Mutual minority and rural depository institutions, or MDIs and RDIs, historically have been the lifeblood of rural and minority communities. At a time when leaders are calling for more engagement by traditional institutions with rural and minority communities, promoting community development financial institutions and various other government-sponsored and government-subsidized intermediaries, the organization of mutual banking institutions has ceased.
No new mutual banks have been chartered for over a half a century.
Effectively, the federal government has abandoned its mandate to charter and insure the deposits of de novo mutuals. This has created a void in banking services in many of the communities that need them the most.
This unlawful moratorium on chartering and insuring mutual banks of the community, run by the community and for the community, demands reassessment of regulations and policies for their chartering and deposit insurance. Capital requirements must be tailored to MDI and rural mutuals. Deference to federal and state chartering authorities by federal deposit insurance agencies must be restored. Capital instruments unique to the mutual legal form must be recognized, and federal government programs to fund their initial capitalization adopted.
Legislative changes, and the indifferent attitude of federal and state banking regulators towards mutuals, has led to a precipitous decline in the diversity and number of these institutions. During the period from 1984 to 1994, mutual banking institutions’ asset share of the total banking industry fell from 16% to 4%, while the number of chartered mutuals declined from 2,400 to 1,076. Today the number of mutual banks is approximately 500. Despite this, mutual banks remain resilient and are among the most stable institutions, providing higher-quality loans before, during and after the financial crisis.
The history of mutual depository institutions in the U.S. is a proud one. During the first half of the 20th century, mutual banks flourished. They provided financial services to immigrant, minority and low-income groups that commercial banks simply ignored. Indeed, these institutions were formed by community groups, for the community and were managed and staffed by community members.
The necessity for profitability at a level that will provide attractive stockholder returns is a critical factor in the lack of interest in forming de novo banks in rural and low-income communities. The absence of stockholders in a mutual eliminates this necessity. A mutual MDI or RDI is chartered not for the profit of its founders, but for the prosperity of its community. It needn’t achieve profitability levels that will tempt risker business strategies. It’s not compelled to swing for the fences because of stockholder demands for short-term profit. Ironically, a stock MDI that succeeds is more likely to monetize that success for its stockholders by selling itself and merging out of existence. A mutual MDI or RDI becomes a trusted educator for the financial literacy of its customers, an incubator for developing financial skills for community members and a source of trust for the community.
Despite the best intentions of Congress and federal regulators, the chartering and deposit insurance processes have evolved in a manner detrimental to the formation of mutual MDIs and RDIs. While the Office of the Comptroller of the Currency and the states are the only chartering authorities, current banking law gives the Federal Deposit Insurance Corp. a veto by virtue of the requirement that new charters obtain deposit insurance.
Until the passage of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), Congress required deference to the OCC’s and Federal Home Loan Bank board’s chartering decisions by the FDIC and the Federal Savings and Loan Insurance Corp. Prior to FIRREA, the deposit insuring agencies had a duty to insure de novo national banks and federal associations. The duty to insure was eliminated under FIRREA. The elimination of deference to the OCC and the duty to insure, means the FDIC can determine the viability of a de novo institution based solely on its assessment of the deposit insurance risk without judging the need for a mutual MDI or RDI.
The FDIC’s de novo guidelines do not prescribe a minimum dollar level of capital for any given proposal but require a Tier 1 capital-to-assets leverage ratio of 8% through the first three years of an institution’s operation. However, many groups attempting to form institutions report that the FDIC implicitly expects a minimum capitalization of $20 million to $25 million. While these guidelines are unclear, the fact remains they are burdensome for de novo community banks. Coupled with this is the lack of recognition for capital instruments that are unique to mutuals. The only instrument suitable for mutuals recognized as Tier 1 common capital by the regulators is a pledged account. This discounts other instruments unique to mutuals including mutual capital certificates. Comparatively, the capital requirements and regulations all discuss instruments that are specific to stock form banks, which is more evidence that mutuals have been left behind.
These unclear and burdensome capital requirements create an insurmountable barrier to entry for prospective de novo mutual MDIs and RDIs. Even if an applicant could surmount the unnecessarily high capital requirement, the rules could lead management to seek riskier investments, often outside of the communities the bank is organized to serve. These capital requirements are the equivalent of hanging a sign at the FDIC’s doorstep saying, “Mutual MDIs and RDIs need not apply.”
To encourage the creation of mutual MDIs, Congress must reinstate the deference principle. While deposit insurance remains a condition for the formation of de novo institutions, decisions regarding the business potential of the institution should stay within the domain of the federal chartering authority, the OCC.
Capital requirements for mutual MDIs must be tailored to their unique structure. There is no reason mutual capital instruments that are tax favorable and marketable can’t be designed to satisfy FDIC risk concerns. More important, the FDIC’s capital interpretations must be harmonized with federal and state law regarding the organization of de novo mutuals.
Rather than reinvent the wheel, lawmakers should look to revitalize MDIs and RDIs, which have long served as the backbone and lifeblood of communities across America.
