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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

Banking and Healthcare: Hand in hand?

Posted by Wendell Brock on Fri, Oct 24, 2008

As the shake-down in the financial services industry continues, traditional banks may find themselves losing customers to healthcare providers.

Health insurer WellPoint Inc. recently received conditional approval from the FDIC to open ARCUS Bank, which will be a Utah-chartered industrial loan company (ILC). The approval was obtained despite an FDIC moratorium on deposit insurance applications for ILCs that would be operated by firms which participate in non-banking business activities. The underwriting and selling of health plans by WellPoint wasn't the problem; it was the company's retail activities, primarily pharmacy services and disease management operations. 

WellPoint appealed to the Federal Reserve Bank to get around the moratorium, arguing that the company is, first and foremost, a financial services provider. The Fed agreed, with the stipulation that WellPoint has to keep its pharmacy and disease management revenues in check-specifically, less than 15 percent of total sales.

WellPoint isn't the only health insurer that's moving into the banking industry. OptumHealthBank, which is part of the UnitedHealth Group (NYSE: UNH), has been providing "health care banking" services since 2005. And last year, a group of Blue Cross and Blue Shield Association member plans chartered Blue Healthcare Bank. Blue Healthcare Bank's mission is to "help participating Blue companies offer their members state-of-the-art healthcare savings and payment options...facilitating members' choice of high-quality, self-directed accounts..."

Vertical integration

It is the growing popularity of high-deductible health plans (HDHP) that's driving these health insurers into the banking business. HDHPs generally charge lower premiums in exchange for coverage that doesn't kick in until a very high deductible is met. Having an HDHP gives the insured the right to maintain a tax-advantaged savings account to hold funds that are earmarked for healthcare expenses. So-called health savings accounts (HSAs) share characteristics with IRAs: contributions can be invested in securities and the earnings are tax-free until the money is withdrawn.

The company providing the HSA has the opportunity to collect account fees, management fees, investing fees, etc. OptumHealthBank, Blue Healthcare Bank and Arcus Bank believe that offering HSAs and related financial services is just a natural extension of their current health insurance offerings; they're simply providing another tool to help their customers manage ever-rising healthcare expenses.

The evolution of banking

For the traditional banking industry, this development presents yet another argument for banks to reassess their innovation efforts. Customers need to have a compelling reason to choose one service provider over another. For some, a negative perception of the traditional banking industry may be enough. Traditional banks stand to lose out on HSA-related revenues and, possibly, revenues related to other financial services as well. Now, and for the foreseeable future, the pressure is on banks to develop strategies that will drive innovation, develop new and improved products and services, and enhance efforts to build deep, lasting customer relationships. 

Topics: Banking, regulators, De Novo Banks, Health Care, Health Insurance

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