Most of us have seen the 1946 perennial Christmas movie "It's a Wonderful Life" based on Phillip Stern's 1943 short story "Greatest Gifts." The Bailey Brothers Building and Loan in the mythical town of Bedford Falls is the idealized community bank. Key scenes depicted this local institution's involvement in serving homegrown businesses and residents.
While Bailey Brothers is a theatrical proxy for community-based financial institutions, small towns across the country have their own real-life examples. In 1943 — the era of George Bailey — there were 12,208 unit banks. My parents' farm town in Salix, Iowa, population 292, for example, has benefited from a community bank since the Great Depression.
The Federal Deposit Insurance Corp.'s Annual Community Bank Study updated for year-end 2022 demonstrates the importance of community banks to our nation's overall economy. Of the country's 4,706 banks, 90% are categorized as community banks with a total of 375,597 employees. These banks hold $2.3 trillion in deposits, or 12% of the national total. Importantly, in lending these deposits back into their surrounding communities, they have an outsize share of loans to businesses that support small-town economies. These small banks account for 39% of the nation's total small-business loans.
Some may say recent bank failures, and the current banking environment, argue against new bank startups. However, I think it is important to remember that these failed banks opened decades ago. Of the 76 banks opened since 2010, none have failed.
Much can be done to encourage the formation of strong new community banks. For one, regulatory outreach and de novo bank information sessions conducted by the Office of the Comptroller of the Currency, the FDIC and various state banking regulatory agencies have been ongoing for decades, but particularly since the Great Recession. Continuing these outreach sessions will result in more new bank applications. Locating these sessions in communities underserved is a possible next step.
Despite regulatory efforts, applications for traditional new banks often now require lengthier review periods for regulatory approval than in the last several decades. Expenses for initial pre-opening bank staff, lawyers, advisors, vendors, office and equipment rentals can substantially increase the organizers' costs. These overhead expenses continue without revenue prior to opening. Anticipated costs over a long review period often deter qualified applicants. Streamlining this review process would provide some relief.
One of the more difficult tasks associated with starting a bank is securing employment commitments from qualified executive candidates prior to the filing of an application. Selected candidates often reflect a perceived bias toward individuals who have previously held these positions in existing banks. This can result in an unintentional older age and gender bias.
In the past, in some states, applicants have received an initial approval for their bank based on its business plan to serve a target-market's needs, and its strong and diverse local board of directors. These preliminary approvals were subject to subsequently identifying key C-level management. This mechanism allowed key bankers to be comfortable with the bank's approval status if they were acceptable to the regulators. Additional benefits to the proposed bank are a reduction of key officer initial salary expenses and the removal of possible conflicts with key bankers' current employers.
MDIs are needed throughout the country. Leaders in minority communities are eager to start banks, and there are constant inquiries regarding the process. Related government programs, major banks, private equity funds, significant family offices and large nonprofits are all prepared to invest in the stock or debt instruments issued by startup MDIs. But these organizers struggle to raise the risk money necessary for both a successful application and the subsequent pre-opening expenses. A solution would be major Community Reinvestment Act credit given to banks who help fund MDI organizing groups.
Director training is a must for all directors of startup banks. Regulators can play a key role in more directly requiring current and new forms of board member education before and after opening a bank. While regulatory agencies, trade associations and independent texts and videos offer director education for bank board and committee members, stressing early education is a high priority. Feedback from successful community bank boards and their regulators often indicates that directors and officers with prior regulatory experience are most valuable. Providing a contact list of recently retired or former regulators interested in serving on new bank boards would be helpful to new organizing groups. This added expertise would both augment and encourage new bank groups.
