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Sluggish Bank Regulators: How Much Are They Costing Taxpayers?

Posted by Wendell Brock on Tue, May 19, 2009

Seventy-three start-up banks opened their doors in 2008, according to industry data provider SNL Financial. The number compares unfavorably to what happened in years prior: there were 146 start-ups in 2007, 152 in 2006, and 135 in 2005. The drop-off in bank start-up activity has several contributing factors, but a big one is the ever-lengthening approval cycle. FDIC regulators, ever-conscious about squeezing risk out of the banking system and short on manpower, are taking longer and longer to provide final approvals on new bank applications. It appears that each de novo application now has to be sent to Washington DC for final approval.

Two years ago, a start-up bank could set aside about six months to receive an application approval. However, sometime in early-2008, things began to slow down. Now, a bank organizing group can expect twelve months or more to go by as the FDIC ponders the new bank’s worthiness.

Because time is money

The added caution on the part of regulators is understandable, but it doesn’t come without a cost. A de novo bank typically brings $10 to $25 million of new private capital into the industry. SNL Financial estimates that new banks last year brought in an average of $18 million apiece, or roughly $1.3 billion in total. But a look at the same numbers in prior years indicates that this figure could have been much higher; the 146 start-ups in 2007, for example, delivered a cumulative $2.67 billion in new funds to the industry.

Manpower constraints

Caution, unfortunately, isn’t the only obstacle new bank applications face. Another issue is lack of manpower. De novo applications are processed in the examination side of the FDIC. But many of those examination employees are now being diverted to the resolution department that manages the closing of  banks. A typical bank closure can require the participation of ninety or more FDIC employees—which is a lot of human resources to shuttle away from examining banks and application processing. Last year, the FDIC shut down 25 failed institutions; the count this year has nearly matched that figure.  While the FDIC works hard to help banks survive and keep our financial system healthy, they also look for the least costly solution to the insurance fund as they close an institution.

Private capital, ready and willing

At a time when the feds are dumping money into the financial sector to loosen up lending, the banking system could sorely use the extra capital provided by de novo banks. It was just recently that the Congressional Budget Office (CBO) increased the expected 2009 cost of TARP by more than $150 billion. The estimated total cost is now $356 billion. Meanwhile, the Obama administration is also tinkering with the idea of selling bailout bonds to generate private capital that could fund bailout efforts.

Given that start-up banks bring their own capital—along with clean balance sheets, banking expertise and a willingness to lend—now might be the opportune time to fast-track bank applications. Finding a way to do that might be a practical addition to the existing banking recovery programs.  

Topics: FDIC, regulators, capital, bank applications

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