a set of proposals known as his Make Community Banking Great Again plan, which lays the foundation for congressional Republicans' banking priorities. Among other things, Hill's plan calls for easing regulatory burdens on smaller banks, facilitating capital access and making it easier for them to partner with fintech firms. 

Andy Barr, R-Ky. — who recently introduced legislation aimed at encouraging new bank formation — also blamed excessive capital requirements for keeping applications low for de novos.

"These requirements leave the organizers of a new financial institution with a razor-thin margin of error in executing its business strategy and generating a profit," he said. "That's why we've seen a dearth of new banks, de novo charters, in our country over the last decade or so."

Barr's bill currently has 15 cosponsors, all of whom are Republicans. The Kentucky congressman has presented this bill multiple times since 2021 and last year, the bill cleared the House Financial Services Committee. The most recent iteration's prospects could be stronger in the 119th Congress, given Republicans control both legislative chambers and the White House.