Please ensure Javascript is enabled for purposes of website accessibility

Why the FDIC Wants More Banks

By Motley Fool Staff – Nov 22, 2016 at 4:41PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Since the passage of Dodd-Frank, upstart banks have been few and far between. The FDIC wants to change that.

In 1984, there were 14,400 commercial banks in the United States. In 2016, there were only 5,210. The decline in banks steepened following the financial crisis, as regulators made it more difficult to start new FDIC-insured institutions. In April, the FDIC decided to change that. In October, it showed that it was serious, making new efforts to encourage the creation of new community banks.

In this video segment from Industry Focus: Financials, The Motley Fool's Gaby Lapera and contributor Jordan Wathen discuss why regulators want more banks in the United States, and how banks like New York Community Bank (NYCB 6.74%) exemplify the kind of future regulators would prefer to avoid.

A full transcript follows the video.

This podcast was recorded on Nov. 7, 2016.

Gaby Lapera: The FDIC says they want new banks.

Jordan Wathen: Yeah, it's almost hard to believe. The FDIC, in April, they came out and said, "We're going to make it easier to start a new bank by reducing the regulatory scrutiny that you get on a new bank from seven years to three years." Basically, when a new bank starts, the FDIC scrutinizes them a little heavier than they otherwise would for seven years. Now, that's down to three years. So, they're making it a little bit easier. Really, it's important because there haven't been many new banks in the United States. The only one I can find is called Bank of Bird-In-Hand, which is based out in Amish country, Pennsylvania.

Lapera: That doesn't sound real.

Wathen: That's the only bank since 2010 to start up.

Lapera: Oh my gosh. First of all, that bank doesn't sound real. I don't think I would put money in there. That is not an official recommendation, mind you, because I'm just a podcast host. But I don't know, a bird in the hand is better than two in the bush, I'm not sure how I feel about that. [laughs] Second of all, the FDIC wanting more banks, I think listeners would probably ask themselves why. Besides creating more competition, one of the things that happened post-financial crisis is that a lot of really big banks left small communities, so a lot of smaller communities have been underserved by the bigger banks. There are a couple of smaller regional banks that have taken advantage of this because, one, the bigger banks left small communities, they moved in and were like, "We're here! We'll take all your deposits and make you loans!" But in general, smaller communities are underserved by larger banks.

Wathen: Right. This is a multidecade trend. Before the show, I went and looked it up. If you go back to the early 1980s, there were 14,000 banks in the United States. As if the second quarter of 2016, there were only 5,200 commercial banks -- roughly one-third as many. And then, obviously, of course, the number of banks doesn't really matter if you live in a place where the larger banks aren't serving. What happens in a lot of cases -- and I'm just going to use this as an example -- New York Community Bank is obviously based out of New York, but they actually have branches in Florida, Arizona, and Ohio. They take deposits in those areas, but they don't make many loans in those areas. They're mostly making loans in New York City -- I think it's greater than 90% of their loans are in New York City. So what happens is, they're taking deposits in the cities, but they're not making loans to the residents of those cities. And obviously, the FDIC and bank regulators as a whole would like to see more community banks that are focused on these smaller areas.

Lapera: Yeah. We'll see how this shakes out. Maybe we'll start reporting to you about new banks soon.

Gaby Lapera has no position in any stocks mentioned. Jordan Wathen has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.