Regulators should rethink their approach to de novo bank activity, Federal Reserve Gov. Michelle Bowman said in a Friday speech.
Bowman, who chairs the Fed Board of Governors’ subcommittee on smaller regional and community banks, said the upfront capital requirements – which require organizers to raise capital to meet forward-looking projections of a bank’s future size – could be lowered.
Bowman also noted that de novos face overlapping and redundant evaluations.
“The solution should not be to create roadblocks to bank mergers and acquisitions — which would lead to further migration of bank activities to the shadow banking system,” Bowman said.
“We need a viable pipeline for the creation of new banks in the United States,” she added. “There are troubling indications that we are falling short on this front.”
Pointing to the model used in the United Kingdom, Bowman expressed her view that improved transparency and better preparation for solvent wind-downs of de novos could be as effective as increased regulatory and supervisory requirements.
“De novo banks often experience rapid growth, poor initial profitability, and loan quality issues that take time to emerge as the bank’s portfolio matures,” Bowman said. “These factors can make de novo banks riskier than established banking franchises.”