Are Bank De Novo Charter Standards Excessively High?

Last week something unusual happened in the banking community. It was not unusual historically, but it is something that has not happened in more than three years. The “unusual event” was the approval of a de novo bank charter! Bank of Bird-in-Hand near Lancaster, Pa., endured a grueling process to receive a state bank charter and approval from the Federal Deposit Insurance Corp. Lancaster is surrounded by Amish settlements, so this bank will be serving a sizable Amish population.

Brent Peters, president and chief executive officer of Bank of Bird-in-Hand, is an industry veteran, having previously formed a de novo bank in 1991. According to Peters, the approval process this time was much more exacting than it was in 1991. The bank that he formed in 1991 provided about 3 inches of documentation to win approval, while this year’s documentation was about 18 inches thick. Regulators were looking for a seven-year plan vs. the historical three-year plan, with a leverage ratio of 8 percent out seven years. Bank of Bird-in-Hand organizers raised $17 million in capital, meaning that the bank should be at a level of approximately $200 million in seven years.

Bank of Bird-in-Hand is formed primarily by Amish businessmen, but expects that its clientele will be about half Amish and half non-Amish. Likewise its board will consist of both Amish and non-Amish members. The board has to meet very high standards compared to previous charters. Regulators are requiring that the board include members with previous bank board experience; additionally, members are to have specific experience on loan, audit, compliance and governance committees. This standard is much higher than previously required of de novo bank boards.

Though it is good news that a bank has finally been chartered after three years — the longest period without a new charter since the Civil War — has the bar been set too high? It is a fine line between adequately screening for charters and overkill to the point of discouraging charters. The extreme standards that the FDIC has set create a precedent that future charter applications will have to meet. Who knows what the economic environment will be three, five or 10 years from now? Perhaps, at some time in the future, the creation of bank charters will be viewed as an activity to be encouraged. Have we created a precedent that, in the future, will be counter to what is needed?

I believe that the bar should be set higher than it was previously, but I fear that the current precedent set by the formation of Bank of Bird-in-Hand is excessive. There are many small communities across the United States that at some point may want to create banks to facilitate capital for the growth of those communities, but they lack the experienced local talent to populate the board of directors. America was founded on an entrepreneurial spirit that this level of governmental oversight may be thwarting.

While the horse is out of the barn on Bank of Bird-in-Hand, let’s hope that cooler heads will prevail in future applications, and that this most recent approval does not set a precedent years into the future. So many communities are losing their local banks and, at this level of scrutiny, it is possible that de novo banks will never be chartered in those communities. Lack of local bank opportunity, over time, can destroy a community. Rural America has been in decline for many years, for many reasons. Let’s not contribute to further decline by setting up needless bureaucratic barriers.

Good luck and congratulations to Mr. Peters and to Bank of Bird-in-Hand. May you meet with great success!

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