Consolidation Does Not Inevitably Lead To De Novos

ICBA chief Cam Fine recently turned optimistic (paid subscription required) about an eventual uptick in de novo charters. However, he doesn’t think that wave will break for a few years.

“It may not be as robust as the late ’90s, when we had 150 to 200 [new banks] a year, but maybe 50 or 60 a year, particularly by 2020,” Fine said. “First in, say 2017, it will be 10 to 15.”

The new activity will sprout once the industry players feel the operating environment has leveled off, he said. “The money will come back once we digest [new regulation] and the turmoil gets in the rear view,” Fine said, adding that startup capital “will maybe go where there is no local bank.”

Based primarily upon what has occurred in the past, Cam’s predictions make sense. On the other hand, the past is not always prelude to the future. As we’ve discussed previously, some of the regulatory agencies, especially the FDIC, have, by their actions and “sub rosa” admissions (if not their public statements), expressed a view that there are simply too many financial institutions in this country to ensure that all prosper, and that reducing the total number of financial institutions is a long-term goal. If that’s the view, then unless it changes, I don’t see another round of de novo charter approvals, certainly not 50 to 60 a year, being likely.

Of course, I could be wrong. It’s happened.

One of the recent trends that those of us in the bank mergers and acquisitions arena have noticed over the past couple of years is the number of deals that have been hung up, and in some cases killed, by fair lending concerns initially raised by fair lending advocates, then taken up by regulators such as the Federal Reserve. Speaking recently with an investment bankers heavily involved in with community bank merger and acquisition transactions, I was struck by how frustrated he and others have become with the Fed’s fly-in-the-ointment role in slowing down what many observers think is an inevitable consolidation of the banking industry. A number of affected participants have voiced the view that that the Fed has gazed over the horizon and been concerned by what it sees: fewer banks to regulate, especially among the ranks of smaller Fed member community banks. These observers assert that the Fed is deliberately slowing down, and sometimes killing, deals on the pretext of fair lending concerns, but actually because it’s concerned that consolidation might adversely affect the agency itself. With fewer total banks to regulate, the proponents of reducing the number of federal bank regulators to a single agency might gain support.

I suppose that’s a plausible view. Certainly, it has had the effect of artificially sustaining a higher number of banks than would be the case if nature took its course. I think it may be simply more likely that the fair lending roadblocks that have been thrown in the way of recent transactions have more to do with the ideological bent of those at the top of the regulatory food chain than they do to with worry about the need to preserve enough of the regulated to justify the existence of the regulator.

Regardless, I think consolidation is a trend that will continue, as does Cam Fine.

“We have 6,300 community banks as of right now,” Fine said. “My personal prediction is that… we will be at 4,800 to 5,300 banks” by the end of 2019.

That sounds about right to me. Fair lending or no fair lending, the trend is toward consolidation and I think that is where the industry is headed, whether or not the Fed makes the process more painful. Where I’m more pessimistic than is Cam is in predicting that such consolidation will, as it has in the past, spur a wave of new bank charters. Given the fact that so many of the community banks that failed in the latest downturn were de novo banks, I simply don’t see the FDIC agreeing to grant 50 to 60 new bank charters on an annual basis.

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