Headlines to ponder

Bank of Bird-in-Hand is the only new bank to open in the U.S. since 2010, when the Dodd-Frank law was passed

The WSJ story is here, via Binyamin Appelbaum.


Not sure this is all that useful as a data point. Since 2010, how many new U.S. television manufacturers? superstore chains?

Was there legislation intended to decentralize or "de-to-big-to-fail" television manufacturers or superstore chains? It takes a lot of willful ignorance to ask what you did.

Commercial banks aren't like tv manufacturers that need relatively large production to achieve economies of scale. Sure Chase, Bank of America, etc. do achieve some economies of scale, but on average, commercial banks are relatively much smaller than TV manufacturers or superstore chains. You need to compare pre and post 2010 data, holding constant the shock effects from the recession. The recession is long over, liquidity has thawed years ago, and the housing market has healed. I haven't seen the data, but I would bet only 1 bank opening in 5 years nationwide would be considered an anomaly at almost any point before 2010 in US history (post-Great Depression). Hard to blame that all on one law, but I would bet it is a large hurdle for entries.

Could be very useful. New banks were surprisingly common before 2010.


"Since the financial crisis, US banking assets and deposits have continued to consolidate in a handful of large banks. As the charts show, the five largest banks by assets now hold 44.0 percent of US banking assets and 40.1 percent of domestic deposits—up from 23.5 percent and 19.5 percent, respectively, in early 2000. Correspondingly, small banks’ share of domestic deposits has fallen from 40.4 percent to 23.0 percent since early 2000, and their share of US banking assets has declined from 35.8 to 19.5 percent."

That's bad news. Smallish banks tend to do most of the lending to small businesses. Large banks only loan to established players.

It's almost like the Dodd Frank bill (and other pieces of financial regulation) are designed to enrich the largest financial institutions and kill off their competition...

FDIC commercial banks at year end
1986 14,213
2000 8,300
2008 7,083
2013 5,869

FDIC savings banks at year end
1986 3,740
2000 1,592
2008 1,221
2013 937

Most savings banks convert to or merge with a commercial bank when leaving the savings bank list.

When did Obama sign Dodd-Frank into law?? 1986?

Well his healthcare law started saving us money before he got elected, so...

No no, it's costing us money and killing civic life. Slowing of cost growth and much lower rate of uninsured is still a major loss in my book.

"Slowing of cost growth" No. That started before the law, even before Obama took office.

Is that due to large US banks taking assets from small banks or large US banks having an advantage in getting newly created financial assets? Since the Financial Crises there's been a lot of Treasury debt issued and the Fed has purchased relatively complex assets that many small banks would probably not trade much in.

Well, another way to look at it is that all well-run banks are actively trying to become smaller. Every time a bank returns capital to its shareholders its stock jumps. That's because ROE on banking is far below alternative investment opportunities. Equity investors capitalized banks pre-2007, when ROEs were north of 15%. Now banks are much less levered because of stringent capital requirements. ROEs are well into single-digit territory. If major banks simply shut down, returning all their book equity to shareholders, it would be a major value creation proposition. They can't actually do that, because they're only allowed to return small amounts of capital at a time, as determined by Fed stress tests.

It's not so much that large banks are better at acquiring assets, it's that they're worse at getting rid of them.

Lloyd agrees:

“More intense regulatory and technology requirements have raised the barriers to entry higher than at any other time in modern history,” Goldman Sachs CEO Lloyd Blankfein said this week, according to the Wall Street Journal. “This is an expensive business to be in, if you don’t have the market share in scale. Consider the numerous business exits that have been announced by our peers as they reassessed their competitive positioning and relative returns.”

Category error.

This post concerns retail banks.

Not 'bulge bracket' investment banks.

Doesn't matter. Regulation kills anything in sniffing distance.


So the fact that there were no 'Armageddon' banking crises between the 1930's and the 1980's is a complete coincidence?

And since banking deregulation began in the late 1970's we've experienced regular, and worsening bank crises which have required [sharp intake of breath] federal gov't bailouts?

Sorry, pal. Moronic statement.

The world must be so simple in your mind.

The lousy interest rate environment isn't helping things, though, either. With long term rates being very low and short term rates basically at zero, you have to amass a very large amount of deposits to generate any substantial gross margin in order to cover your fixed costs. Added regulatory costs drive that threshold up further, obviously, but I wouldn't be surprised that if you talked to people in the industry, the chatter is more along the lines of "now's a terrible time to start a bank" than "Dodd-Frank made it too difficult to start a bank."

We can't allow new entrants to tap into the free money pipeline.

Well, you know what they say.

A bank in the hand post-Dodd-Frank is worth two in the bush pre-Dodd-Frank.

You can buy a defunct bank real cheap, so why create a new one.

FDIC might be able to help you.

But you would be required to put up real money to capitalize it.

Bigger banks can easily carve out a bit of existing asset to satisify the FDIC so you can buy a small bank.

FDIC sells to all comers. The problem I have with FDIC is that it doesn't break larger failed banks apart and sell them to smaller banks to be regionals, but rather sells the complete bank to a larger player.

"An average of more than 100 new banks a year opened in the three decades before Dodd-Frank"

100 a year to 1 per 5 years seems a relevent change. Whether Dodd-Frank is the cause is a different (legit) issue.

So the lack of new television manufacturers and superstore chains isn't terribly relevent, since nothing like a 100 per year new entrants in those categories ever existed. [What's more, because of branding and supply chains, there may in fact have been an upswing in TV making in the US in the last 5 years, but it wouldn't be apparent to the casual observer.]

The average over three decades is misleading because the number was declining for most of that time.

Bank deregulation resulted in a significant reduction in the number of banks, especially local banks, and that took place mostly in the 80s onward.

Mulp, you're missing the point.

There used to be churn in the market.

A hundred new banks would open, 150 would close.

Today, new bank formation has slowed to a crawl but we're still losing loads of existing banks every year.

Cooper, Ever heard of ATM's? How many local banks are replaced by ATM machines, online banking, etc.

I think this whole post is silly, by the way, given the changes in state and federal banking laws and interstate branch banking.

Local banks existed in the past because of state and federal branch banking barriers to entry, so you remove the barriers, and do you have more or fewer banks? You get fewer banks. You have branch banking, and fewer local banks.

This whole post is devoid of bank regulatory history, changes to state banking laws, and changes to interstate and branch banking laws.

You could also say that we have fewer savings and loans than we had 20 years ago too.

By the way, if you want to read more on the changes in the law and how reducing barriers reduced the number of local banks, here is a 2005 Federal Reserve Board study: http://www.federalreserve.gov/pubs/feds/2005/200520/200520pap.pdf


I'm taking Bryan Willman's data and analyzing it.

We went from around a hundred new banks founded every year and then suddenly the number of new banks opening up screeched to a halt.

We should see lots of churn in the banking industry. New banks opening up and old banks closing/merging.

Now we're only seeing bank closures/mergers but no few entrants.

Banking in this country is becoming a heavily consolidated industry which is bad for economic growth. You need smaller regional banks to lend to local communities and help fund small businesses. There is plenty of evidence supporting this:


Anecdotally, you can talk to small business owners and they say they are still frozen out of the credit market while huge corporations and governments are able to borrow at near zero interest rates.

You mean after the regulations supposed to prevent another S&L crisis took effect?

According to the FDIC bank directory, the claim is false:

59074 Bank of Bird-in-Hand Bird In Hand PA NM November 29, 2013 72,592 Yes
59070 HarborOne Bank Brockton MA SB July 1, 2013 2,043,591 Yes
59060 AloStar Bank of Commerce Birmingham AL NM April 15, 2011 902,851 Yes
59028 CertusBank, National Association Easley SC N January 21, 2011 1,483,012 Yes

According to the FDIC data, the number of banks has been in rather steep decline since the mid 80s after steadily increasing in number before that time.

Did Obama sign Dodd-Frank into law in the 80s??

Or was bank deregulation the cause of the elimination of the majority of small local banks?

HarborOne is a MA chain of banks. A new branch is not a a new bank.

Is there information on how many new Credit Unions have formed since 2010. I think that's the new thing in banking. I could swear I've seen at least a half dozen new credit unions in Central MA.

It was created as a bank in 2013 out of an existing credit union that was unable to do business outside the local community and thus was limited to pretty much lending credit union member money to credit union members. Now the management will have more freedom to lend other people's money to anyone, including those who might no care about whether depositors get their money back.

The Bernank does not tolerate dissent.


oops, wrong thread. sorry.

The recent dearth of new FDIC-insured banks is not a function of Dodd-Frank (although D-F sucks). Here correlation is not causation.

The finacial crisis and the fact that de novo banks suffered much larger (compared to established community banks) proportionate losses/insolvencies is the cause.

What deregulation? Before D-F, American banking was a low-margin and over-regulated business. That explains the need for banks to be over-leveraged (say 45 to 6% equity to assets) and to chase yield (higher risk, higher yield), spread of loan revenues (fees and interest) over interest expenses. And, the risks are numerous, niot limited to credit default risk.

Smaller banks have been failing since the crisis began. Then, when a small bank fails, the FDIC sells the assets to a larger bank. On the other hand, humongous banks were not allowed to fail. This is the system we had in place in 08, and that hasn't changed. All that we've attempted to do is limit taxpayer losses if big banks fail, partly by trying to limit how much they can lose which we're on the hook for and also making them somewhat less likely they'll fail.

Why on earth would you start a small bank? It's just that prior to 08, some people didn't understand how the system really works.Ihttp://www.facethefactsusa.org/facts/most-banks-failed-during-recession-were-community-banks
Smaller banks have been failing since the crisis began. Then, when a small bank fails, the FDIC sells the assets to a larger bank. On the other hand, humongous banks were not allowed to fail. This is the system we had in place in 08, and that hasn't changed. All that we've attempted to do is limit taxpayer losses if big banks fail, partly by trying to limit how much they can lose which we"re on the hook for and somewhat less likely they'll fail.
Why on earth would you start a small bank? It's just that prior to 08, some people didn't understand how the system really works.It's much harder not to know how things really work now. It's much harder not to know how things really work now.

You're not alone Bernanke, Geithner, Yellen, et al don't understand how the system works either.

I do not what happened there. My apologies

There does seem to be a disconnect here. When bank deregulation became big, lots of small banks were gobbled up by large ones leaving fewer small banks in the market. That was supposedly due to economies of scale...which does make some sense.

Now Dodd-Frank is also keeping little banks from starting so all you get is big ones? So which is it, does regulation atrificially create a banking market dominated by lots of little guppies or one dominated by a few whales?

There are no economies of scale in banking above several hundred million in assets.

Rather, 'diseconomies of scope' begin-these are most obvious in the 'universal banks', e.g. JPM, C, Deutsche, etc

What about of Bank of Two-Bush-in-the-House ?

A low interest rate environment coupled with increased costs associated with D-F make owning a small bank a bad investment at this time. I imagine that will change as the interest rate environment improves and the regulatory pendulum begins to swing back.

On the other hand, most commenters seem to assume that more banks is the desired outcome. I would argue that the US would be better off with fewer institutions as an overly granular industry leads to instability through race to the bottom competition. That is exactly what happened in CRE construction among community banks in the lead up to the recession and was a primary contributor to bank failures, particularly in the West and Southeast. Additional consolidation in the industry wouldn't be a bad thing as it relates to institution less than $10B or so in assets.

Which old school industries which require substantial capital had a lot of new entrants during this same period?

How many banks opened between 2008 and 2010? If none, then this is hard to untangle.

How many banks failed between 2008 and 2010? Is that hard to untangle, too?

The statement about banks was new openings, not net openings. If no banks opened between 2008-1010 before Dodd-Frank, then maybe there was a shift that made firms not want to form new banks that was independent of Dodd-Frank.

The shift was that they needed capital to open, that there were tighter self-dealing standards, and there was the Great Recession.

Moreover, branch banking (if you read the Federal Reserve article) and reduced barriers to entry (branch banking laws, etc.) took away the benefit of local monopoly, which reduced the attractiveness of entry efforts. Please do some research on your own, study and read the Federal Reserve article, and get informed, rather than creating some pre and post DF causation theory.

The Antitrust Division used to challenge bank mergers, on the theory that state regulatory barriers created protected places, but the laws have changed, and banking has become much more competitive...making local exit, not entry, more attractive.

What the WSJ article is trying to spin is a story, promoted by the Community Banking lobbyist who control Senator Shelby, that they do not need to be regulated, but do need to be bailed out when they fail. The best way to steal from a bank is to own one.

If you want to see the history of the Shelby spin and the lobbying efforts, look here: http://www.politico.com/story/2015/03/richard-shelbys-big-challenge-116252.html

Once again, you have been fooled by the banking lobby.

Who needs banks? Good riddance to them. As a member of the 1%, my family self-finances all their investments. If there's a piece of property we want, we buy it with cash. We have several million in cash, and it earns almost nothing, so this makes sense rather than take out a loan. And every few years we accumulate another million in cash that our debt-free rentals generate. As I've said before, the biggest headache is accounting for all the money we have; with some banks we've run out of combinations of account holders for FDIC insurance purposes. That said, it's not all roses, as we don't find much incredible value in DC real estate anymore, not that there's no value, but there's no bargains either.

As for Bird-in-Hand bank being the only new bank, perhaps there's under-counting? After all, a bird in the hand is worth TWO in the bush, yuk x 2.

Indeed. Their major role now isn't loaning or storing money, although that's still part of it, it's providing convenience, allowing purchases with plastic cards in person, by telephone or via the internet. It's hard to imagine the difficulties of the Roaring Twenties, almost a century ago now, when one had to slap a metal quarter on the bar of the speak-easy to get a glass of bathtub gin or plunk a silver dollar on the counter for most of a week's groceries at the general store. Actually the era of Babe Ruth and Lucky Lindy is as remote now as the Roman Empire of Septimius Severus, whose birthday is tomorrow.

@Ray - I am surprised to read that you are a member of the 1%. Who would have guessed? Perhaps you can use that to attract a fiance 1/2 your age.

@a surprised reader-- I've been shouting it from the rooftops for a while now. I found out the minimum, as of 2008 (and it's probably lower now) for being in the 1% is having a Net Worth of $8 million or more. My family has much more than that (I'm a Trust Baby, but I have made money on my own too).

Could anyone tell me in what percentile I can find Ray Lopez?

I live near there. The age old joke is "to get to Paradise, you have to go through Bird-in-Hand, Blue Ball and Intercourse." All real towns.

I got nuthin about new banks either.

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