Lack of New Banks is a significant issue for the US Banking industry

Governor Michelle W. Bowman of Federal Reserve in this speech raises concerns over lack of new banks particularly de novo banks in US:

why have there been so few de novo bank formations over the last decade?

There have been only a handful of new bank charter applications over the past decade. In fact, only 44 de novo banks have been established, which include both state and national charters. A 2014 study by Federal Reserve Board economists noted that from 1990 to 2008, over 2,000 new banks were formed, which on average is more than 100 per year.⁶ In contrast, the study noted that only seven new banks were formed from 2009 to 2013. The 2014 Board study suggests that “low interest rates and depressed demand for banking services—both of which depress profit for banks, and particularly new banks—may also have discouraged entry.”⁷

The conclusions from a Federal Reserve Bank of Kansas City study completed this year align with observations from the 2014 Board study. In this more recent study, the authors noted that new bank formations tend to be cyclical, accelerating during periods of economic expansion and slowing during recessionbs.⁸ While regulatory burden has also contributed to depressed de novo formations, the authors pointed to the weak economy following the 2007-2009 financial crisis and low profitability for banking as overriding factors.

A recurring theme that has surfaced through my discussions with bankers and other industry stakeholders is the regulatory burden imposed upon de novo banks. In particular, community bankers noted the challenges in raising the capital required to establish a new bank. The 2014 Board study noted that the states’ statutory capital requirements for a new state-chartered bank could be as low as $10 million, but in practice could be as high as $30 million.⁹ Given the high initial capital requirement, a de novo bank has a small margin of error in implementing its business strategy and meeting profit projections.

Just like costs of doing Business, there is a need to figure costs of doing banking business.

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