Last week, I had the honor and pleasure of testifying at the first hearing of the newly constituted Financial Institutions and Monetary Policy subcommittee of the House Financial Services Committee. I enjoyed my dialogue with new Chairman Andy Barr (R-KY) and Ranking Member Bill Foster (D-IL), as well as new members of the committee Byron Donalds (R-FL), Monica De La Cruz (R-TX), and Andy Ogles (R-TN).
The hearing was entitled “Revamping and Revitalizing Banking in the 21st Century,” and the centerpiece was the reintroduction of a bill sponsored by Barr to lift regulatory barriers to new – or de novo – banks as a means of increasing financial inclusion in rural and underserved areas. Other modestly deregulatory bills from both parties were also introduced for consideration in the hearing.
The mere fact that lawmakers would propose deregulation in an effort to boost the underbanked provoked a snarky, one-sided article from Politico. Headlined “Anti-woke GOP attacks inequality with deregulation,” the article quoted two critics of the bills introduced and only an unnamed “Wall Street advocate” ostensibly in support.
The article quoted the committee’s ranking Democrat, Rep. Maxine Waters (D-CA), declaring, “We’re not going to let them roll back regulations that are protecting the citizens of this country.” It cited the Democrats’ witness, Renita Marcellin of the progressive Americans for Financial Reform, as saying that many of the bills “represent regression from the path to creating a more equitable banking system that works for working-class communities.”
By contrast, neither I nor any of the proponents of the bills among witnesses or House members were quoted at all in the piece. And other than mentioning that one unspecified bill was bipartisan, Politico obscured that members of both parties have expressed concern about regulatory barriers to small banks and credit unions and the extraordinary red tape that aspiring de novo banks have faced since the Financial Crisis of 2008 and the enactment of the Dodd-Frank financial overhaul in 2010.
As I said in my testimony, only a handful of new banks have been approved by the FDIC since financial crisis, in contrast to the previous decades of the FDIC’s history, even during crisis years.
“In some of the years following the financial crisis, no new banks were approved. By contrast, in the decades before the crisis, the FDIC approved more than 100 new banks – and sometimes more than 200 – in most years going back to 1961. This was the case even in the late 1980s and early 1990s, at the height of the savings-and-loan crisis.”
I pointed out that while certainly “there was more than one factor in the stunning drop in the number of new banks per year” — including “costly provisions of the 2010 Dodd-Frank financial overhaul, which imposed a crushing burden on many existing community banks and credit unions, likely discouraged formation of new banks, and still does so today” – a constricting new FDIC policy regarding new banks was directly responsible as well. That policy required applicants for de novo banks to put up today 8 percent of the assets they projected to have in seven years. As I explained:
“For instance, if those forming a bank thought it might have $500 million in assets in seven years, they would have to come up with $40 million in cash before they could open for business. That requirement, noted a letter from the Independent Community Bankers of America and the American Association of Bank Directors, “effectively prevents the formation of de novo banks at all, or only in severely limited circumstances,” as such a large amount of upfront capital “is beyond the reach of many in communities where it is virtually impossible to attract capital from outside sources.”
I pointed out that while the FDIC has eased up slightly in recent years on rules for de novo applications, “even the ‘high’ years after the financial crisis – such as the 15 de novo approvals in 2018 – pale in comparison to the decades before, when the FDIC approved more than 100 new banks in a typical year.” That’s why I argued that Barr’s reintroduced “Promoting Access to Capital in Underbanked Communities Act,” as well as Rep. Jake Auchincloss’s (D-MA) new “Promoting New and Diverse Depository Institutions Act” are so needed. As I explained:
“The chairman’s bill would move the FDIC toward a system of phased-in capital that would allow de novo banks to build capital as they gain customers, rather than having to meet a nearly impossible burden for massive amounts of capital up-front. The bill would also give the FDIC a time limit to approve an application for a new bank or specify where the application falls short and what applicants can do to meet the FDIC’s standards of approval.”
Congressman Auchincloss’s bill would require both the FDIC and bank and credit union regulatory agencies to jointly conduct a study and create a strategic plan to address challenges by applicants to form de novo banks and credit unions.
The real story that Politico missed is that support for removing regulatory barriers to banks and credit unions better serving the underbanked is bipartisan. Last year, Barr’s bill was cosponsored by now-retired Rep. Ed Perlmutter (D-MA), who chaired the predecessor of Barr’s subcommittee. Now Democrat Auchincloss is sponsoring legislation to focus financial regulatory agencies on removing barriers to new banks and credit unions. And last year, the Democrat-controlled House passed a modest but solid deregulatory bill – the Expanding Financial Access for Underserved Communities Act — to lift restrictions on credit unions including some rural and underserved areas in their “fields of membership.”
As I have written previously, “in CEI’s view, deregulation of banks, credit unions, or any financial services business is always superior in advancing financial inclusion to more government programs such as public banking and postal banking.” Hopefully, both houses of Congress will give these bills a fair hearing.