New community banks chartered in the years before the crisis tended to open in less-concentrated markets, according to a Federal Deposit Insurance Corp. working paper released Tuesday.
The period between 2000 and 2008 saw the creation of 1,042 de novo community banks, the
Yet as in earlier decades, de novo banks faced higher failure rates and took on riskier assets, such as commercial and development and commercial real estate loans. They were also more likely to appear in areas with heavy merger-and-acquisition volume.
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The agency plans to reduce the period of heightened regulatory scrutiny to which de novo institutions are subjected to three years, down from the seven-year period established in the wake of the financial crisis.
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In an interview, FDIC Chairman Martin Gruenberg said the agency will work with banking groups, state commissioners and others to help foster the growth of new banking charters.
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Ray Grace, North Carolina's banking commissioner, believes federal bank regulators should embrace charters for banks dedicated to innovation. Doing so, he said, would help the banking industry secure its spot as a "laboratory for change."
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But the paper also found that leading up to the crisis, de novo banks seemed to face higher obstacles to entry. They tended to avoid areas with a higher concentration of financial institutions and larger deposit sizes and seek out underserved regions. This could mean that these young banks faced significant barriers to entry, and stiffer competition from better-established rivals.
The dearth of de novo banks since the crisis has been a growing concern for regulators. "We have seen the number of de novo applications decline to a trickle in recent years," said FDIC Chairman Martin Gruenberg during the agency's community banking conference
To encourage the creation of new banks, the FDIC announced that it would reduce the enhanced review period for new institutions from seven years to the pre-crisis three-year period.
In his speech, Gruenberg said the rate of de novo banks had been affected by the "challenging economic environment" post-crisis, but that the tide might be turning. "We have seen indications of increased interest in de novo charter applications in recent quarters," he said.
