Surprisingly, the loss of more than 800 independent banks wasn’t due to an unusually large number of bank exits during the financial crisis. Instead, it was due to a fall in bank entries, from around 100 new banks per year prior to the Great Recession to just three per year on average since 2010 (only four new banks appeared from 2011 to 2013).
1. Does too-big-to-fail play a role in this, by making it hard for smaller banks to compete? Are some conservative (e.g., Peter Wallison) complaints about Dodd-Frank reinforcing TBTF possibly valid?
2. Does the causality run the other way? That is, have business formation rates been low, and this reduces the demand for services of small banks?
These are genuine questions, not rhetorical ones–my inclination is to believe Thoma’s story. I do not know if it is possible to find data that would answer these questions, but I think that searching for answers could be interesting.
100 new banks per year? I wish I would have had a chance to guess that number before I knew it because I have no idea what I would have guessed. But I don’t think it would have been anywhere near that many.
1) Small banks are bearing disproportionate and increased costs of compliance (because the increased burden is an irreducible fixed cost amortized over a small asset/equity base). $1-3mm in annual compliance cost makes a big difference (for prospective ROE) to a de novo community bank with, say, 25mm in equity. This is an incentive for them to sell-out and a disincentive to form de novo banks.
2) The deposit gathering function has little economic value in a ZIRP environment. People don’t like to pay interest on their deposits, which makes maintaining a deposit cost spread vs. money markets quite difficult for banks. Why run branches and pay FDIC insurance fees if you can raise wholesale funding for next to nothing?
3) Larger banks are trading much cheaper on P/B than pre-crisis so highly priced acquisitions of community banks are dilutive and per #2 they are not inclined to pay big deposit premiums. The pot of gold at the end of the rainbow for a successful de novo bank is now quite a bit smaller.
4) With the rise of e-banking and ATMs as well as the aftermath of the banking boom in the late 90s and early oughts the US is “over-banked” such that new branch opportunities/locations are scarce.
5) Slack loan demand is also a factor.
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Those are all good reasons but how many new banks would there be today if there had been no TARP? There hasn’t been a normal, non-TARP housing recession since the S&L crisis (I just made that up but it’s been a long time). Citigroup and Bank of America each has a book value of $200B largely because of TARP. Their capitalizations are ironically LARGER post-crisis than before. Take out that $400B and I imagine there would be more new banks. TARP both preserved the status quo and prevented a new elite from rising.
My point is, no destruction, no creation.
Other economic sectors have displayed the same pattern of fewer new entrants.
Little banks startup when bigger banks consolidate. Consolidation causes managers with books of business to look for better opportunities. A few of these disaffected people may get together to start a new bank.
However, consolidation speeds up when buyer stock prices are high. And this is only when lending opportunities are good. And this is only when GDP growth is good. Absent that, one should expect fewer startups.