The House Financial Services Committee (FSC) held a hearing to explore how the current regulatory regime governing bank mergers and new (de novo) bank formation impacts the financial sector. Lawmakers and witnesses discussed potential regulatory reforms aimed at fostering competition and ensuring widespread access to financial services.
Witnesses representing community banks argued current regulations governing bank mergers and acquisitions present significant hurdles to new bank formation. They testified alongside attorneys and other industry experts presenting a variety of viewpoints.
The witness panel was comprised of: Keith Costello, president and CEO of Locality Bank; Mary Usategui, president and CEO of BankMiami; Amanda Allexon, partner at Simpson Thacher & Bartlett LLP; John Berlau, senior fellow and director of finance policy at the Competitive Enterprise Institute; and ReShonda Young, founder of Jabez Inc.
Multiple bank representatives asserted current capitalization requirements are onerous for community banks and the merger approval processes implemented since the enactment of the Dodd-Frank Act.
FSC Chair French Hill (R-Ark.) stressed the need for more timely, transparent and consistent guidance for financial institutions regarding the bank merger process.
“They need the tools at their disposal to make informed decisions about pursuing or withdrawing applications without wasting time and money navigating changing and opaque standards,” Hill said.
One proposed solution for supporting de novo banks is to implement a new tiered model for capital requirements, as outlined in one piece of legislation introduced by FSC Chair Andy Barr (R-Ky.), dubbed H.R. 478, the “Promoting New Bank Formation Act.” The hearing memorandum also included summaries for draft bills describing other tailored regulatory approaches intended to encourage new bank formation and ease regulatory burdens on existing community banking institutions.
When asked about the Department of Justice’s decision to withdraw certain guidance on bank mergers under the Biden administration, Allexon noted the process of drafting new guidance or rulemaking can be taxing because “every word means something” and there are a multitude of factors to take into account.
“When you’re putting together a proposal like that in the hopes of creating transparency or expediting the process, there can be unintended consequences,” Allexon said. “Those particular pieces of guidance created some presumptions that bank merger transactions were negative.”
She noted that it can be a major hinderance to bank formation when applicants are made to feel they are “starting behind” rather than from a “neutral position” when attempting to satisfy all the regulatory considerations entailed in drafting a merger application.
Some arguments came from the perspective that community banks are essential small businesses, offering relationship-based services at the local level.
“Community banks are small businesses that serve other small businesses,” Costello said. “Starting and running one gives you a deep appreciation for the challenges entrepreneurs face daily – something that can’t be replicated by working in a large, corporate financial institution.”
Costello then posed the question on many of the minds of many of the hearing participants – “Why aren’t there more de novo banks?”
“The answer is largely economic,” he said. “Starting a new bank today is not financially viable for most entrepreneurs or investors. And the return on investment is not competitive with other options since the Dodd-Frank Act regulatory burden has increased dramatically. Capital requirements are higher, approval timelines longer and compliance costs are steep, and these burdens fall hardest on community banks that did not cause the financial crisis.”
Rep. Maxine Waters (D-Calif.) argued that actions seeking to speed up the bank merger process would be detrimental to community banks because it would lead to the formation of “mega-banks,” referring to the recently approved merger of Capital One and Discover Financial Services. Waters also noted the difficulties entrepreneurs face in trying to open de novo banks, referencing the experience of one of the witnesses in particular.
Young experienced how difficult it can be to open a new bank first-hand after she was inspired to do so in Iowa with the mission of addressing discrimination and misconduct she witnessed and confronted during her career in banking and real estate. The state of Iowa has not issued a de novo bank charter since 1997.
She noted the people she worked with at the Iowa Division of Banking had never gone through the process of chartering a de novo bank and were essentially learning along with her. She said the experience exposed the lack of resources readily available to assist small business owners in starting a new bank, presenting a barrier to entry into the financial marketplace, especially for minority depository institutions (MDIs).
“We need greater technical assistance for both banks and regulators to make MDI formations a more viable process,” Young said. “Starting a de novo is very expensive and it’s an arduous process. The guidelines around how capital can be raised and who it can be raised from generally accredited investors poses a barrier to entry. These requirements need to be adjusted.”
Waters suggested some of the obstacles to de novo bank formation may be better addressed by creating a de novo advisory panel or a mentor-protégé program.