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June 27, 2024
De Novo Banks: Policy Issues for the 118th Congress
While the size of the banking system has grown in terms of
assets, the number of banks has steadily fallen over the past
four decades. For example, in the 1980s, there were more
than 18,000 banks. Today, there are fewer than 5,000
commercial banks. Consolidation has been facilitated by
mergers and acquisitions, bank failures, and, more recently,
a downturn in the formation of new banks. New banks are
called de novo banks (from the beginning). Generally, de
novo banks are smaller institutions, and their formation is a
source of competition in the banking system. In the past
two decades, the rate of de novo formation has bottomed
out, and Congress and regulators have long debated
methods to revitalize interest in new bank formation while
balancing safety and soundness concerns over the health of
the newest, least established banks.
More than 1,000 new banks were formed between 2000 and
2008. However, after the 2007-2009 financial crisis, the
annual rate of new bank formation stalled and has barely
ticked up in recent years. Further, the failure rate of de novo
banks is relatively high: Research from the Federal Reserve
suggests that they failed at more than double the rate of
more established institutions in the years leading up to the
2007-2009 financial crisis and are generally more prone to
failure than are established banks.
Figure I. De Novo Bank Formation
Quarterly Data from 2000 to 2024
Source: FDIC analysis done by BankingStrategist.com. Data and
figure can be found at https://www.bankingstrategist.com/de-novo-
bank-chartering-trends.
While actual formation has generally slowed, there has
been a recent resurgence in applications for de novo bank
charters in recent years. The following section discusses the
criteria by which a regulator considers an application for a
new bank charter.
FORTmi a New Bank
Organizers of a new bank must apply for a bank charter at
either a state regulator (for a state charter) or the Office of
the Comptroller of the Currency (OCC) (for a national
charter). (Credit unions similarly have state and federal
charters, with federal charters issued by the National Credit
Union Administration [NCUA].) Simultaneously, the
proposed new bank would need to apply for deposit
insurance approval from the Federal Deposit Insurance
Corporation (FDIC) or share insurance from the NCUA.
Regulators approve or deny applications on the basis of a
few key factors, including the business plan, the
qualifications of the proposed board and senior
management, and the adequacy of the proposed capital
levels.
Supervisory Concerns for New Banks
Supervisors are cognizant of the higher likelihood of de
novos failing and set capital levels on an individual basis,
reflecting the risks of a proposed bank's business model.
For example, the OCC may determine that higher amounts
of capital than those the organizers proposed are warranted
based on local market conditions or the proposed business
plan. Similarly, the Fed's supervisory guidance states that
a de novo should maintain capital ratios commensurate
with its risk profile and, generally, well in excess of
regulatory minimums.
Supervisors are also concerned with how and whether a
proposed bank can meet the community's credit needs,
particularly as it applies to the Community Reinvestment
Act, and how the bank plans to comply with various
banking laws, including those that govern fair lending, anti-
money laundering, sanctions, and privacy policy.
Regulators are also concerned about the general decline in
the number of banks in the financial system. For example,
in April 2023, Fed Governor Michelle Bowman gave a
speech on the need for smaller institutions and stated that
preserving and enhancing the number of banks should be a
regulatory and legislative imperative, including by
encouraging new bank formation.
Regulatory Interest in Promoting De NOVOS
While bank regulators closely regulate de novos in an effort
to appropriately guard against the risks they present, they
also recognize the benefits these banks can generate and
have taken steps to encourage their formation. Given that
deposit insurance is a critical threshold for a de novo to
pass, the FDIC states that it is committed to working with
groups interested in organizing a de novo institution. The
FDIC has provided resources and guidance for new banks,
including a statement of policy on applications for deposit
insurance and a handbook for de novo charters. Meanwhile,
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