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Bankers and regulators may need to study the barriers of entry into banking just as seriously as the NFL and Major League Baseball consider new franchises for football and baseball.
June 13 -
The Feds research raises more questions than it answers, among them: Is the researcher right when he says the great bankers he interviewed could run a bank successfully anywhere, anytime?
June 12 -
It's hard to believe but true: more than 700 banks maintained a pristine Camels 1 rating throughout the six-year period bracketing the financial crisis. New Fed research shows why.
May 23
In this final installment of my response to the St. Louis Fed's
- The banking industry needs higher barriers of entry
- Bankers need to protect themselves from bad bankers
States experiencing a rapid growth in new banks risks face several risks. Common sense suggests that a surge in new bank formation requires a commensurate growth in the number of skilled bankers, directors and regulators to manage, govern and supervise these banks. In the absence of a reliable pipeline of new, skilled talent, states that allow rapid new bank formation experience a serious dilution of talent.
My book, "
In contrast, the 10 states with the highest percentage of new bank formation from 1996 to 2010 a list that nearly mirrors the Fed's list of states with the lowest percentage of thriving banks added 781 new banks for the time period, a total equal to 70% of the banks doing business in those states in 1995.
Returning to a point made in
Go back to 1960. Since then the NFL added 10 new teams and Major League Baseball added 14. In the case of the NFL, the new teams won a total of only 19% of their games during the teams' first three years in existence. For baseball, the record is better at 38%, but to give some perspective, these teams collectively lost 1,632 more games than they won in their first three years.
Professional baseball and football teams are highly unlikely to win a lot of games in their startup years. In contrast, in U.S. banking, until the crisis hit full-blast, it appeared that the startup banks were all the 1927 New York Yankees starring the Babe Ruths of banking. The states that allowed the most new banks to form experienced far and away greater growth in statewide loans and, for a while, growth in profits, than the states that did not experience rapid expansion. Yet consider the tragic annihilation of Georgia banks over the past five years.
Just to be clear, the banks that suffer when new banks are formed too rapidly are not just the new ones. My heart breaks for the stakeholders in banks like Community Bank and Trust and the Bank of Hiawassee, two Georgia banks each over 100 years of age that failed during the recent debacle.
The real crisis in American banking today is a severe talent shortage that will only get worse as the industry's most experienced practitioners retire. The Fed study missed the forest through the trees. Yes, our nation's best bankers are top-notch. But, contrary to the Fed's findings, these great bankers are not only located in states like Texas and Iowa.
Our reality is that even great bankers cannot succeed when forced to compete in markets where rapid new bank formation rates dilute the pool of skilled bankers, wise directors and experienced regulators.
Richard J. Parsons is the author of "