These days, when some in the political circle are calling for an expansion of Dodd-Frank, the chairman of the FDIC, Martin Gruenberg decided in April to ease regulations in an effort to try to jump start the creation of new banks. As you know, the number of de novos sagged after the Great Recession.
In short, Gruenberg slashed the period of microscopic regulatory scrutiny for de novos from eight years to three.
It’s an interesting twist to be sure. But at BankMarketingCenter.com, we’re more than a little skeptical.
Don’t misunderstand, the idea of more community banks is a good one, especially for growing bedroom communities of larger cities that are at present, banking deserts. Consider the town of Odenville, Ala.
In growing St. Clair County on the outskirts of Birmingham, Ala., Odenville once had a community bank in the heart of town. No more. Developers, as well as new and lifelong residents, say a new bank is needed.
So, Gruenberg’s move is a good one, right? In the words of the ESPN college football analyst Lee Corso: “Not so fast, my friend.”
Some have even gone so far as to cook up recipes for a successful de novo, including ingredients like hiring a successful CEO from an active or closed community bank, and trying to lure quality officers with strong salaries and stock options, as well as a quality board of respected community leaders.
When Gruenberg claimed the demise of the de novos is because of economic factors I totally agreed.
But the real economic factors differ drastically from Gruenberg’s take.
Sure you can find a seasoned bank CEO and his team of officers that are interested in joining a de novo. With a guaranteed salary and lavish stock options, who wouldn’t be interested?
The problem is finding a qualified board of directors. Most smart business people have heard the horror stories of successful business people being sued after serving on a bank’s board of directors. Many officers and directors were sued only months after receiving CAMELS ratings of one or two. The FDIC wanted to show the public how they were protecting everyone’s hard- earned money.
No business leader who has poured his or her life into making their business a success, wants to see a nice nest egg shattered when the bank’s officers and board are sued. Even an out-of-court settlement can be devastating, not only for the bank and its reputation, but for the bottom line of its individual board members. FDIC litigation is a nightmare in a gray flannel suit.
Trying to raise capital is another factor. How many smart businessmen want to invest $20 to $30 million in a de novo, knowing it could take years before turning a profit. And you can’t get director’s fees until the bank turns a profit. With Dodd-Frank and other governmental regulations, it will be hard for community banks to show a profit in the future. Now comes FASB’s CECL (Current Expected Credit Loss) where you have to write down loans before the ink even dries on the loan documents.
And with all the lawsuits filed by the FDIC, the Directors and Officers Liability Insurance (D&O insurance) has spiked 30 to 40 percent, also eating into the profits.
Add in the costs of cutting edge technology, and it’s a tough pill for smart business folks to swallow. Gruenberg is right when he says economics have hampered de novo creation, but that’s a small part of the story.
I hate to say it, but the FDIC started dimming that Welcome Sign several years ago, and I’m not sure if or when it will ever come back.
A recent article in the ABA Banking Journal posed the pivotal question: “The Welcome Sign Is Up for De Novos –But Is It Enough?
Our thought is, not only is it insufficient, but the FDIC and other banking regulators need to examine a variety of ways to give board members a bit more comfort. For now, Gruenberg’s latest move is like putting a tuxedo on a pig – you can call it Welcome, but it’s still a pig.
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