FDIC Acting Chairman Travis Hill Remarks at the American Bankers Association Washington Summit
Introduction
On my first day as Acting Chairman two and a half months ago, I outlined a list of issues on which the FDIC would focus. Today, I will provide an update on a few of those policy issues and describe the agency’s plans for future work in these areas.
De Novo Bank Formation
For many years, commentators have been discussing consolidation across the banking industry, as the total number of bank charters has declined from around 8,500 at the start of 2008 to approximately 4,500 today. While much of the focus has been on the role of bank mergers, statistically, the decline in banks since the start of the Great Financial Crisis is less a product of increased merger activity and much more a product of the steep decline in new bank formation.
Since 1980, the intercompany merger rate has been fairly consistent, generally moving within a range of 1% to 4% per year, depending on the year. The overall average rate since 1980 is approximately 2.5% per year, while the average rate per year since 2018 is 2.7%. If we count all charter closings (which also includes failures and intracompany mergers), the average since 1980 is 4.2% per year, while the average since 2018 is 3.4%. In other words, the decline in banks has been slowing in recent years. And of course, in absolute terms the annual number of mergers and charter closings has declined dramatically.
Meanwhile, the de novo rate has fallen off a cliff. From 1995 to 2007, the lowest number of new banks established in a year was 93. Going back a little further, in 1984, 412 new banks formed. Meanwhile, since the start of 2010, the total number of new banks formed over 15 years is 86, an average of less than 6 per year. Forty-four of those 86 opened in the four years between 2019 and 2022, a modest but meaningful increase largely attributable to reforms to the process and mindset put in place by Chairman McWilliams.
While I do not expect we will get anywhere close to the 100-plus new banks per year of the pre-2008 era, in order to preserve the long-term viability of the community bank model, we need to find ways to encourage more new bank formation, and we are actively considering several ideas to achieve this objective. One idea we are considering is identifying scenarios in which certain types of applicants may be subject to adjusted standards, including with respect to up-front and ongoing capital expectations. One such type of application might include proposals to open traditional, noncomplex community banks in parts of the country that lack local banks. Currently, approximately 68 million Americans live in counties that do not have a community bank headquarters. It might be the case that the benefit a new community bank provides to the “convenience and needs of the community to be served” in regions that lack a community bank presence justifies a more flexible approach to the other statutory factors the FDIC is required to consider.
We are also reevaluating how we process deposit insurance applications from organizers proposing banks with new or innovative business models. I recognize there are benefits to bringing some of these firms into the bank-regulated sphere. For example, a fintech with a large number of deposit accounts may present less risk to the Deposit Insurance Fund (DIF) if it becomes a regulated bank, rather than placing deposits at multiple banks through complex partnership arrangements. While applicants will still need to meet the full suite of regulatory obligations of being a bank, we will, in collaboration with the chartering authorities, approach these types of applications with an open mind.
Among the types of deposit insurance applications the FDIC processes are applications from industrial loan companies (ILCs). At an FDIC Board meeting last summer, I expressed my view that the FDIC should issue a request for information (RFI) or advance notice of proposed rulemaking to ask a comprehensive set of questions addressing issues related to ILC applications. I continue to believe this would be useful, and as a result the FDIC is now actively working on issuing such an RFI. I recognize that a wide range of stakeholders across the financial services industry have expressed strong opinions on this issue over the years, and I encourage interested parties to provide input once the RFI is released.
Overall, deposit insurance remains a special government privilege, and we will maintain rigorous standards for approval in line with our statutory requirements. But we will do so with an eye towards reestablishing a meaningful pipeline of new entrants into the banking sector.
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