Ken Burgess comes from a family of bankers. His father ran a bank during his childhood – banking runs in his blood.
Burgess is chairman of FirstCapital Bank of Texas, which he started in the late 1990s. As a bank founder and the new chairman-elect of the American Bankers Association, Burgess is concerned that high start-up costs and regulatory hurdles are leading to more banking consolidation and preventing the emergence of smaller banks.
Since the Dodd-Frank Act was enacted in 2010, more than 1,900 banks have closed, failed or been sold, while just six new banks have been chartered, said Burgess, in his statement on behalf of the ABA before the House Financial Services Subcommittee on Financial Institutions and Consumer Credit in March.
In addition to his congressional testimony, Burgess and other community bank leaders also met with President Trump and Treasury Secretary Steven Mnuchin earlier this year to discuss the need for regulatory relief to encourage formation of new banks, also referred to as de novo banks.
“We had a tremendous response to try and get things done and I feel strongly they will do everything in their power to fix things to try and make things better,” he said.
Burgess said a major issue facing new banks is the amount of capital they need to raise as part of the chartering process. According to his congressional testimony, de novo banks need $20 to 30 million to get started, significantly higher than the $6.5 million Burgess raised when he started his bank in the late 1990s.
Burgess believes the two major hurdles for new banks are the amount of start-up capital they need to raise and excessive levels of regulation.
“The lack of de novo banks is strong evidence that the economics for new community banks don’t work. Investors have options,” he said in his testimony before the House subcommittee. “As the capital requirements keep increasing, so does the risk of banks losing their ability to attract investors.”
Return on investment
Paul McAdam, senior director of regional banking in the financial services practice at J.D. Power, said new bank investors are looking for a good return on investment, something that’s difficult to prove compared with other more lucrative investment opportunities.
“The return on starting a bank simply isn’t what it used to be,” McAdam said.
Based on his study of the financial services sector and what leading experts report about banking profitability, McAdam said banks have more operating expenses than they did in years past, which affects the bottom line and their profit margins.
Challenges in the economy since the Great Recession, along with increased regulations and low-interest rates all are factors that have deterred new bank formation, according to McAdam.
“I see it in the overall industry numbers, the numbers on overall bank profitability are pretty dramatically down from what they were pre-recession,” he said.
Most banks also require some type of physical presence or brick-and-mortar facility to interact with their customers, while in today’s digital age more and more customers are going online to conduct transactions.
“Not all millennials do all their banking over their mobile phone, but overall, the macro trend is that the physical presence, staffing and in-person service is a very expensive model and self-service banking is much more prevalent,” McAdam said.
The fine print
Government regulations also have been a factor in the rising costs for new banks, according to industry officials.
Don Childears, CEO and president with Colorado Bankers Association, said new government regulations on mortgage lending are one example. He said those regulations often involve complicated instructions or rules for banks to consider when filling out mortgage paperwork.
For example, with the TRID Mortgage Disclosure Rule, Childears said “the government did a relatively good job combining two disclosure forms into one” for home mortgages – the Truth in Lending Act and Real Estate Settlement Procedures Act. “It’s good for the consumer and more efficient for the banks in the long run, but the killer is that the form has 1,000 pages of tedious instructions,” he said.
The heightened compliance standards even have caused some smaller banks to exit the mortgage lending business together, despite customer demand for these services, Childears said. It also has led to more bank consolidations and mergers, he said.
New credit unions are also facing similar challenges. Keith Stone, president and CEO with The Finest Federal Credit Union, based in New York, testified to the House Financial Services Subcommittee on behalf of The National Association of Federally-Insured Credit Unions.
The chartering process for credit union can take up to three years, depending on complexity and the organization’s business model, according to Stone’s testimony. Stone also said NCUA’s chartering process involves 17 steps.
When asked what changes he would like to see to Dodd-Frank regulations in regards to the chartering process for new credit unions, he said: “I think that the NCUA could establish timetables for responses at various stages of the chartering process and set an advocate at the agency for de novo credit unions to work with.”
Freelance writer Elise Oberliesen contributed to the writing and research of this article.