BankNotes ...

As we know, the FDIC is an insurance company-its primary purpose is to insure the deposits of the banks in the United States. Because the FDIC provides the insurance, the FDIC gets to make many of the rules! (Congress, of course, has its hand in rule-making also.) After all, if a bank fails, this creates a crack in the financial system. If many banks fail or an extremely large bank fails, then we experience a financial earthquake. The FDIC's job is to make sure we do not experience a crack, let alone an earthquake. This is one reason is why starting a new bank is so difficult. The regulations are tough, the experience bar for management to clear is very high, and the barriers to entry are difficult. Again, all of this is to protect the public's trust in where people place their money.

So in difficult times, as we are experiencing now, the strategic plan of the FDIC is in place to guide the regulators in managing the complex issues they experience in the financial/banking environment. The targeted loss reserves are between 1.15 and 1.50 percent of estimated insured deposits. The loss reserve is the insurance fund, which is financed by charging the banks an insurance premium based on the risk exposure of the bank and its insured deposits. This premium is derived from the FDIC's Financial Risk Committee (FRC) assessments, quarterly failure projections and loss estimates. The FRC analyzes the risk exposure of the insurance fund based on the risks of the insured banks. When bank loans go bad, the risk exposure of the bank goes up and the FRC reevaluates the risk of the fund. This, in turn, sets a new premium for the bank and for other similar banks.

The FDIC reviews the assessment history of all failed banks on an ongoing basis to determine if the system is working properly. In 2007, after much research and testing, a new risk-based assessment system was implemented through the modification of FDIC systems and business procedures. This updated system is designed to measure the risk of individual banks more accurately, which allows for the assessment of fees that are more in line with the risk level. Currently, the FDIC is the primary regulator for 5,197 state-chartered banks that are not members of the Federal Reserve System or are national banks or thrifts which are regulated by the OCC and OTS respectively.

Because of the complexity of the analysis that is required to develop accurate pricing and review the effectiveness of new regulations, the FDIC will require additional staff. Further demands will arise from the combining of the Bank Insurance Fund and the Savings Association Insurance Fund; the merger affected 48 information systems and resulted in some changes in deposit coverage. As a result, the FDIC will require new analysis techniques and will be tasked with extensive testing of the systems. All of these systems are necessary to manage the risk of consumers and businesses not being able to pay their debts, while keeping consumer and commercial deposits safe and accessible.

This enormous balancing act adds to the challenge of starting a new bank. The risks to a new bank are great because they have new capital to employ; new banks need assets on the books and many deposits to help fund the new loans. However, because of the strict regulatory controls, new banks succeed more often than not. It is rare that a de novo bank fails. If the right organizers and bank board, management team, business plan and capital are in place, chances are great that a de novo bank will succeed.

By Wendell Brock, MBA, ChFC

De Novo Strategy, Inc.