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OVERSIGHT OF THE FDIC APPLICATION PROCESS 

HEARING 

BEFORE THE

COMMITTEE ON OVERSIGHT 

AND GOVERNMENT REFORM 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED FOURTEENTH CONGRESS 

SECOND SESSION 

JULY 13, 2016 

Serial No. 114–139 

Printed for the use of the Committee on Oversight and Government Reform 

( 

Available via the World Wide Web: http://www.fdsys.gov 

http://www.house.gov/reform 


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COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM 

JASON CHAFFETZ, Utah, Chairman 

JOHN L. MICA, Florida 

MICHAEL R. TURNER, Ohio 

JOHN J. DUNCAN, JR., Tennessee 

JIM JORDAN, Ohio 

TIM WALBERG, Michigan 

JUSTIN AMASH, Michigan 

PAUL A. GOSAR, Arizona 

SCOTT DESJARLAIS, Tennessee 

TREY GOWDY, South Carolina 

BLAKE FARENTHOLD, Texas 

CYNTHIA M. LUMMIS, Wyoming 

THOMAS MASSIE, Kentucky 

MARK MEADOWS, North Carolina 

RON DESANTIS, Florida 

MICK MULVANEY, South Carolina 

KEN BUCK, Colorado 

MARK WALKER, North Carolina 

ROD BLUM, Iowa 

JODY B. HICE, Georgia 

STEVE RUSSELL, Oklahoma 

EARL L. ‘‘BUDDY’’ CARTER, Georgia 

GLENN GROTHMAN, Wisconsin 

WILL HURD, Texas 

GARY J. PALMER, Alabama 

ELIJAH E. CUMMINGS, Maryland, Ranking 

Minority Member 

CAROLYN B. MALONEY, New York 

ELEANOR HOLMES NORTON, District of 

Columbia 

WM. LACY CLAY, Missouri 

STEPHEN F. LYNCH, Massachusetts 

JIM COOPER, Tennessee 

GERALD E. CONNOLLY, Virginia 

MATT CARTWRIGHT, Pennsylvania 

TAMMY DUCKWORTH, Illinois 

ROBIN L. KELLY, Illinois 

BRENDA L. LAWRENCE, Michigan 

TED LIEU, California 

BONNIE WATSON COLEMAN, New Jersey 

STACEY E. PLASKETT, Virgin Islands 

MARK DESAULNIER, California 

BRENDAN F. BOYLE, Pennsylvania 

PETER WELCH, Vermont 

MICHELLE LUJAN GRISHAM, New Mexico 

JENNIFER HEMINGWAY, Staff Director 

ANDREW DOCKHAM, General Counsel 

SEAN HAYES, Health Care, Benefits and Administrative Rules Subcommittee Staff Director 

COREY COOKE, Counsel 

SHARON CASEY, Deputy Chief Clerk 

DAVID RAPALLO, Minority Staff Director 


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C O N T E N T S 

Page 

Hearing held on July 13, 2016 ............................................................................... 1 

WITNESSES 

The Hon. Martin J. Gruenberg, Chairman, U.S. Federal Deposit Insurance 

Corporation 

Oral Statement ................................................................................................. 4 

Written Statement ............................................................................................ 7 

Mr. Matthew Browning, Former Board Member, National Association of Industrial Bankers, Testifying on Behalf of the National Association 

Oral Statement ................................................................................................. 29 

Written Statement ............................................................................................ 31 

Dr. Simon Johnson, Professor of Global Economics and Management, MIT 

Sloan School of Management 

Oral Statement ................................................................................................. 47 

Written Statement ............................................................................................ 49 

Mr. Guy Williams, President and Chief Executive Officer, Gulf Coast Bank 

and Trust Company, Testifying on Behalf of the American Bankers Association 

Oral Statement ................................................................................................. 54 

Written Statement ............................................................................................ 56 

APPENDIX 

2016–08–02 Gruenberg-FDIC- Hearing Follow-up Responses ............................. 116 


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OVERSIGHT OF THE FDIC APPLICATION 

PROCESS 

Wednesday, July 13, 2016 

HOUSE OF REPRESENTATIVES, COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM, Washington, D.C. 

The committee met, pursuant to call, at 10:01 a.m., in Room 

2154, Rayburn House Office Building, Hon. Jason Chaffetz [chairman of the committee] presiding. 

Present: Representatives Chaffetz, Mica, Duncan, Jordan, 

Walberg, Amash, DesJarlais, Farenthold, Massie, Meadows, 

Mulvaney, Buck, Walker, Blum, Hice, Carter, Grothman, Hurd, 

Palmer, Cummings, Maloney, Clay, Lynch, Kelly, Lawrence, Watson Coleman, Plaskett, DeSaulnier, Welch, and Lujan Grisham. 

Chairman CHAFFETZ. The Committee on Oversight and Government Reform will come to order. And without objection, the chair 

is authorized to declare a recess at any time. 

I appreciate you being here. This is an important topic, the role 

of banking, and what it plays in the American economy cannot be 

understated. 

The FDIC, the Federal Deposit Insurance Corporation, was created by Congress to help maintain stability in the financial sector. 

Several things are currently happening with the FDIC that raise 

some concerns. Importantly, since 2013, the FDIC has not had a 

Senate-confirmed inspector general. I do think that this needs to 

be put in place sooner than later. That is far, far too long. 

In May, the FDIC reported it suffered five—five—major data 

breaches since October of 2015, all involving taxpayer personal 

identifying information. In the banking sector, this is particularly 

of concern, to have it happen five times that we know about. 

But today’s hearing will highlight an area truly undermining our 

country’s financial future. Our local financial institutions continue 

to drown in a sea of red tape. 

There has to be regulation, don’t get me wrong. There need to 

be rules of the road. But they need to be fairly administered and 

they need to be predictable so that new entrants can also come into 

the marketplace. 

Since passage of Dodd-Frank and the implementation of additional policies by the FDIC, we haven’t seen our financial sector 

getting stronger. What we have seen is a drastic decrease in the 

formation of new banks and an increase in bank mergers and acquisitions. 

I think, my own personal opinion is the systemic risk is greater, 

not less. 


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As of March 2016, the United States had 6,122 banks. This is the 

lowest number of banks since the Federal regulators began keeping 

track in 1934. The lowest number. It’s a huge drop from 25 years 

ago when the United States had over 14,000. Some will claim that 

that was too many. They didn’t have the financial strength and the 

proper deposits in order to cover their potential losses. 

But this decrease in banks does matter. Competition fosters innovation, consumer-responsive products, and provides more options 

for individuals who need access to credits. We’ve had a growing 

population in the United States of America, and yet, less institutions in proportion to that population than in the past. 

The FDIC is responsible for issuing deposit insurance to new industrial loan companies, or ILCs, or de novo banks outside of the 

Federal Reserve System. Proof of deposit insurance is a standard 

requirement for new community banks to receive their State banking charter. 

Put in simpler terms, just like the State requires motorists to 

have car insurance to register a car, you can’t run a bank without 

proof of deposit insurance. But unlike car insurance companies who 

will compete for your business, the FDIC doesn’t appear to want 

consumers to have any new banks. 

The decline in applications for new banks is unsettling. Between 

2011 and 2015, the FDIC processed an average of three applications per year—per year. This is a drastic decrease from an average of 219 applications per year between 2004 and 2008. 

Using the same car analogy, if States suddenly had no one registering their cars because citizens were unable to obtain car insurance, we would all wonder what was going on with those insurance 

companies. 

Since 2011, the FDIC has only approved three—three, since 

2011—de novo bank applications, and no, not one, ILC application. 

Not one of them has been approved. This stands in stark contrast 

to even 2008 when the FDIC approved 48 de novo banks. 

Further, the banks the FDIC has approved seem only to meet 

very small niche markets rather than broad community needs. For 

example, one of the three approved banks—this is a good thing, 

don’t get me wrong, this is a good thing—was located in the heart 

of the Pennsylvania Amish country, meant to serve only that market instead of creating opportunities for competition in more diverse areas. 

Today’s hearing is an attempt to understand why this radical decline in new bank formation. I would like to understand if the 

FDIC is truly open to receiving and accepting applications or if red 

tape is resulting in interested parties just throwing up their hands 

and walking away. 

I’m sure we can all agree that we want secure and stable banks. 

Don’t get me wrong, we have to have the safety and security of stable banks. But we must be sure that the regulator who’s charged 

with allowing new banks to enter the market is not circumventing 

the process. This results in weakening the financial sector and limiting options to households in underserved markets across the 

United States of America. 

We thank the witnesses for being here today. Already, the information that was provided in the written testimonies are insightful 


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and very helpful, but we do have some serious questions and look 

forward to the hearing. 

I would like to now recognize the ranking member, the gentleman from Maryland, Mr. Cummings, for his opening statement. 

Mr. CUMMINGS. Thank you very much, Mr. Chairman. 

Neighborhood banks are the lifeblood of local communities. They 

can be a key source of capital for small businesses. They can help 

working families save for the future. 

No one knows this better than my constituents in west Baltimore, where banks are outnumbered by alternative financial services that sometimes offer the most basic products on abusive and 

extremely predatory terms. The lack of basic banking services is 

one of the key challenges for families trying to climb out of poverty 

in this Nation. 

A discussion about what more can be done to ensure that all 

communities are adequately served by community banks is, indeed, 

long overdue. Some suggest that communities lack banks because 

the FDIC is inappropriately blocking the approval of new community banks. But this claim does not appear to be supported by the 

facts. 

The Federal Reserve has reported that a key factor explaining a 

lack of new bank applications is our current low interest financial 

environment. A bank’s income, particularly a new bank without an 

established lending portfolio, is closely tied to the Federal funds 

rate, which has been close to zero since the Great Recession. That 

is why the FDIC received only 10 applications for deposit insurance 

between 2011 and 2015 compared with more than 1,000 applications between 2004 and 2008, when the financial crisis began. 

Our Nation relies on the FDIC to protect the Deposit Insurance 

Fund, which repays depositors if an insured bank fails. The FDIC 

approves only those applications that meet strict standards and 

that are built around realistic business plans that are likely to ensure profitability. That’s because if the fund fails, taxpayers will be 

on the hook to pay for the bank’s mistakes. 

Many other regulators failed in their duties prior to the Great 

Recession, but the FDIC’s stewardship of the fund before the financial crisis meant that the FDIC did not have to draw on taxpayer 

funds to repay the customers of failed banks. 

These protective measures are not preventing community banks 

from succeeding. In fact, the net income earned by community 

banks in the first quarter of 2016 grew by 7 percent over their income in the first quarter of 2015, according to the FDIC’s most recent quarterly banking profile. 

By comparison, the net income of noncommunity banks actually 

fell by nearly 3 percent in the first quarter of 2016 compared to the 

first quarter of 2015. 

Yet, the FDIC has reported that over the past 12 months, and 

I quote, ‘‘Almost 62 percent of community banks improved their net 

income,’’ end of quote. As a result, the percentage of unprofitable 

community banks fell to its lowest level since 1998. 

As our Nation has seen firsthand, without rigorous standards 

banks could take outsized risks, assuming that the insurance fund 

would clean up their losses. Sadly, I am concerned that today’s 

hearing is only the latest in a series of efforts by my Republican 


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colleagues to roll back essential safeguards and put the financial 

system back at risk. 

In 2014, the Republican Congress repealed a portion of the DoddFrank Act relating to swaps pushouts, allowing large banks to 

gamble with FDIC-insured funds. Last year, Republicans introduced legislation to repeal the Volcker rule, which stops banks that 

are too big to fail from trading for their own profit. 

And then this year, the Republican chairman of the Financial 

Services Committee has proposed a bill to prohibit the FDIC from 

ensuring that large banks do not cause another financial crisis if 

they fail. Rather, in trying to put the taxpayer back on the hook 

for risky practices, Congress should be trying to understand why, 

given that the community banks appear to be thriving, critical and 

basic banking services are not being provided in some communities, 

like the one I live in. 

I look forward to the testimony, and I thank our witnesses for 

being here today. 

With that, Mr. Chairman, I yield back. 

Chairman CHAFFETZ. I want to thank the gentleman. 

We’ll hold the record open for 5 legislative days for any members 

who would like to submit a written statement. 

We’ll now recognize our panel of witnesses. 

We are pleased to welcome the Honorable Martin J. Gruenberg, 

chairman of the United States Federal Deposit Insurance Corporation. 

Mr. Matthew Browning, former board member of the National 

Association of Industrial Bankers. Mr. Browning is testifying on behalf of the National Association of Industrial Bankers and the Utah 

Bankers Association. 

Dr. Simon Johnson is professor of global economics and management at the MIT Sloan School of Management. 

And Mr. Guy Williams is the president and chief executive officer 

of the Gulf Coast Bank and Trust Company. Mr. Williams will be 

testifying on behalf of the American Bankers Association. 

We welcome you all. We thank you for being here. 

Pursuant to committee rules, all members are to be sworn before 

they testify. So if you’ll please rise and raise your right hand. 

Do you solemnly swear or affirm that the testimony you are 

about to give will be the truth, the whole truth, and nothing but 

the truth? 

Thank you. 

Let the record reflect that all witnesses answered in the affirmative. 

We would appreciate it if you limit your oral comments to 5 minutes. We’ll give you a little latitude, but try to keep it to 5 minutes. 

Your entire written statement will be entered into the record. 

Chairman, you are now recognized for 5 minutes. 

WITNESS STATEMENTS 

STATEMENT OF MARTIN J. GRUENBERG 

Mr. GRUENBERG. Thank you. Chairman Chaffetz, Ranking Member Cummings, and members of the committee, thank you for the 


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opportunity to testify today on de novo banks and industrial loan 

companies. 

The FDIC encourages the formation of new financial institutions 

and welcomes applications for deposit insurance. New institutions 

help preserve the vitality of the community banking sector, fill important gaps in local banking markets, and provide credit services 

to communities that may be overlooked by other financial institutions. 

While we have seen a broad-based improvement in bank financial performance over the past several years, the prolonged period 

of low interest rates that has followed the financial crisis has narrowed industry net interest margins substantially from precrisis 

levels. 

Margin pressure remains a challenge for existing institutions 

and new entrants and appears to be the leading factor in the sharp 

decline in new institutions since the crisis. 

As the economy continues to improve and interest rates rise, we 

anticipate that interest in new charters will increase. Over the past 

several quarters, the FDIC has seen indications of increased interest from prospective organizing groups. 

By statute, any proposed depository institution seeking Federal 

deposit insurance must file an application with the FDIC. Before 

filing an application, the FDIC encourages organizing groups to 

participate in a prefiling meeting. The goal is to inform applicants 

about the information needed to facilitate the review process. 

The FDIC imposes certain standard conditions on all institutions 

that are granted Federal deposit insurance. These conditions include minimum initial capital, State charter approval, disclosure of 

insider transactions, financial audit requirements, among others. 

The FDIC may also impose nonstandard conditions when additional controls are appropriate or necessary to either mitigate risks 

that are unique to the proposal or to ensure actions or activities 

in process at the time of approval are completed before the insurance becomes effective. 

In August of 2009, the FDIC extended from 3 to 7 years the period during which de novo State nonmember banks were subject to 

higher capital maintenance requirements and more frequent examinations. We also require de novo State nonmember banks to obtain prior approval for material changes in business plans. 

The FDIC made these changes because the failure rate of de 

novo institutions chartered between 2000 and 2008 was more than 

double the failure rate for established small banks. Many of these 

failures occurred between the fourth and seventh year of the de 

novo period. 

Given the ongoing improvement in post-crisis industry performance, the FDIC recently rescinded this policy, returning to a 3-year 

de novo period in April of this year. 

As State-chartered federally insured institutions, ILCs must 

meet the same standards as any FDIC-insured bank. Since parent 

companies of ILCs are not generally subject to Federal banking supervision, the FDIC has included prudential considerations in its 

supervisory approach designed to ensure the independence of the 

ILC separate and apart from its parent. 


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The FDIC has recently announced a number of initiatives to support the efforts of organizing groups to establish new banks. In November of 2014 and again in April of this year, the FDIC issued 

deposit insurance questions and answers to eight applications in 

developing proposals to obtain deposit insurance. 

In March of last year, the FDIC provided an overview of the deposit insurance application process during a conference of State 

banks supervisory agencies. 

In September of last year, the FDIC also hosted an interagency 

training conference promoting coordination among State and Federal regulatory agencies in the review of charter and deposit insurance applications. The FDIC is also preparing a practical guide for 

organizing groups. This resource will address topics such as developing a sound business plan, raising financial resources, and recruiting competent leadership. 

We are also planning outreach meetings in several regions 

around the country to ensure that industry participants are well 

informed about the FDIC’s application review processes and the 

tools and resources available to assist organizing groups. 

Finally, the FDIC is using this period of low application activity 

as an opportunity to review our current application processes for 

transparency and timeliness. As this review continues, we will look 

for opportunities to solicit public comment from the industry and 

groups interested in organizing a de novo bank about the steps 

that the FDIC could take to enhance or clarify the application process. 

Mr. Chairman, that concludes my opening statement. I’ll be glad 

to respond to questions. 

[Prepared statement of Mr. Gruenberg follows:] 


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STATEMENT OF 

MARTIN J. GRUENBERG 

CHAIRMAN 

FEDERAL DEPOSIT INSURANCE CORPORATION 

on 

DE NOVO BANKS AND INDUSTRIAL LOAN COMPANIES 

before the 

COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM 

U.S. HOUSE OF REPRESENATA TIVES 

July 13, 2016 

2157 Rayburn House Office Building 
8 


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Chairman Chaffetz, Ranking Member Cummings and members of the Committee, thank 

you for the opportunity to testify today on de novo banks and industrial loan companies (ILCs ). 

My written testimony will begin with an overview of recent banking industry performance and 

condition. Next I will address trends in de novo and ILC formation and the process by which the 

FDIC reviews applications for deposit insurance. Finally, I will discuss the supervisory process 

for de novo institutions and steps the FDIC is taking to support de novo formations. 

Banking Industry Performance 

The post-crisis period has been marked by a gradual, consistent improvement in banking 

industry performance, even in the face of some significant headwinds. FDIC-insured institutions 

posted record earnings of nearly $164 billion in 2015. Almost two-thirds of all institutions 

reported higher earnings for the year than they did in 2014. Many banks have worked off 

significant volumes of noncurrent loans during the post-crisis period, and for most banks, this 

process is largely complete. Only eight institutions failed last year-the lowest number since 

2007. By the end of the first quarter of2016, the number of problem institutions declined to 165, 

the lowest level since mid-2008. 

This recovery in their financial condition has put FDIC-insured institutions in a better 

position to support economic activity by extending credit to creditworthy borrowers. Loan 

balances at FDIC-insured institutions at the end of the first quarter were 6.9 percent higher than a 

year earlier, marking their highest 12-month growth rate since mid-2008. 

Community banks have also posted a strong recovery in the post-crisis period that has, in 

several respects, outpaced the recovery at larger institutions. Loan balances at community banks 

grew by 8.9 percent in March from a year ago, exceeding the industry average by more than a 
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quarter. Loan growth at community banks was Jed by an 11.9 percent increase in commercial 

real estate loans, an 8.6 percent increase in commercial and industrial loans, and a 5 percent 

increase in 1-to-4 family residential mortgages. 

In addition, net income at community banks grew by 7.4 percent in the first quarter of 

2016 compared to a year earlier, while industry net income declined slightly. The decline in 

overall industry earnings was largely attributable to a drop in trading revenue and a sharp 

increase in reserves to recognize potential losses from noncurrent commercial and industrial 

loans related to the energy sector. However, neither of these factors had a material impact on 

community bank performance during the quarter. 

While the current seven-year economic expansion has supported a broad-based 

improvement in bank financial performance, the prolonged period of low interest rates that has 

followed the financial crisis has narrowed industry net interest margins substantially from precrisis levels. 

During the I 0 years leading up to the crisis, the average net interest margin for 

community banks was 4.0 percent. By 2015, after seven years of exceptionally low interest 

rates, the average community bank margin had fallen to 3.57 percent-a decline of 43 basis 

points. Noncommunity banks saw their margins fall even further, to just 3.0 percent in 

2015. Margin pressure is likely to remain a challenge until interest rates rise to levels more in 

line with historical norms. 

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Trends in De Novo Formation 

The FDIC remains supportive of the formation of new financial institutions and 

welcomes applications for deposit insurance. The entry of new institutions helps to preserve the 

vitality of the community banking sector, fill important gaps in local banking markets, and 

provide credit services to communities that may be overlooked by other financial institutions. 

Recent FDIC research on new bank formation since 2000 highlights both the economic 

benefits of de novo banks and their vulnerability to economic shocks. 1 Of the more than 1,000 

new banks formed between 2000 and 2008, 634 institutions were still operating as of September 

2015, holding $214 billion in total loans and leases. FDIC researchers also found that the failure 

rate of banks established between 2000 and 2008 was more than twice that of small established 

banks--consistent with previous research that found de novo banks to be susceptible to failure 

under adverse economic conditions. These findings underscore the importance of promoting the 

formation of new banks and establishing an effective application process and supervisory 

program that will ensure new banks adopt appropriate risk management practices and enhance 

their prospects for long-term success. 

As shown in the Appendix, from 2000 through 2007-the seven years leading up to the 

recent financial crisis--the FDIC received more than 1,600 applications for deposit insurance. 2 

Of those, 75 percent were approved, 12 percent were returned and 13 percent were withdrawn. 

Included were 57 applications for deposit insurance for ILCs, 53 of which were acted upon 

during this period. Just over half were approved, 23 percent were returned and 26 percent were 

withdrawn. 

1 Lee, Y an and Chiwon Yom, "The Entry, Perfonnance, and Risk Profile of De Novo Banks," FDIC Center for 

Financial Research Working Paper 2016-03, Apri12016. 

https://www.fdic.gov/bank/analyticai/CFR/20 16/WP 2016/WP20 16 03.pdf 2 The Appendix provides a chart of applications for deposit insurance for de novo institutions received for each year 

since 2000, along with the disposition of the applications received in that year. 

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During the crisis from January 2008 through December 2010, the FDIC received 

140 applications for deposit insurance (excluding those for the acquisition of failed banks and for 

the conversion of credit unions), with the number received dropping significantly in each year. 

Of those applications, approximately 20 percent were approved, 32 percent were returned, 46 

percent were withdrawn and one percent are still pending. Included were seven applications for 

deposit insurance for ILCs with one approved, two returned, two withdrawn and two pending. 

The approval rate for applications received during the crisis was less than one-third of the 

rate of approval during the pre-crisis period. The primary reason for this difference was the 

challenging economic environment that made it difficult for applicants to demonstrate viable 

business plans. 

De novo formation has always been cyclical as illustrated in Chart 1. De novo activity 

surged in the economic upswings, such as those of post-World War II, the mid-1990s, and the 

early 2000s. A significant share of pre-crisis chartering activity occurred in the Southeast and 

the West, as the economies in those areas rapidly expanded. Of the 899 new institutions 

chartered from 2002 through 2007, 275 (31 percent) were headquartered in the FDIC's Atlanta 

region, and 227 (25 percent) were headquartered in the FDIC's San Francisco region. These two 

regions also led the country in bank failures, as their economies experienced severe downturns 

during the recession. 

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"' c 

400 

350 

300 

,g 250 

" j 200 

§ 150 

8 

100 

so 

0 

Chart 1 

Newly Chartered Banks and failures/ 1935 - 2015 

FDIC-Insured Commercial Banks Only 

g 8 ;:; ~ 0 0 0 0 N N N N 

Source; FDIC, Historical NEW CHARTERS Ill FAILURES 

Since January 2011, the FDIC has received only 10 applications for deposit insurance for 

de novo institutions. Of those applications, three have been approved, five have been withdrawn 

and two remain in process. No new applications tbr ILCs were received in this period. A drop 

in de novo activity also occurred after the last financial crisis in the 1980s and early 1990s, when 

de novo bank formation declined to historically low levels betbre recovering as economic 

conditions improved. 

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Even with the recovery in community bank earnings following the recent financial crisis, 

low interest rates and narrow net interest margins have kept bank profitability ratios (return on 

assets and return on equity) well below pre-crisis levels, making it relatively unattractive to start 

new banks. Recent research by economists at the Federal Reserve suggests that economic 

factors alone-including a long period of zero interest rates-explain at least three-quarters of 

the post-crisis decline in new charters, as illustrated in Chart 2. 3 If this model is accurate, one 

would expect the rate of new charters to rise as interest rates normalize. 

Chart2 

3 Adams. Robert M. and Jacob P. Gramlich, "Where Are All the New Banks'! The Role of Regulatory Burden 

in New Charter Creation," Finance and Economics Discussion Series 2014-113, Divisions of Research & Statistics 

and Federal Reserve Board, D.C. 

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The rate of de novo formations can be affected by other factors as well. For example, a 

Federal Reserve Bank of Kansas City study found that markets with more merger activity 

experienced higher rates of new bank formation, and that the mergers with the strongest link to 

new bank formation were those in which small banks were taken over by large banks or local 

banks taken over by distant banks.4 These mergers can create gaps in service to small businesses 

and customers with a strong preference for personal contact and contribute to new bank 

formation. As a Federal Reserve Bank of Philadelphia study observed, in these markets, de novos 

are also more likely to find a ready supply of skilled, experienced bankers displaced from the 

merger and acquisition activity. 5 

De novo ILC formations have additionally been affected at various times by moratoria. 

For example, the state of Utah placed a moratorium on new ILC charters between 1986 and 

1997, after several ILCs had experienced significant financial difficulties in the early 1980s.6 

During this period, existing charters could be acquired, but new charters were not issued. Also, 

in response to requests from Congress amid concerns about the applications filed by WalMart 

and Home Depot to respectively form and acquire an ILC, the FDIC's Board of Directors 

imposed a six-month moratorium on deposit insurance applications and change-in-control 

notices with respect to ILCs beginning July 28, 2006. The FDIC's Board of Directors extended 

the moratorium for one year on January 31, 2007, with respect to ILCs that would become 

4 Keeton, William R. "Are Mergers Responsible for the Surge in New Bank Charters?" Federal Reserve Bank of 

Kansas City. Economic Review. First Quarter 2000. 

https:l/www.kansascitvfed.org!publicatlecomev/PDFIIgOOkeet.pdf 

5 Collins, Michael E. "Trends in De Novo Formation." Federal Reserve Bank of Philadelphia. SRC Insights. Third 

Quarter 2007. https://www.philadelphiafed.org/bank-resourceslpublications/src-insights/2007/thirdguarter/g3si2 07 6 Johnson, Christian and GeorgeS. Kauftnan, "A Bank by Any Other Name." Federal Reserve Bank of Chicago 

Economic Perspectives. 4Q2007. https:/lwww.chicagofed.org!publications/economic-perspectives/2007/4gtr2007-

part3-johnson-etal 

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subsidiaries of companies engaged in nonfinancial activities. Finally, Section 603 of the DoddFrank Wall Street Reform and Consumer Protection Act imposed a three-year moratorium on 

ILCs controlled by commercial firms and prohibited the FDIC from acting favorably on 

applications for deposit insurance filed by such institutions after November 23, 2009. 

De novo activity, however, represents only a portion of total new investment in the 

banking industry. In many cases, interested applicants have opted to buy a failed bank or 

problem bank rather than start a de novo institution. Acquiring an existing institution, instead of 

pursuing a de novo strategy, has the advantage of providing a core deposit and loan base on 

which the new investors can build a sustainable franchise. 

As the economy continues to improve, we anticipate that interest in new charters will 

increase. Over the past several quarters, the FDIC has seen indications of increased interest from 

prospective organizing groups in filing applications for new insured depository institutions. 

Application Process for Deposit Insurance 

Section 5 of the Federal Deposit Insurance Act (FDI Act) requires any proposed 

depository institution seeking Federal deposit insurance to file an application with the FDIC. 

Before filing an application, the FDIC encourages organizing groups for proposed new 

depository institutions to participate in a pre-filing meeting. This meeting frequently occurs with 

staff in the FDIC regional office that will receive the application. During a pre-filing meeting, 

FDIC staff explains the application process, including general timelines for application processing 

as well as any special information needs and other matters unique to the proposal. The goal is to 

inform applicants about the necessary information for their filing to facilitate the review process. 

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Application Requirements 

FDIC rules and regulations describe the application requirements in detail. 7 Proposed 

new depository institutions apply for Federal deposit insurance by filing an Interagency Charter 

and Federal Deposit Insurance Application form (Application) with the appropriate FDIC 

regional office. 8 The Application collects information that the chartering authority and the FDIC 

will need to evaluate the charter and insurance applications respectively. The Application 

requests information on seven main topics: an overview of the proposed institution's operations; 

its business plan and proposed policies; details on its management team, including its board of 

directors; a description of the type and amount of capital to be raised, including any plans for 

employee stock ownership plans or stock incentives; how the institution will meet the 

convenience and needs of the community to be served; a description of the premises and fixed 

assets at inception; a description of the information systems to be used by the institution; and any 

other relevant information. 

Applicants must answer all questions in the form and provide supporting information 

setting forth the basis for the applicant's conclusions. In cases where information is not available 

at filing time, the FDIC will determine whether the information is necessary to begin the 

evaluation of the application. If additional information is needed, the FDIC will send the 

applicant a written request identifying the items needed. If not, the FDIC will deem the 

application substantially complete and begin its review and evaluation of the proposal. 

7 The procedures governing the administrative processing of an application for deposit insurance are contained in 

part 303, subpart B, of the FDIC's rules and regulations (12 CFR part 303). 

www.fdic.gov1formsdocuments/lnteragencyCharter-lnsuranceApplication.doc 

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Statutory Conditions 

Since 1935, governing statutes have required that the FDIC consider specific factors 

when evaluating applications for deposit insurance. The current statutory factors, set forth in 

Section 6 of the FDI Act, include: 

• The institution's financial history and condition; 

• The adequacy of its capital structure; 

• Its future earnings prospects; 

• The general character and fitness of its management; 

• The risk presented by the institution to the Deposit Insurance Fund; 

• The convenience and needs of the community to be served by the institution; and 

• Whether the institution's corporate powers are consistent with the purposes of 

the FDIAct.9 

Evaluation of the Application 

While these statutory factors serve as the foundation of the Application, the FDIC 

Statement of Policy on Applications for Deposit Insurance provides guidance to FDIC staff and 

the industry about the FDIC Board's expectations for staffs evaluation of the statutory factors. 10 

Evaluation of the Application is carried out at both the field office level and regional office level, 

and is coordinated by a regional office case manager, who is assigned responsibility for the 

ongoing supervision and monitoring of the institution once it opens for business. 

At the field office level, an examiner from the local area will review the Application and 

then meet with the organizers and proposed directors to ascertain their understanding of the 

9 12 u.s.c. § 1816. 10 63 Fed. Reg. 44756 August 20. 1998. effective October 1, 1998; amended at 67 Fed. Reg 79278 December 27, 

2002. 

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responsibilities they are taking on as directors, their abilities to execute the business plan, and 

their commitment to the proposed bank. The examiner documents the findings relative to each 

of the statutory factors and opines as to whether the criteria under each area has been met. The 

examiner submits this report to the assigned case manager. 

At the regional office level, the case manager reviews the examiner's report for accuracy 

and consistency with FDIC policy. The case manager prepares a summary of the major findings 

of the examiner's report as it relates to each of the statutory factors, and concludes with a 

recommendation for action: conditional approval or denial. The recommendation is considered 

by regional management in consultation with division management, and it is acted upon by the 

region, the division or the FDIC Board of Directors, depending upon the application 

characteristics. 11 

Conditions of Approval 

The FDIC imposes certain standard conditions on all institutions that are granted Federal 

deposit insurance. 12 These conditions include such items as minimum initial capital, minimum 

ongoing capital requirements for the three-year de novo period, minimum fidelity bond insurance 

coverage, and financial statement audit requirements during the de novo period. 

The FDIC may also impose non-standard or prudential conditions on a case-by-case 

basis. Typically, nonstandard conditions are used when the FDIC determines, through the 

examiner's review and the case manager's summary, that additional controls are appropriate or 

II For example, authority to act is retained by the FDIC Board of Directors on applications for institutions that are 

more than 25 percent foreign-owned or controlled, institutions that share common ownership with a foreign 

institution without a common parent company, institutions organized as industrial loan companies, and institutions 

that would raise unique or unprecedented policy matters. 12 These standard conditions are contained in a Resolution of the FDIC Board of Directors dated December 2, 2002, 

delegating authority for action on certain application matters, including applications for Federal deposit insurance. 

See https://www.fdic.gov/regulations/laws/matrix/ 

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necessary to either mitigate risks that are unique to the proposal or to ensure that actions or 

activities in process at the time of approval are completed before insurance becomes effective. 

The most common nonstandard conditions require FDIC approval of business plan changes, 

employment agreements and stock options plans, bank policies, and additional directors or 

officers. In the case of ILCs, additional nonstandard conditions are commonly used to address 

corporate relationships, management authority and independence, and corporate and operating 

records. 

The majority of nonstandard conditions do not exceed the three-year de novo period. 

However, nonstandard conditions may be imposed for any length of time that is deemed 

necessary to mitigate the relevant risk. For example, certain monoline institutions are subject to 

heightened supervisory expectations to mitigate risks associated with engaging in a single line of 

business. 

Supervisory Approach to De Novos 

The FDIC' s Risk Management Manual of Examination Policies describes the supervision 

program for de novo institutions. The Manual states that newly chartered and insured institutions 

are to have a limited scope examination (visitation) within the first six months of operation and a 

full scope examination within the first twelve months of operation. Subsequent to the first 

examination and through the third year of operation, at least one examination is to be performed 

each year. The goal of the close supervisory attention in an institution's formative years is to 

help ensure its success. 

In August 2009, the FDIC imposed nonstandard conditions in extending from three to 

seven years the period during which de novo state nonmember banks were subject to higher 

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capital maintenance requirements and more frequent examinations. The FDIC also required de 

novo state nonmember banks to obtain prior approval from the FDIC for material changes in 

business plans (FIL 50-2009). These nonstandard conditions were put into place at that time 

because institutions insured less than seven years were overrepresented among the bank failures 

that began in 2008, with many of the failures occurring during the fourth through seventh years. 

Out of 1,042 de novo institutions chartered between 2000 and 2008, 133 (12.8 percent) failed, 

representing more than double the failure rate of 4.9 percent for established small banks. 13 

Moreover, a number of de novo institutions pursued business plan changes during the first few 

years that led to increased risk and financial problems while failing to have adequate controls 

and risk management practices. Given the ongoing improvement in post-crisis industry 

performance, the FDIC recently rescinded this policy, returning to a three-year de novo period in 

April2016. 

Supervision of ILCs 

As state-chartered federally insured institutions, ILCs are supervised by their chartering 

states and the FDIC, and they must meet the same standards as any FDIC-insured bank. 14 Parent 

companies of ILCs are subject to regulation or oversight by the state banking agency under 

which the ILC is chartered. However, parent companies ofiLCs are not generally subject to 

Federal banking supervision and therefore are not generally required to meet regulatory 

requirements imposed by the Bank Holding Company Act of 1956 (BHCA). 15 Although the 

FDIC does not have the statutory authority to directly supervise the parent companies ofiLCs, 

13 Lee and Yom. April2016 14 ILCs currently operate in California, Hawaii, Minnesota, Nevada and Utah. 15 Congress enacted the Competitive Equality Banking Act of 1987, which broadened the definition of the term 

"bank" in the BHCA while specifically excluding ILCs from the new defmition of "bank." A parent of an ILC may 

be subject to Federal banking supervision if it also owns a bank or a savings and loan. 

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the FDIC does have authority under Section IO(b)(4) of the FDI Act, in examining any insured 

depository institution, including an ILC, to examine the affairs of any affiliate, including the 

parent holding company, as may be necessary to disclose fully the relationship between the 

institution and the affiliate, and to determine the effect of such relationship on the depository 

institution. 

In the early 1990s, the FDIC and the Utah Department of Financial Institutions (DFI) 

discovered that some ILCs were operated with minimal physical presence, books, records, and 

on-site management in Utah. The FDIC and the DFI held meetings with ILC industry 

representatives and developed conditions for state charters and Federal deposit insurance orders 

to address these concerns. Since that time, the FDIC has included prudential considerations in its 

supervisory approach, in informal and formal enforcement actions, and in conditions in orders 

granting Federal deposit insurance to ILCs. This approach is designed to ensure the 

independence and survival of the insured ILC separate and apart from a parent that may not be 

subject to the scope of consolidated supervision, consolidated capital requirements, or 

enforcement actions imposed on parent organizations subject to the provisions of the BHCA. 

In 2004, the FDIC took steps to reiterate its supervisory expectations to FDIC examiners 

and the banking industry. In March 2004, the FDIC issued a memorandum to FDIC regional 

directors regarding prudential conditions that might be imposed in approving applications for 

deposit insurance involving insured depository institutions to be owned by or significantly 

involved in transactions with commercial or financial companies, should the risk characteristics 

of a given proposal warrant such action. The memorandum included examples of prudential 

conditions drawn from prior approvals to address the risks associated with the absence of 

consolidated supervision of the parent organization. The examples address matters such as 

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corporate relationships, management authority and independence, and corporate and operating 

records. In June 2004, the FDIC published a detailed description of its supervisory approach and 

possible prudential conditions in its inaugural issue of Supervisory Insights, a professional 

journal to promote sound principles and best practices for bank supervision. The lead article in 

this issue of Supervisory Insights puts ILC supervision strategies in historical context and 

includes a brief chronology of ILC failures. Subsequent to issuing the 2004 memorandum, the 

FDIC approved 15 deposit insurance applications proposing to establish an ILC, subject to 

various standard and nonstandard (prudential) conditions. 16 

Beginning in 2004, the FDIC Office oflnspector General (OIG) conducted two 

evaluations and the Government Accountability Office (GAO) conducted two studies regarding 

the FDIC' s supervision ofiLCs, including its use of prudential conditions. 17 The 2004 OIG 

evaluation focused on whether ILCs posed greater risk to the deposit insurance fund than other 

financial institutions and reviewed FDIC's supervisory approach in determining and mitigating 

material risks posed to those institutions by their parents. A September 2005 GAO study cited 

several risks posed to banks operating in a holding company structure, including adverse 

intercompany transactions, operations, and reputation risk. The study also raised concerns about 

the FDIC's ability to protect an ILC from those risks as effectively as the consolidated 

supervision approach under the BHCA. 

16 See FDIC Office of Inspector General Evaluation 06-014, The FDIC 's Industrial Loan Company Deposit 

Insurance Application Process, https://www.fdicig.gov/reoorts06/06-014.pdf, dated July 20,2006. This report 

provides several charts identifying the standard and non-standard (prudential) conditions imposed on a sample of 

ILC applications approved after the implementation of the 2004 memorandum. 17 See OIG Evaluation 04-048, The Division of Supervision and Consumer Protection's Approach for Supervising 

Limited-Charter Depository Institutions, httos://www.fdicig.gov/reports04/04-048.odf; OIG Evaluation 06-014, The 

FDIC's Industrial Loan Company Deposit Insurance Application Process, httos://www.fdicig.gov/reports06/06-

014.pdf; Industrial Loan Corporations: Recent Asset Growth and Commercial Interest Highlight Differences in 

Regulatory Authority. GA0-05-621. September 2005. 

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The reports acknowledged the FDIC's actions to ensure the independence and safety and 

soundness of conunercially owned ILCs. The reports further acknowledged authorities the FDIC 

possessed and exercised to protect an ILC from the risks posed by the parent and affiliates, 

including its examination authority; ability to impose conditions on or enter into agreements with 

an ILC holding company in connection with an application for Federal deposit insurance; ability 

to terminate an ILC's deposit insurance; ability to enter into agreements during the acquisition of 

an insured entity; and ability to take enforcement measures. However, these reports reiterated 

the concern about the risks of the ILC model and the ability of the FDIC to adequately supervise 

them. In response, the FDIC continued to address capital, liquidity and other matters as 

appropriate, through the use of written agreements with an ILC and its parent. 

The FDIC's approach to ILC supervision was ultimately tested during the recent financial 

crisis. Despite the failure and bankruptcy of a number of commercial and financial parents of 

ILCs, as detailed below, only two ILCs failed during the recent crisis, Security Savings Bank, 

Henderson, Nevada (Security), and Advanta Bank Corp, Draper, Utah (Advanta), a financially 

owned ILC. Security failed in February 2009 due to ineffective management and rapid growth in 

high-risk assets. Advanta, which was engaged exclusively in issuing credit cards to small 

businesses, failed in March 20 I 0, as its clients suffered the effects of the recession. 

Many other ILCs' parent companies or affiliates experienced severe stress, but their ILCs 

did not fail. ILC parents and affiliates that filed for bankruptcy included Lehman Brothers, 

General Motors, Flying J Inc., Capmark Financial Group Inc., CIT Group Inc., and Residential 

Capital, LLC. 

In 2008, parents of a number of ILCs converted into bank holding companies through 

expedited conversions permitted by the Federal Reserve due to prevailing emergency conditions 

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in the financial markets. ILC parent companies that undertook expedited conversions to bank 

holding companies were Morgan Stanley, Morgan Stanley Capital Management LLC, and 

Morgan Stanley Domestic Holdings, Inc.; Goldman Sachs Group, Inc.; American Express Travel 

Related Services Company, Inc.; CIT Group Inc.; and GMAC LLC. Also, in 2008, Merrill 

Lynch, the parent company of an ILC, was sold to Bank of America. 

Although the financial crisis was severe, the supervisory approach of the FDIC and 

chartering states proved to be effective. No ILCs failed during the recent financial crisis because 

of the failure of a parent, preventing significant additional losses to the Deposit Insurance Fund. 

FDIC Actions To Support the Formation of New Institutions 

The FDIC continues to monitor developments with respect to the formation of new 

banking institutions and recently announced a number of initiatives to support the efforts of 

viable organizing groups. These initiatives, which began in 2014, support the development, 

submission, and review of proposals to organize new institutions, including industrial loan 

companies. 

In November 2014, the FDIC issued Deposit Insurance "Questions and Answers" 

(Q&As) to help applicants develop proposals to obtain Federal deposit insurance. In issuing the 

Q&As, the FDIC addressed concerns raised by commenters through the decennial regulatory 

review process required by the Economic Growth and Regulatory Paperwork Reduction Act 

(EGRPRA). The Q&As provide additional transparency to the application process and augment 

the FDIC's Statement of Policy on Applications for Deposit Insurance. Topics addressed in the 

Q&As include pre-filing meetings, processing timelines, capitalization, and initial business 

plans. 

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In March 2015, the FDIC provided an overview of the deposit insurance application 

process during a conference of state bank supervisory agencies. This session was followed by an 

interagency training conference hosted by the FDIC in September 2015 to promote coordination 

among state and Federal regulatory agencies in the review of charter and deposit insurance 

applications. Supervisory participants in the conference included the FDIC, state banking 

agencies, the Federal Reserve System, and the Office of the Comptroller of the Currency. 

As mentioned earlier, on April6, 2016, the FDIC reduced from seven years to three years 

the period of enhanced supervisory monitoring of newly insured depository institutions. The 

FDIC had established the seven-year period during the financial crisis in response to the 

disproportionate number of newly insured institutions that were experiencing difficulties or 

failing. In the current environment, and in light of strengthened, forward-looking supervision, 

the FDIC determined it was appropriate to return to the three-year period. 

Also, in April2016, the FDIC supplemented its previously issued Deposit Insurance 

Q&As to address multiple issues related to business plans. The FDIC intends to issue additional 

Q&As as needed to help organizing groups understand specific aspects of the deposit insurance 

application process. 

The FDIC is preparing a publication designed to serve as a practical guide for organizing 

groups from the initial concept through the application process; it also will include post-approval 

considerations. The publication will focus on those issues that frequently have been identified as 

obstacles to the FDIC's ability to favorably resolve the statutory factors enumerated in Section 6 

of the FDI Act that are applicable to the FDIC's approval of Federal deposit insurance. This 

resource will address topics such as developing a sound business plan, raising financial 

resources, and recruiting competent leadership, each of which helps to ensure that every new 

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institution is positioned to succeed. The FDIC plans to have this publication available later this 

year. 

The FDIC has designated professional staff within each regional office to serve as subject 

matter experts for deposit insurance applications. These individuals are points of contact to 

FDIC staff, other banking agencies, industry professionals, and prospective organizing groups. 

They serve as an important industry resource to address the FDIC's processes, generally, and to 

respond to specific proposals. 

Finally, we are planning outreach meetings in several regions around the country to 

ensure that industry participants are well informed about the FDIC's application review 

processes and the tools and resources available to assist organizing groups. 

Conclusion 

In conclusion, the current economic environment with narrow net interest margins and 

modest overall economic growth remains challenging for U.S. banks and the establishment of de 

novo institutions. The FDIC is committed to working with and providing support to groups with 

an interest in organizing a bank or an industrial loan company. As outlined earlier, the FDIC 

continues its efforts to provide interested organizing groups with a clear path to forming a new 

insured depository institution, regardless of the type of charter pursued by an organizing group. 

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APPENDIX 

2001 156 116 22 18 

2002 147 111 17 19 

2003 161 112 20 29 

2004 214 148 39 27 

2005 299 237 39 23 

2006 232 184 16 32 

2007 223 161 19 43 

2008 101 28 27 45 

2009 33 17 15 

2010 6 5 

2011 

2012 

2013 4 3 

2014 1 

2015 I 2 

2016 2 2 

Total 1,787 1,261 239 283 4 

I· • • Ue ~ov(! ~J>plieations Received by Y l)at, and The Disposition tlf Tlmse A;ppllqlttions< 

llv P:ere.entage ·.· .·. •.. . · 

·.·... .Appli.eationsReeeiv!!dJanuary 1, 2000~ i;hrougll~"r ...... · ·.·~ • 

Yeat;Reeeived Count Approve Retitm Witlidra:wB: Pending 

Total 1,787 70.6 13.4 15.8 0.2 

Pre-2008 1,637 75.1 11.9 13.0 0.0 

2008-2010 140 20.0 32.1 46.4 1.4 

2011-2016 10 30.0 0.0 50.0 20.0 

* The above tables do not include: 1) applications filed for the purpose of acquiring failing 

institutions, or 2) applications filed by existing non-FDIC financial services companies seeking to 

convert to an FD!C-insured depository institution. 
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DeNovolLC:::::::s:~:::~::e::T:::t~pticat~rls 

Yeal'l{el;ei\<ed Total A.pp,,\'e< Ret~~ 'Wi'tliuraWn Pending 

2000 5 4 I 

2001 4 2 I 

2002 8 6 2 

2003 9 2 2 5 

2004 10 6 2 2 

2005 12 4 5 3 

2006 7 2 3 2 

2007 2 I 

2008 4 2 

2009 3 2 

2010 

2011 

2012 

2013 

~--~2~01~4~--~-------+--------4-------------------4-------~ 2015 

2016 

Total 64 28 15 19 2 

De Novo ILC Applications Received by Year; and Tne.Dispos~tlon.uf.Those"Applications 

By ].>ercentage ·•· ... ·· . · ·· · 

Applications Received JanuarY 1, 2000,~ro,ugltJliJte 30,2016 

Year Received Count Appro vii Return· Withdrawn Pllnding 

Total 64 43.8 23.4 29.7 3.1 

Pre-2008 57 47.4 22.8 29.8 0 

2008-2010 7 14.3 28.6 28.6 28.6 

2011-2016 0 0 0 0 0 

Note: Moratoria related to ILCs were in effect during parts of the period. Please see pp. 7-8 of the 

testimony for details. 

2 
29 

Chairman CHAFFETZ. Thank you. 

Mr. Browning, you are now recognized for 5 minutes. 

STATEMENT OF MATTHEW BROWNING 

Mr. BROWNING. Good morning, Chairman Chaffetz and Ranking 

Member Cummings. My name is Matt Browning, and I’m here on 

behalf of the National Association of Industrial Bankers and the 

Utah Bankers Association. 

Why are we here today? We are here today because the FDIC is 

not following its direction from Congress and is preventing the 

chartering of new banks. 

Congress set forth the approval process for new banks in the 

Federal Deposit Insurance Act. However, the FDIC has unilaterally 

adopted a no-growth policy of not allowing new bank charters and 

uses vague nondenial denials as a backdoor means to pursue this 

policy. In order to avoid the mandates of the Federal Deposit Insurance Act, the FDIC simply avoids calling an application complete 

and, instead, asks endless open-ended questions and makes vague 

suggestions of needed changes in a prospective bank’s plan. 

I would like to share my own experiences with the committee 

that leads me to conclude the FDIC is blocking the formation of 

new banks. 

In 2012, I led the effort on an application for a new bank’s charter and Federal deposit insurance. We modeled our bank on the 

needs of our clients. It was very similar to the banks owned by our 

competitors. We were following a proven conservative model with 

a long history of exceptionally low risk. 

Our introductory discussions with local FDIC and State regulatory officials went well. We were then surprised when FDIC’s 

Washington, D.C., staff suggested that serving our client needs and 

demands for banking services was, in fact, not a sufficient reason 

to charter a bank. The staff began making vague demands for 

modifications that would make our bank markedly different and 

force us outside our areas of expertise. 

FDIC officials never mentioned any deficiency in our plan relating to safety and soundness, no deficiency in our compliance, no deficiency in our capital. Our board, management, loan programs, 

and control systems were never criticized. By all objective measures, our plan met the requirements for approval under the longarticulated statutory requirements. 

We were ready to make reasonable changes. But the FDIC imposed novel, unwritten, and unacknowledged standards on us, and 

these continued to evolve as we progressed. 

After 18 months of ongoing discussions, after repeated plan revisions, after spending more than $800,000 in direct expenses and 

many thousands of hours, we concluded we were engaged in an exercise in futility. We abandoned the process without filing an application. 

Sadly, I understand these outlays are modest compared to those 

of many other applicants who have received similar treatment. 

Our plan could not proceed because it was impossible to truly understand the new arbitrary requirements of the FDIC. We experienced denial by attrition. We unwittingly played rope-a-dope with 

the FDIC, wasting a great deal of time and money in the process. 


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30 

Earlier this year, Chairman Gruenberg stated, quote, ‘‘The FDIC 

welcomes applications for deposit insurance, and we clearly have a 

role to play in facilitating the establishment of new institutions,’’ 

end quote. 

Sadly, the common perception among particular applicants is the 

FDIC’s claim is mere posturing. The FDIC’s many years of conduct 

directly contradict its public statements. The actions speak loudly 

and continue to affirm the widely held industry impression that 

agency staff in Washington is adversarial, uncooperative, evasive, 

and at times belligerent. This was certainly my experience, as it 

has been for many others. 

Potential applicants will not commit the substantial time and 

money needed for an application until the FDIC has really seen to 

change its unilateral no-growth policy. 

The FDIC should rightly have broad discretion on approving new 

banks; however, it does not have the discretion to arbitrarily shut 

down the formation of new banks altogether or to covertly use attrition to deny bank applications. 

Policymaking should not be done in the dark. Regulators should 

not create policy without a clear understanding of the effect on the 

economy and should ensure alignment with Congress. The FDIC 

must not only tolerate but truly accommodate innovation within 

the banking sector. This accommodation must extend not only to 

new products and services in existing banks, but accommodation 

must also be made for new banks and new bank models designed 

to serve the evolving needs of American consumers and businesses. 

Thank you, and I’m happy to answer your questions. 

[Prepared statement of Mr. Browning follows:] 


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UNITED STATES HOUSE OF REPRESENTATIVES 

COMMITTEE ON OVERSIGHT & GOVERNMENT REFORM 

Hearing On 

OVERSIGHT OF THE FDIC APPLICATION PROCESS 

Wednesday, July 13, 2016 

WRITTEN TESTIMONY OF MATT BROWNING 

On Behalf of 

National Association of Industrial Bankers 

Utah Bankers Association 
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Good morning, Mr. Chairman and Ranking Member Cummings. My name is Matt 

Browning, and I am appearing before you on behalf of the National Association of Industrial 

Bankers (NAIB) 1 and the Utah Bankers Association (UBA). 2 I am a former member of the 

board and executive committee for both organizations. 

Thank you, Chairman Chaffetz and Ranking Member Cummings, for holding this important hearing to review the Federal Deposit Insurance Corporation's (FDIC) failure to approve 

new bank charters, and the impact of that failure to act on the banking system and our nation's 

economy. 

NAIB and UBA believe the lack of new banks is an especially important subject for 

Congressional review because of its effect on access to a stable supply of credit on fair terms. All 

providers of credit are important to the economy, but none have been more important to consumers and small businesses than banks and credit unions. Throughout our nation's history, banks 

and credit unions have proven their ability to operate in all economic conditions, and they are 

unquestionably the best regulated. 

In recent years, however, banks' role as providers of credit has declined, and the absence 

of new bank approvals is one element of that decline. History suggests that banks have formed a 

core of credit providers in times of critical need, and we believe that studies would show these 

depository institutions are still best equipped to provide credit in times of downturn. Our regulatory policies and practices should reflect this central role of banks in our economy. 

The David Eccles School of Business at the University of Utah has prepared a series of 

charts to illustrate this assertion, and those charts are appended to this statement. I believe these 

will help the Committee's analysis of this important issue. One chart is particularly interesting. 

It shows a model developed by economists at the Federal Reserve Board of Governors that predicts an average of30 new banks should have been chartered between 2009-2014. 

1 NAIB is the voice of the industrial banking industry, First chartered in 1910, industrial banks operate under a 

number of titles; industrial loan banks, industrial loan corporations, or thrift and loan companies. These banks engage in consumer and commercial lending on both a secured and unsecured basis. They do not offer demand checking accounts but do accept time deposits, savings deposit money market accounts and NOW accounts. Industrial 

banks provide a broad array of products and services to customers and small businesses nationwide, including some 

of the most underserved segments of the US economy. 2 The Utah Bankers Association is the professional and trade association for Utah's commercial banks, savings 

banks and industrial banks. Established in 1908, the UBA serves, represents and advocates the interests of its members, enhancing their ability to be preeminent providers of financial services. 

2 
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"We use the model to predict the level of new bank formation that would have occurred absent any regulatory changes post-crisis, and compare the model's predicted levels of bank formation to the actual/eve! 

of bank formation" (Adams and Gramlich, 2014: 4) 

A recent article in The Economist magazine described the current climate for bank 

startups as "barren, dry, desolate. "

3 This is not dramatic overstatement, but harsh reality. Thereality of chartering a bank in today's regulatory environment bears little resemblance to the stated 

theory of how this process should work. 

CHARTERING A NEW BANK: THE THEORY 

The Federal Deposit Insurance Corporation, as you may know, does not charter financial 

institutions. Banks are chartered by the individual states or, in the case of national banks, by the 

Office of the Comptroller of the Currency (OCC). The FDIC decides whether to grant newly 

chartered banks federal deposit insurance, a requirement for any institution that collects deposits 

from individuals. The FDIC also serves as federal regulator for state-chartered banks, exercising 

further supervisory authority over those institutions. 

If the organizers of a new bank choose a state ehmier, the FDIC is the primary federal 

regulator responsible for processirig the application. If the application is approved, the FDIC 

shares responsibility with the state regulator for examining the bank and ensuring that it operates 

in a safe and sound mmmer, complying with all applicable federal laws and regulations. Iftl1e 

organizers ehoose a federal charter, the FDIC must still review the application and consult with 

3 "Bank Free or Die; Small Banks in America." Economist (US! 25 July 2015: n. pag. Web. 
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the relevant federal regulator. In all cases, a new bank cannot begin operating until the FDIC approves its application or does not object to another federal regulator approving the application. 

This approval process for new banks is written into law as Sections 4, 5 and 6 of the Federal Deposit Insurance Act. 1n these sections, Congress clearly articulated the statutory requirements for applicants and the criteria regulators must consider when considering those applications. The law requires applicants to present a detailed business plan, show financial and staff 

resources, and demonstrate an ability to operate a profitable and legally compliant institution. 

Concerned this process could prevent the timely consideration and approval of new 

banks, Congress enacted Section 343(a) of the Riegle Community Development and Regulatory 

Improvement Act of 1994, which "requires" federal banking agencies- including the FDICto take action on an application within one year of the day upon which "a complete application is 

received." According to the FDIC's own Case Manager Manual, "it is expected that processing 

time frames approaching the one-year time limit and/or needing a waiver will occur in rare and 

unusual circumstances."4 

Unfortunately, the FDIC ignores both Congress and its own internal processes by using 

the simple expedient of not finding an application "complete," asking endless questions interspersed with long periods of silence. Potential applicants, even existing banks seeking routine 

approvals for organizational and operational changes, view the FDIC applications process as a 

black hole designed to deny changes through inaction in service of a no-growth policy. 

I am not here to criticize the practice of requiring an application to be complete before the 

FDIC acts on it. Our concern is that the FDIC has unilaterally adopted a no-growth policy without acknowledging it, justifying it to Congress, and reviewing it through a healthy public debate. 

CHARTERING A NEW BANK: THE REALITY 

The reality ofthe new charter application process was painfully apparent in the case of 

John Deere, the iconic maker of agricultural machinery, which applied for a bank charter in November 2009. A Fortune I 00 company, Deere has been in business for 172 years and had successfully operated an FDIC-insured federal savings bank since 1999. It sought a new bank charter in order to offer the kinds ofloans and services not permitted for a savings bank, which it also 

believes are unmet needs in places where Deere has a long and substantial retail presence serving 

America's farmers. 

The company sent the entire FDIC board and a number of US Senators a widely circulated letter in November 2012 that described its long history of interactions with the FDIC and 

submissions in response to numerous requests for additional information. In closing, John Deere 

wrote that they believed the company had fully complied with all requirements to have its application approved. They asked the FDIC to complete its process, which by then had been pending 

for nearly three years. 

4 United States. Federal Deposit Insurance Corporation. Case Manager Manual. N.p.: April2004. Print. 

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To date, Deere does not have a new charter. 

Deere's plight is not unusual. From 2003 to 2007, an average of 126 new banks opened 

for business each year in the U.S. Since 2008, formation of new banks in the U.S. has virtually 

stopped. We are aware of only three de novo banks formed in the nation since 2009.5 Given the 

vital role banks play in our economy and our communities, this situation raises many concerns. 

CHARTERING A NEW BANK: A PEEK BEHIND THE CURTAIN 

Although I am here to speak for the associations, my own experiences in this area are relevant, and reinforce my personal conclusion that the FDIC is blocking the formation of new 

banks. 

I served as the president of a federally insured industrial bank, and later joined another 

company where I was to become the chief executive of a new industrial bank. My first duty was 

to organize the bank, which included preparing the applications for the bank's charter and federal 

deposit insurance. 

The parent company of this proposed bank was a profitable regional retail brokerage and 

investment banking firm with more than a century of operating history. It wanted to organize a 

bank in order to offer bank products and services to its brokerage clients and the public generally 

in the same manner as many of our competitors. 

Ironically, the parent company had a nationally recognized division that offered specialized advisory services for banks analyzing complex areas such as loan loss reserves, capital adequacy, interest rate risk and liquidity needs. 

We initially modeled our bank on the needs of our clients and the banks owned by our 

competitors. We did not plan to do anything out of the ordinary. We were following a proven, 

conservative model with a long history of exceptionally low risk. 

As our application progressed, I found an important difference between the FDIC's 

Washington DC staff and its regional office in San Francisco. In recent years, the FDIC has consolidated decision-making in Washington, DC. This has blinded the agency to what is going on 

in the economy at ground level by precluding contributions from expert, experienced regional 

staff. In my case, the regional office was generally supportive and reasonable. Our treatment 

changed when Washington staff unveiled previously unknown policy interpretations and tilted 

the playing field. 

5 Recent studies have reported different numbers of new banks varying between two and seven. Five of those new 

banks, however, were actually reorganizations of an existing bank, such as converting a charter from one type to 

another or spinning off from a parent company. The studies agree that between 2009 and today only three de novo 

banks formed in the entire nation. 
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Chairman Gruenberg now describes the role of regional offices this way: "We have designated subject matter experts and applications committees in the FDIC regional offices to serve 

as points of contact for deposit insurance applications. "6 While useful, being a "point of contact" 

is, in reality, a euphemism for the token role regional officials now play in the process. 

After our initial introductory meeting with FDIC and state regulatory officials, we followed the normal practice of regularly discussing the progress of our application with FDIC application specialists. We were surprised when they said our plan needed modifications that would 

make our bank markedly different from those of our competitors, and force us outside our areas 

of expertise. We eventually made many changes to our plan to accommodate FDIC demands. 

The FDIC officials did not mention any deficiency in our plan relating to safety and 

soundness or compliance with laws and regulations. They never told us our loan programs were 

risky or our financial projections were deficient. Our plan used a legally permitted bank charter 

to engage in sound lending programs that would generate sufficient income to support the bank, 

in practices similar to many other banks'. Our board, management, facilities, systems, compliance, and internal audit were not criticized. As far as we knew, our plan met all the requirements 

for approval under the applicable laws and regulations. 

Nevertheless, the FDIC kept insisting our bank plan needed to offer additional loan programs that would serve unspecified unmet needs. Our plan, designed to offer loans and other 

services demanded by our clients, was deemed inadequate because competing banks offered 

those same products and services. Therefore, the FDIC told us, our bank was not necessary to 

meet the needs of those consumers- no "community need" existed for this bank. The FDIC officials went on to say that strengthening the parent company's business by deepening its relationship with its current and future customers was not a valid reason to approve a bank. This was 

both surprising and confusing, since it ignored the benefit to our customers of providing a broader array of products and services at a competitive cost. 

Competing for business is the manner in which most banks operate. The unmet needs of 

our customers and the competitive needs of the parent company drove our plan from the outset. 

Furthermore, every financially sound bank benefits its parent. The only banks that do not benefit 

their parent in addition to their customers are banks that are failing or those that have no parent. 

Banks that do not benefit their customers cannot remain in business. 

Still, we tried to accommodate the FDIC with modifications to our plan. New yet ambiguous demands followed each change. The FDIC suggested that the bank self-originate mortgages, creating inefficient, complex and redundant operations with an existing affiliate, and consider 

offering SBA loans. These suggestions did not fit our overall business plan and were confusing, 

because an affiliate already offered mortgages and we saw no demand for SBA loans among our 

target customers. 

6 See note 18 infra 

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It was also suggested we source less stable deposits through alternate high-cost channels 

despite an existing program of very low-cost, exceptionally stable deposits that far exceeded the 

bank's needs. These demands went beyond any requirements imposed on the existing comparable banks that would be our competitors. They baffled us, as they would introduce increased risk 

and expense into bank operations. 

After many months, many modifications to our plans, and expenditures well in excess of 

$800,000 and countless hours, we concluded we were engaged in an exercise in futility. We halted the effort to get our charter approved. 

Our effort failed because the FDIC imposed unwritten and unacknowledged standards on 

us that changed as we progressed. We were ready and able to make any reasonable changes to 

our plan to meet the long-articulated FDIC standards and requirements. We failed because we 

were never able to understand specifically the FDIC's new requirements for approval. We were 

only told, regularly, that we needed to do more. 

Today I strongly believe the FDIC did not want to approve our application regardless of 

any changes offered, but did not want to deny it on the merits because that would require stating 

explicit reasons and provide an opportunity to challenge the decisions as arbitrary and capricious. 

What we experienced was denial by attrition. Put another way, we unwittingly played rope-adope with the FDIC and wasted a great deal of time and money in doing so. 

As a member of the banking community, I can say without hesitation that experiences 

such as ours with the applications process have produced a deeply held view that applications for 

new banks are a waste of time and actively discouraged in practice. 

All of this poses a question: Why is the FDIC not approving any charters? Their own answers are unpersuasive. 

On several occasions FDIC officials have blamed the dearth of new bank applications on 

economic conditions, which likely did play a role during the Great Recession. But if that were 

the only factor we would expect to see new bank applications surging as the economy recovers, 

and that is not happening. Indeed, studies have shown that in all prior recessions bank applications declined during the downturn, but never went to zero, and quickly returned to normal numbers of applications after the recession ended. The lack of new bank applications, even now, is 

anomalous and cannot be explained by current economic conditions or increased regulatory costs 

since 2008. A careful review of the existing data shows that the only credible explanation for the 

lack of new applications is a de facto moratorium imposed by the FDIC. 

A paper issued by the Federal Reserve Bank of Richmond in 2015 clearly shows that 

bank profitability has recovered to near normal levels since the recession, and if we were following historical trends, new banks would have been formed at normal rates for the past few years. 7 

Thus, factors other than economic conditions are blocking the organization of new banks. We 

7 McCord, Roisin, and Edward Simpson Prescott. "The Financial Crisis, the Collapse of Bank Entry, and Changes in 

the Size Distribution of Banks." Federal Reserve Bank of Richmond Economic Quarterly 100.1 (2014): 23-50. Print. 

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believe the array of new requirements imposed by the FDIC on new bank applicants and the 

FDIC's stonewalling of pending applications are the real barriers to opening new banks. The 

chartering of new community banks and specialty banks has always been an engine of innovation 

in our nation's banking services and credit markets. This engine has stopped. 

In 2009, American Banker reported: 

Though the ban is not official, several industry sources said groups looking to start banks 

in Florida, Georgia, California, Nevada, or Arizona have been told by FDIC officials 

that applications for deposit insurance will not be considered for up to a year- even if 

organizers have already raised capital and their charter applications have been approved by their primary regulator. 8 9 

In another case, in 2010, a state bank regulator discussed how the FDIC nudged entrepreneurs seeking to start a new bank into buying an existing bank in need of capital. That regulator 

told a reporter, "They weren't looking for anything but a traditional community bank. Hopefully 

sometime the FDIC will get back to the business of approving de novo applications. There is still 

interest out there. "

1 0 

The lack of new charters has helped to fuel continued growth among the nation's largest 

banks. By not allowing a natural renewal through new charters, the FDIC is enshrining a more 

concentrated, less dynamic banking sector. 

Some critics say the FDIC is fixated on risk, and has decided that the best way to minimize risk is to reduce the size of the banking industry and limit new banks, just as auto insurers 

could reduce their collision-related losses by refusing to cover cars. 

Beyond the drive toward consolidation, however, the FDIC has shown a strong hostility 

to new bank models since 2008. This is short-sighted. Technology has transformed the overall 

structure of the financial services markets. Technological advances such as ATMs, credit and 

debit cards, and mobile-based applications have made branches increasingly less important, and 

changed the basic relationship between banks and many of their customers, especially younger 

ones, from geographically based to product-based. Banks must become technology leaders if 

they want to remain in business tomorrow. If the FDIC continues to block change and growth, 

banks will become increasingly insignificant as suppliers of credit to the economy. 

This is unacceptable. A healthy economy requires a healthy banking system. A vibrant 

and innovative banking system is critical for job growth and economic expansion. It appears that 

the FDIC has failed to take broader economic needs into account when fashioning new unilateral 

policies it has followed for the past decade. 

8 The tenn "primary regulator" refers to the agency that approves a charter e.g., a state banking department or, in the 

case of national banks, the Office of the Comptroller of the Currency. 9 Fajit, Marissa. "FDIC in Unofficial Clampdown; Reluctance Seen to OK Start-ups Insurance." American Banker 

12 Jan. 2009: I. Web. 

lO Rehm, Barbara A. "FDIC Set to End De Novo Dry Spell." American Banker 2 Dec. 2010. Web. 
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The nation needs new banks, and the time is overdue to allow banks of every kind to resume playing their natural role in the economy. Given the rapid development of technology, it is 

also essential for regulators to allow banks to adapt to the changing economy and develop new 

ways to deliver products and services designed to serve the needs and demands of more techsavvy generations. 

THE FDIC'S CONDUCT SHOWS A PATTERN OF ERECTING ROADBLOCKS TO 

NEW ENTRANTS 

Along with endless processing times, and constantly evolving, ambiguous requirements, 

FDIC policies designed to block new banks include: 

A new highly constricted, novel definition of"serving public needs and convenience" 

Prohibiting branchless banks 

Prohibiting applications that rely on brokered deposits 

Prohibiting specialty banks, which often have mono line or tailored business plans 

The FDIC has unilaterally adopted these new policies, without public notice and request 

for comment, and has concealed what it was doing to avoid oversight. The FDIC's practice of 

using "non-denial denials" to avoid oversight and accountability for blocking growth of a vital 

sector of the economy is improper and dangerous. The agency has adopted these policies without 

a clear understanding of the needs of the economy, or of its own proper role in facilitating the 

development of a thriving and stable economy. 

WHO GETS HURT? 

Outside the FDIC, the need for new bank charters is recognized. North Carolina's banking commissioner, Ray Grace, recently told the North Carolina Bankers Association that regulators "need to shake themselves up" in order to fulfill the industry's potential as a laboratory for 

change. A news story on Commissioner Grace's remarks noted that "Obtaining new charters 

has proven difficult since the f'mancial crisis, as the Federal Deposit Insurance Corp. balks 

at signing off on new banks."11 (emphasis added) 

When the FDIC "balks," it particularly affects three types of banks, each of which brings 

vital economic benefits to the customers they serve: 

Community banks 

Minority banks 

Specialty banks, such as industrial banks 

11 Davis, Paul. "Regulators Need to Approve New Types of Banks: N.C. Banking Commish." American Banker. (II 

Mar. 2016 

.htto://www.americanbanker.com/news/community-bankinglregulators-need-to-aovrove-new-types-of-banks-ncbanking-commish-l 079861-l.html. 

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COMMUNITY BANKS 

While community banks are small in relation to total bank assets, they make a disproportionate number of agricultural and small business loans. As Federal Reserve Governor Lael 

Brainard has noted, "Community banks have long been a primary source of credit for small businesses and today may continue to have the best business model for fulfilling many small business credit needs." She also pointed out that "community banks continue to hold about 50 percent of outstanding small business loans at commercial banks, far in excess of their 20 percent 

share of commercial banking assets and deposits." 12 

As Governor Brainard explained, community banks "tend to provide different types of 

loans to different types of (small business] borrowers, using different underwriting methods." 

While large institutions may have the advantage of access to vast quantities of automated data, 

she said, "( s ]mall banks ... have advantages in the provision of relationship-based lendinglending based on context-specific or qualitative information, such as the owner's character and 

reliability and the needs of the community." 

While much of the nation has enjoyed an economic recovery since 2008, rural America 

has not participated. A May 2016 study by the Economic Innovation Group found that only 20 

counties generated halfthe country's net new business startups. 13 None of these 20 counties are 

in rural areas. 

Our national economic recovery will not be complete without small business lending to 

entrepreneurs in the counties that have been left behind. That capital will have to come from 

somewhere, and these communities will likely need new banks to help their residents prosper. 

This cannot happen until the FDIC begins to approve new charters again 

As the number of banks declines, it is unlikely that large institutions will fill this void. 

Community banks compete on service more than on rates. As banks grow, they typically focus 

more on efficient delivery of a high volume of standardized products and services. This can leave 

smaller customers and communities by the wayside. 

As the Federal Reserve Bank of Richmond points out, the formation of new banks is vitally important to fill the voids created as existing banks grow, merge, and leave their smaller 

niches unserved. This process is dynamic and dramatic. Between 2007 and 2014, the number of 

small banks in the U.S. declined by an astonishing 41%. The Richmond Federal Reserve Bank 

study found this was largely the result of "a striking decline in new bank entry not seen in previous periods. From 2009 through 2013, entry falls to almost zero." (emphasis added) 

12 Brainard, Lael. "Community Banks, Small Business Credit, and Online Lending." Community Banking Research 

and Policy Conference, Cosponsored by the Federal Reserve System and Conference of State Bank Supervisors, 

Federal Reserve Bank of St. Louis, St. Louis, Missouri. 30 Sept. 2015. 

https://www. federalreserve.gov/newseventslspeechlbrainard20 150930a.httn. 

13 Economic Innovation Group. "The New Map of Economic Growth and Recovery." May 2016 

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This trend is alarming because community banks disproportionately serve small businesses and rural American communities. In 2011, community banks held the majority of deposits 

in rural and "micropolitan" counties- areas surrounding an urban center between I 0,000 and 

50,000 people- according to the FDIC. The FDIC also found that community banks were four 

times more likely than non-community banks to locate their offices in rural areas. In 20 I I, the 

physical banking offices in about 20 percent of American counties- approximately 600 in allwere exclusively owned by community banks. 14 

Earlier, I cited an article from The Economist that described the formation of Primary 

Bank inN ew Hampshire - only the second of three banks to be chartered in five years. Primary 

Bank's founder, New Hampshire businessman Bill Greiner, had seen three local banks evaporate. The Economist concluded: 

Such local knowledge does not fit neatly with the impersonal/ending procedures used by 

big banks, which are more geared towards large borrowers which have hard data, such 

as financial statements and credit ratings. Although new platforms-such as peer-to-peer 

lenders-are emerging, they are young and limited in size. In the meantime, America's 

small businesses hope that more will follow in Mr. Greiner's footsteps. 

The dearth of new bank charters has a profound impact on rural America, including a 

significant decrease in the availability of banking services in U.S. "micropolitans"- the smaller 

cities and towns that serve regions that account for approximately 25% of the US population. 

Agricultural communities are also seeing a marked decline in the availability of banking 

services. Community banks provide 50% to 77% of agricultural loans. While estimates vary, all 

agree that community banks are an important source of agricultural finance, and are disappearing 

in rural America. Some communities have no local financial services, and individuals may have 

to travel up to two hours to reach a banking location. 

This creates "financial deserts" in rural America, exacerbated by the fact that many of 

these communities lack the Internet services that may offer alternative means of banking. This 

growing gap in outlying communities' access to vital financial services highlights the profound 

flaw in the FDIC's unilateral no-growth, no new competition policy. New competition from 

banks that focus initially on those underserved communities is the best way to fill these gaps. 

Community banks also serve small businesses, providing approximately 50% of all small 

business finance. Some observers suggest the decline in small business formation, especially in 

small towns and rural areas, is the direct result of the disappearance of community banks. 15 

14 Lux, Marshall, and Robert Greene, 2015. "The State and Fate of Community Banking." Mossavar-Rahmani Center for Business and Government Working Paper Number 37, Harvard University. 15 DeYoung, Robert, eta!., "Small Business Lending and Social Capital: Are Rural Relationships Different?" (paper 

presented at the Community Banking in the 21st Century conference, Federal Reserve System & Conference of 

State Bank Supervisors, St. Louis, Mo., October 2-3, 2013); Berger, Allen N., Seth D. Bonime, Lawrence G. Goldberg, and Lawrence J. White. "The Dynamics of Market Entry: The Effects of Mergers and Acquisitions on Entry in 

the Banking Industry." Journal of Business, University of Chicago 77.4 (2004): 797-834. Web.; McCord, Raisin, 

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But rural and exurban areas are not the only markets damaged by the FDIC's failure to 

act. Minority and urban populations also suffer. 

MINORITY BANKS 

Of the nation's 6,110 FDIC-insured institutions, only 162 are Minority Depository Institutions (MDis). In fact, FDIC data show that only 22 MDis are African American-owned, and 

only 30 are Hispanic American-owned. 16 These institutions make up less than one percent of the 

nation's banks. 

The FDIC' s December 2015 Minority Depository Institutions report explains the need for 

these banks: 

Having offices in minority communities is also important to providing access to mainstream financial services. A 2011 FDIC survey shows that 10 million "unbanked" U.S. 

households did not have bank accounts while another 14 million households could be 

considered "underbanked. "17 

That survey found that 21.4% of African American and 20.1% of Hispanic American 

households were unbanked, compared with 4% of white households. The FDIC noted that 

"MD Is are important service providers to minority populations, which tend to have higher percentages of unbanked households than other population groups." 18 

Michael A. Grant, president of the National Bankers Association, a Washington, D.C.-

based organization of minority- and women-owned banks, has said that he sees a greater need for 

black-owned and black-run banks now than before the recession. "We've lost as much as 40% or 

more of the wealth in the black community since the mortgage crisis," he told the NerdWallet 

blog earlier this year. He said, "Some customers get turned down by mainstream institutions for 

business loans and mortgages, then come to black banks as a last resort- and get the loan."19 

Minority banks are, by and large, community banks. The challenges and opportunities 

that apply to community banks apply to minority banks as well. Community banking has also 

traditionally served lower income individuals, and low-income communities are often left without any financial services beyond the transactional services provided by A TMs. 

and Edward Simpson Prescott. "The Financial Crisis, the Collapse of Bank Entry, and Changes in the Size Distribution of Banks." Federal Reserve Bank of Richmond Economic Quarterly 100 .I (20 14 ): 23-50. Print. 16 FDIC Minority Depository Institutions Report, Dec. 

20 15,httos:/ /www .fdic.gov/regu1ations/resources/minoritvJmdi.html. 17 2011 FDIC National Survey of Unbanked and Underbanked Households, http://www.fdic.gov/householdssurvey/. 18 United States. Federal Deposit Insurance Corporation. "Minority Depository Institutions: Structure, Performance, 

and Social Impact." FDIC Quarterly. 3rd ed. Vol. 8. N.p.: n.p., n.d. Print. 19 Lee, Jeanne. "Black-owned Banks Fight To Bounce Back." NerdWallet. 19 Feb. 2016. 

https://www.nerdwallet.comlblog!banking/black-owned-banks-fight-to-bounce-backl. 

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Some observers believe the US is moving to a structure where the lowest 40% of the income distribution will not have access to banking, and will be forced to rely on secondary providers such payday lenders and check cashing services.20 

FDIC Chairman Martin Gruenberg acknowledged this last month in remarks to the Urban 

Financial Services Coalition. After noting that "[m]any consumers- minorities in particularremain unserved by the banking system," he went on to say that "the number of MD Is has declined since the onset of the financial crisis and has continued to decrease in recent years." He 

made no mention of the obvious solution: chartering new minority banks. 

While advocates agree with the need for MDis, given the FDIC's treatment of a wellcapitalized multinational company like Deere, what could a minority entrepreneur expect when 

planning a start-up? 

SPECIALTY BANKS 

As in the case of Deere, specialized institutions, such as industrial banks, have long been 

part of the fabric of the financial system. Industrial banks have existed for more than a century 

and operate under a number of titles: industrial banks, industrial loan banks, industrial loan corporations, thrift and loan companies, and more recently federal savings banks. 

Industrial banks provide a broad array of products and services to customers nationwide, 

including some of the most under-served segments of the U.S. economy. Banks under this charter serve truckers, taxi drivers and postage buyers, while others use the charter to provide services for some of the largest credit card and commercial finance companies in the nation. 

Specialty banks, which might also be called branchless banks, are leaders in the development of new technologies to deliver financial services. This is one of the strongest and clearest 

trends in banking and financial services today. Younger generations increasingly rely on banking 

services delivered through their mobile devices. Growing numbers of people no longer visit a 

bank branch. Instead they bank from home, using online systems that can be accessed from anywhere, which is easier than driving to a branch. 

Although the existing specialty banks have been the strongest and safest banks in the nation for many years, the market's widely held perception is that the FDIC will not approve any 

new application for an industrial bank, or for any other kind of branchless bank that would offer 

specialized products and services nationwide. This is a dangerous policy, driving innovations 

crucial to the future of banking to less regulated and less stable providers. 

Two states, Nevada and Utah, currently offer these charters. Despite state laws that enable new charters, the FDIC has refused to approve or consider new applications. In fact, the 

agency actively discourages these applications. 

20 Baradaran, Mehrsa, 2015. How the Other Half Banks: Exclusion, Exploitation, and the Threat to Democracy. 

Harvard University Press, 2015. 

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The Nevada and Utah legislatures chose to permit these longstanding charters, and Congress has reaffirmed their authority on three occasions: in 1987 (Competitive Equality Banking 

Act), 1999 (Graham-Leach-Bliley Act), and 2010 (Dodd-Frank Wall Street Reform and Consumer Protection Act). Now the states- and by extension, Congress- find their public policy 

preempted, without any legal process, by the unilateral actions of the FDIC. 

A GLIMMER OF HOPE? 

On April 6, 2016, Chairman Gruenberg announced that the FDIC was rescinding a policy 

that required heightened scrutiny of de novo banks during their first seven years of existence, and 

was returninf to the prior policy, which subjected new banks to regulatory micromanagement for 

three years.2 The announcement also stated that "the FDIC welcomes applications for deposit 

insurance, and we clearly have a role to play in facilitating the establishment of new institutions." 

From an applicant perspective, the three-year or seven-year duration of the de novo scrutiny is not a determinant in whether to apply. In fact, the common perception among potential 

applicants is that the FDIC's claim to welcome new applications is mere public relations. 

This perception exists because the FDIC's decade-long conduct contradicts this announcement. It has still not acted on the John Deere application, which has languished for years. 

And it has done nothing to change a common impression that people at the agency in Washington are adversarial, uncooperative, evasive and at times belligerent. Potential applicants will not 

commit the substantial time and money needed to prepare an application until they see the FDIC 

changing its practices of enforcing a unilateral no-growth policy while avoiding accountability to 

Congress. 

A recent article in the National Law Journal called the dearth of deposit insurance approvals "a self-fulfilling prophecy," as the FDIC's failure to act has suppressed interest in new 

charters. The author, an attorney, wrote that "[e]xperience has shown us that persons wanting to 

organize a new insured depository institution have been discouraged by the FDIC's failure to approve more than a small handful of new deposit insurance applications in the past few years 

(none so far in 2016, two in 2015, none in 2014, three in 2011, and two in 2010, according to the 

FDIC's website)."22 

A May 13 letter from Senator Dean Heller, Chairman of the Senate Banking Subcommittee on Economic Policy, told FDIC Chairman Gruenberg that the agency's "record of creating an 

environment favorable for the establishment of new de novo chartered institutions has been dis21 Gruenberg, Martin. "Strategies for Long-Term Success." FDIC Community Banking Conference. Arlington, VA. 

6 Apr. 2016. Speech. 22 Hom, Charles M. "FDIC Chairman Gruenberg Announces Initiative to Promote New Bank Charters; New Supplementary Guidance on Deposit Insurance Applications Announced." National Law Joumal6 Apr. 2016: n. pag. 

Print. 

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appointing. In Nevada and throughout the country, there is a growing demand for local community banks from individuals, small businesses, ranchers and farmers."23 

Is the FDIC serious about approving new charters? It seems unlikely. In recent remarks 

about the impact of post-financial crisis banking reforms on the financial system and the economy, Chairman Gruenberg did not seem aware of any problems. He told Washington, DC's Exchequer Club last month that he believes "the reforms put in place since the crisis have been 

largely consistent with, and supportive of, the ability of banks to serve the U.S. economy."24 

He made no mention of new charters or underserved markets. 

ONLY CONGRESS SHOULD DECIDE IF THERE ARE ENOUGH BANKS 

While the FDIC should have broad discretion over approving new bank applications, it 

does not have the discretion to shut down the formation of new banks altogether, or to refuse to 

process applications for types of banks authorized by Congress to access deposit insurance. Congress, which enacted the Federal Deposit Insurance Act and numerous banking bills, did ask for 

this. The states, which have chartered banks since 1780, are finding their 236 years of prudential 

regulatory experience ignored. 25 

The Committee should take particular note of the lack of studies or research to justify the 

FDIC's unilateral no-growth policies. FDIC is not just an insurance company. It is a regulatory 

agency with basic responsibilities to develop and implement policies designed to support the 

economy. Through its actions, the FDIC shows no concern or understanding about the needs of 

the economy. 

In evaluating deposit insurance applications, the FDIC should gather and use information 

that identifies: 

the kinds and amounts of financial services needed to support a thriving and stable economy; 

the best ways to provide these services; 

the optimal numbers and types of banks to support the economy; 

the best regulatory policies to support the development of these banks and other financial 

services providers; and 

the best regulatory policies to control risks and address potential crises. 

We found no studies conducted by the FDIC or any other entity addressing these questions. We found no announcement by the FDIC that it is adopting new standards that would reduce or block new bank applications, no description of studies or reasoning for changes to its 

23 Senator Dean Heller. Letter to The Honorable Martin Gruenberg. 13 May 2016. MS. Washington, DC. 24 Gruenberg, Martin. "The Impact of Post-Crisis Reforms on the U.S. Financial System and Economy." Exchequer 

Club; Washington, D.C. 15 June 2016. Speech. 25 States chartered banks from 1780 until 1933 without the aid of the FDIC. 

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long-articulated standards for applicants, and no requests for comment or input on these new policies. 

WHAT SHOULD THIS COMMITTEE REQUIRE FROM THE FDIC? 

We believe that policymaking must be transparent, and that regulators must not create 

policy without a clear understanding of its effect on the economy, a thorough assessment of the 

nation's best interests, and an open process seeking input from all interested parties. 

To make the FDIC accountable for its failure to charter de novo banks, we urge this 

Committee to require the FDIC to: 

I. Outline, with specificity, what it is doing to align its actions with its stated policies and 

convince potential bank organizers that it will actually process applications promptly and 

fairly. 

2. Designate the specific criteria used to approve a bank charter so that applicants know the 

rules and can legitimately evaluate their likelihood of success. Any unpublished differences 

or new creative interpretations from established statutory criteria need to be public and accessible. 

3. Provide a plan and timeframe to return to the pre-crisis delegation of authority to the Regional Offices. 

4. Describe how the FDIC plans to free states to resume their traditional role as innovators in 

the banking system, providing our economy with a vibrant, pro-growth banking system that 

meets the needs of commnnities and the nation. 

* 

Thank you for the opportunity to share our views. I would be happy to answer any questions you may have. 

16 
47 

Chairman CHAFFETZ. Thank you. 

Mr. Johnson, you are now recognized. 

STATEMENT OF SIMON JOHNSON 

Mr. JOHNSON. Thank you very much, Mr. Chairman. 

I would like to make three points. The first is to strongly agree 

with what Mr. Cummings said at the beginning with regards to effective overall interest rates in the U.S. economy on new entries. 

And I’m afraid—and I think this is absolutely the key fact for this 

hearing, and I hope we can establish those facts—I’m afraid there 

is an issue—perhaps it’s an issue of omission—in Mr. Browning’s 

testimony. He had some slides prepared by people at the University of Utah, and they seemed to have read a Richmond Fed research paper on this issue of interest rate spreads. 

The Richmond Fed paper itself references and is based on a Federal Reserve Board of Governors paper. I have that paper with me, 

and I have the figure to which they seem to be referring. They say 

interest rate spreads have remained relatively stable for banks. 

That statement applies to established banks, Mr. Chairman, not to 

de novo banks, the point made by Mr. Cummings, because they 

have a different loan portfolio, they don’t inherit loans that already 

have interest rates at a certain level. 

So the evidence is clearly, from the Fed’s research, which is being 

referenced by Mr. Browning, the evidence is clearly that the net interest spread for de novo banks is much lower than it has ever 

been in recorded U.S. history. That’s a major disincentive to create 

community banks. 

The second point I would like to make, Mr. Chairman, builds on 

what you said at the beginning, which I think is also fundamental 

to this hearing, which is the FDIC is an insurance company—a 

strange insurance company, an insurance company chartered by 

the Federal Government, backed ultimately by the taxpayer. But 

as you know, Mr. Chairman, if the FDIC faces losses or the deposit 

fund faces losses, those are covered by premiums paid by other 

banks. 

Now, we can, I think, reasonably look at the FDIC’s performance 

as an insurance company over the past couple of cycles. And what 

we see, including in the most recent experience, is that the FDIC’s 

deposit fund almost ran out of money. 

Now, if you think that the FDIC is being overly cautious over the 

business cycle, the credit cycle, you’d expect that fund to always be 

positive, maybe even highly positive. That was not the experience. 

If the FDIC was being reckless, and we’re asking the FDIC to 

take bigger risks today—well, you’re asking any insurance company to take bigger risks, they’re going to have bigger losses over 

the cycle, you’re going to have bigger negatives in that insurance 

fund—those premiums are not, Mr. Chairman, that deficit is not 

ultimately going to be paid by the taxpayer. We’re the backstop. 

We’re the line of credit through the Treasury. It’s the people sitting 

behind me representing the banking industry who are going to pay 

a high premium. 

So the question, I think, comes down to—and I hope we can get 

to this—do established bankers want to pay a higher premium to 


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run their existing business? Because that’s basically what the ask 

is today, if you’re asking the FDIC to take more risk. 

Now, as Chairman Gruenberg said, the FDIC has attempted to 

move its rules recently, and they have relaxed or reduce the de 

novo supervision and intensive scrutiny period from 7 years back 

to 3 years. I think that’s a responsible move, and I’m supportive 

of that. I really do not see a case for asking the FDIC to take greater risks with their deposit fund unless the bankers are all adamant 

that they want to pay higher insurance fees, because the taxpayer 

certainly does not want to be on the hook here and will not be on 

the hook. 

The third and final point I would like to make is with regard to 

what are and are not the big issues here. I think Mr. Cummings 

put his finger exactly on one of the big issues, which is the lack 

of affordable, responsibly provided financial services to low-income 

communities. There’s a huge gap in the United States, and many 

of the alternative financial services that currently exist are, frankly, predatory. If you look at all the different ways that credit is provided to those communities, it’s not acceptable. There’s big issues 

there of consumer protection, and I hope we can discuss those to 

some degree. 

But if we’re talking about entry and what affects entry and what 

distorts competition in this market, Mr. Chairman, I think we have 

to talk about the big banks. We have to talk about the unresolved 

questions around too big to fail. The very largest banks in this 

country have an unfair, distortive, implicit subsidy from the taxpayer, because they are not allowed to fail and the creditors would 

ultimately be protected. 

The FDIC is involved in trying to improve that situation, and 

there is a living wills requirement, as you know, for all these big 

banks. But, frankly, 6 years after that requirement was created, we 

have not made enough progress with those living wills. 

So, you know, if we want to talk about entry, we should be talking about fintech, we should be talking about new ways that finance is provided in the United States. There’s a lot of risk capital 

going into finance. Yes, it is relatively hard to get insured deposits, 

but that’s because the FDIC has responsibility not to impose bigger 

effective taxes on the rest of the banking industry. 

Where are we on too big to fail, and how can we possibly create 

a level playing field for community banks before and until we really make sure that no bank and bank holding company in the 

United States is too big to fail? 

Thank you very much. 

[Prepared statement of Mr. Johnson follows:] 


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Testimony submitted to the House Committee on Oversight and Government Reform, 

hearing on "Oversight ofthe FDIC Application Process," Wednesday, July 13, lOam 

(embargoed until the hearing begins). 

Submitted by Simon Johnson, Ronald Kurtz Professor of Entrepreneurship, MIT Sloan School of 

Management; Senior Fellow, Peterson Institute for International Economics; and co-founder of 

http://BaselineScenario.com. 1 

A. Overview 

1) The Federal Deposit Insurance Corporation's Application Process is an important part of how 

new banks obtain (or do not obtain) charters.2 Some commentators have expressed concern 

that the current Process for obtaining federal deposit insurance inappropriately limits the 

amount of entry into the community banking sector. 3 

2) In April2016, the FDIC rescinded Financial Institution Letter (FIL) 50-2009, Enhanced 

Supervisory Procedures for Newly Insured FDIC-Supervised Depository Institutions. This 

rule change reduced the "de novo period" for examinations, capital maintenance, and other 

requirements from seven years to three years.4 Informal guidance is also reported to have 

changed, consistent with the goal of encouraging de novo banks to be created. 5 

3) This policy change was welcomed by the Independent Community Bankers of America 

(ICBA) and the American Bankers' Association (ABA).6 

4) Community banks play an important role in the U.S. economy and encouraging de novo bank 

applications is a sensible policy goal. However, under current circumstances and based on 

1 Also a member of the Federal Deposit Insurance Corporation's Systemic Resolution Advisory 

Committee, the Office ofFinancial Research's Financial Research Advisory Committee, and the 

independent Systemic Risk Council (created by Sheila Bair and now chaired by Paul Tucker). All the 

views expressed here are mine alone. Underlined text indicates links to sources and supplementary 

material; to see this, please access an electronic version of this document, e.g., at 

http://BaselineScenario.com. For important disclosures, see http://baselinescenario.com/about/. 2 The Process is summarized on the FDIC's website, https://www.fdic.gov/regulations/laws/rules/5000-

3000.html. Section 6 of the Federal Deposit Insurance Act specifies the seven criteria that the FDIC must 

take into account in its evaluation. The FDIC does not charter banks -this is done by The Office of the 

Comptroller of the Currency (OCC) and state authorities. 3 The FDIC has a broadly sensible and robust defmition of community banking and I use that throughout 

this testimony. See Chapter 1 in the recent (2012) FDIC Community Banking Study, 

https://www.fdic.gov/regulations/resources/cbi/report!CBSI-l.pdf. Most of these banks are, as the name 

suggests, deeply rooted in local communities. 4 In 2009, the de novo period was increased to seven years; it has now been returned to three years. This 

should be seen in the overall context of stronger FDIC forward-looking supervision. See the press 

release, https://www.fdic.gov/newslnews/press/2016/pr16027.html; also the Supplemental Guidance, 

https:/ /www .fdic.gov/news/news/fmancial/20 16/fil16024.html and 

https://www. fdic. gov/news/news/fmancia!J20 16/fill6024a.odf. 5 This is the publicly expressed view of two law firms active in this area: Bracewell 

(http://www .bracewelllaw. com/news-publications/updates/fdic-action -encourages-de-novo-bank -charterapplications), and Kennedy Sutherland (http://kslawllp.com/categorv!financial-institutions/communitybanks/de-novoD. 

6 See the ICBA press release, http://www.prweb.com/releases/2016/04/prwebl3322093.htm, and the 

ABA announcement, http:/ /bankingjournal.aba.com/20 16/04/fdic-announces-effort -to-encourage-denovo-applications/. 

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available data, the case for further changing the FDIC rules regarding the Application 

Process for de novo banks is not compelling. 

5) The broad facts regarding community banks are not in dispute. The total number of 

commercial banks with FDIC-insured deposits fluctuated around 13,000-14,000 in the 

decades leading up to 1980. Since that time there has been a steady decline to just over 5,000 

(from the latest available data, as of March 2016).7 

6) Seen over a period of decades, the major policy change that Jed to the decline in the number 

of community banks was the phasing out of restrictions on inter-state banking.8 A large part 

of the process of consolidation was driven by mergers and acquisitions, i.e., smaller banks 

had a positive market value on a forward looking basis and were bought by other banks. 

7) In addition, the economies of scale in banking likely changed over a long period of time, in 

part due to the rising importance of information technology in this sector- and this made it 

harder for the smallest banks to survive as stand-alone entities. Recent evidence on average 

costs as a function of asset size suggest that these decline from around 9 percent to around 6 

percent as assets rise to $1OOm. 9 

8) When executives at community banks make bad decisions (or are unlucky), the bank goes 

out of business typically through an FDIC-managed resolution event. There are no "too big 

to fail"-type subsidies available from the government; deposit insurance ultimately protects 

depositors but not shareholders or executives. The failure of community banks is very much 

related to the overall business and credit cycle, particularly as it affects specific communities. 

9) Looking back at the number of failures over the past three decades, the aberration or 

abnormal period seems to have been the long boom between 1994 and 2007, when very few 

banks failed. In 1986-1993, the annual rate offailure (as a percent of charters reporting at 

previous year-end) was 1.6 percent; in 2008-2013, the annual rate of failure was 1.0 percent; 

in 1994-2007, the annual rate of failure was only 0.05 percent.10 

10) It seems reasonable to compare the latest credit cycle (with a peak in 2007, driven by 

residential real estate) with the previous cycle (peak in the late 1980s, driven by commercial 

7 See Table 1 in the FDIC's latest Quarterly report, 

https://www.fdic.gov/bank/analvtical/quarterly/2016 voi!O 2/fdic v!On2 lgl6 quarterly.pdf. This 

gives the total number of"FDIC-insured institutions" as 6,122; excluding insured U.S. branches of 

foreign banks. Of the 6,122 institutions, 5,289 are Commercial Banks and 833 are Savings Institutions; 

see also FDIC Historical Trends, Statistics at a Glance, 

https://www.fdic.gov/bank/statistical/stats/2016mar/fdic.pdf. The FDIC's detailed Quarterly Banking 

Profile provides more detail and is available here: https://www.fdic.gov/bank/analytical/qbp/. The longest 

time series on FDIC-insured banks is available from the FDIC's data page, 

https://www5.fdic.govlhsob/HSOBRpt.asp (and select the Commercial Banks option). 8 See "Community Banks Remain Resilient Amid Industry Consolidation", FDIC Quarterly, 2014, 

Volume 8, No.2; https://www.fdic.gov/bank/analytical/guarterly/2014 vol8 2/article.pdf. 9 Stefan Jacewitz and Paul Kupiec, "Community Bank Efficiency and Economies of Scale", FDIC, 

December 2012, https://www.fdic.gov/regulationslresources/cbi/report/cbi-eff.pdf. The price level has 

more than doubled since the early 1980s and this should be taken into account when considering nominal 

thresholds for bank size over time. At year-end 2013, 68 percent of community bank charters had assets 

between $100 million and $10 billion (p.37 in "Community Banks Remain Resilient"). 10 See Chart 3 on p.35 of"Community Banks Remain Resilient". 

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real estate). In both instances some banks went out of business and the number of new 

charters quickly fell to a very low Ievel. 11 

11) However, compared with the previous cycle, the number of applications for new charters has 

subsequently stayed very low since 2008. 

12) The business model of community banks is primarily to take deposits (from households and 

small firms) and to make loans. A very low interest rate environment does not make things 

easy for this model. 

13) Researchers at the Federal Reserve have looked carefully at this issue and found a strong 

correlation between interest rates and new entry into banking over a long period of time. 

With regard to recent experience, they concluded: "Our results suggest that even without any 

regulatory changes following the financial crisis, the weak economy and low interest rate 

environment would have caused 75-80% of the current decline in new charters."12 

14) This view is consistent with the assessment of James Chessen, chief economist at the 

American Bankers Association, who wrote recently, "Great investment options don't exist in 

today's abnormally low-rate environment. But even with more normal rates and a steeper 

yield curve, can a new bank grow fast enough to cover investor expectations?"13 

15) Mr. Chessen adds this important point: "Every bank knows the competition is tough among 

banks but even harder against tax-favored competitors like credit unions and the Farm Credit 

System, or new online marketplace lenders." 

16) In addition, Trust Preferred Securities (TruPS) were an important way that community banks 

raised capital between 2000 and 2007- these are a debt-like instrument that the Federal 

Reserve ruled (in 1996) could be counted as Tier 1 capital. Small TruPS were securitized 

into collateralized debt obligations (CDOs). These securities did not on the whole perform 

well during the crisis.14 Smaller banks will likely find it hard to raise capital in this way. 

17) More broadly, there has been dramatic concentration in the provision of credit in the United 

States since the 1980s- reflecting the advantages and implicit subsidies received by very 

large "too big to fail" financial institutions. Most of the growth in total assets over the past 

30 years has been concentrated in banks with assets over $10 billion. There has been slight 

growth in the $1 OOm-$1 Obn segments, and actually a decline in the total assets of banks with 

less than $100m. 15 

11 Chart 4 on p.36 of "Community Banks Remain Resilient". According to the FDIC's Statistics At A 

Glance, there were no "new reporters" in 2014, only one (a commercial bank) in 2015, and none in the 

year to date in 2016. 12 Robert M. Adams and Jacob P. Gramlich, "Where Are All the New Banks? The Role of Regulatory 

Burden in New Charter Creation," Finance and Economics Discussion Series 2014-113, Division of 

Research & Statistics and Monetary Affairs, Federal Reserve Board of Governors, Washington DC, 

http://www.federalreserve.gov/econresdata/feds/2014/files/20 14113pap.pdf 13 James Chessen, "The Welcome Sign Is Up for De Novos But Is It Enough?" ABA Banking Journal, 

June 24, 2016, http://bankingjoumal.aba.com/20 16106/the-welcome-sign-is-up-for-de-novos-but-is-itenough!. 

14 "By October 2010, about one-third of the dollar volume ofTruPS used to collateralize COOs had either 

defaulted or deferred dividend payments", FDIC, Community Banking Study, December 2012, p.6-!0. 15 A vivid graphic to illustrate this point has been prepared by Thomas Hoenig, vice-chairman of the 

FDIC: https://www.fdic.gov/about/learnlboardlboenig/creditchannels.pdf. Mr. Hoenig's summary 

assessment is, "[I]n 1984 the distribution of assets among community, regional, and money center banks 

was nearly proportional, with more than 15,000 commercial banks serving a variety of borrowers, from 

consumers and small businesses to global conglomerates. Today, the 20 largest banks by assets control 

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18) The bigger issues going forward are not the details of how the FDIC treats de novo banks but 

rather whether legislation and regulation has done enough to create a sufficiently level 

playing field within banking. The lack of effective living wills for systemically important 

financial institutions should in this context be seen as a major concern. 

19) Section B below discusses the FDIC and de novo banks in more detail. Section C reviews 

evidence on whether "compliance costs" are deterring entry into finance more broadly. 

B. The FDIC And De Novo Banks 

De novo banks have a higher failure rate than do established small banks. In a recent FDIC 

study, staff members conclude, "Consistent with a life-cycle theory of de novos, compared with 

small established banks, these de novos were financially fragile and took many years to reach 

maturitv, relying more on non-core funding, and failed at higher rates during the recent financial 

crisis".r6 

Specifically, the authors found that 12.8 percent of banks chartered between 2000 and 2008 

subsequently failed. This should be contrasted with a failure rate of established small banks that 

was only 4.9 percent. 17 

As James Chessen (ABA chief economist) puts it, "Sure, de novos are risky. They have failed at 

twice the rate of other banks historically. They create losses for the FDIC (which banks fund)." 

The deposit insurance provided through the FDIC is funded privately (through quarterly 

assessments on insured banks), but it is a program set up by the government and has a backup 

line of credit from the U.S. Treasury. 

Weak financial regulation was an important contributing factor in the crisis of2008. 18 While the 

FDIC did much better than the Office of Thrift Supervision or the Federal Reserve, a significant 

number ofFDIC-insured banks failed and the deposit insurance fund suffered losses. According 

to the FDIC's statistics, the deposit fund suffered siguificant losses in 2008 and 2009- falling 

from a balance of$52.4 billion in 2007 to $17.3 billion in 2008 to negative $20.9 billion in 2009. 

The fund has since recovered and now stands at $75.1 billion. In 2008, 25 insured institutions 

failed - a significant increase relative to experience in previous 15 years. The number of failures 

rose to 140 in 2009 and peaked at 157 in 2010. 

However, helped by the long (if slow) economic recovery, the FDIC now seems to have brought 

the situation under control- only 8 insured institutions failed in 2015, and the number of 

"problem institutions" is down to 165 (from a peak of884 in 2010). 

more than 80 percent of industry assets, and the number of banking firms has declined to less than 6,200. 

The group of community banks with less than $1 billion of assets, which in 1984 controlled nearly a third 

of banking assets, today controls less than 10 percent of industry assets." 

https://www .fdic.gov/news/news/speeches/spapr0616b.html# ftn 1. 16 See p.2 of"the Entry, Performance, and Risk Profile of Do Novo Banks," by Yan Lee and Chiwom 

Yom, April7, 2016, FDIC CPR WP 2016-03 (working paper), 

https://www.fdic.gov/bank/analytical/CFR/2016/WP 2016/WP2016 03.pdf. 17 Lee and Yom, 2016. 18 See Simon Johnson and James Kwak, 13 Bankers: The Wall Street Takeover and the Next Financial 

Meltdown, Pantheon, 2010, particularly Chapters 5 and 6. 

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The FDIC and all regulators face significant pressures to relax standards during relatively good 

years. But when another downturn arrives, as it surely will, both the macroeconomy and local 

communities will be stronger if the FDIC has been able to maintain stronger supervisory 

standards over the cycle. 

The costs of the previous crisis were enormous - at least one year's worth of GDP in aggregate, 

and disproportionately borne by lower income Americans. 19 The FDIC is entirely right to seek a 

balance between encouraging new entry and ensuring the safety and soundness of banks with 

federally-insured deposits. 

C. Compliance Costs 

Is there a broader issue with "compliance costs" in the U.S. financial sector, in the sense that 

regulation is somehow limiting the availability of credit or other financial sector services? 

The FDIC has looked directly at this question for community banks. Its conclusion: "Consistent 

with the notion that these costs were a normal part of business, the interview participants noted 

that their overall business model and strategic direction had not changed or been affected by the 

regulatory compliance cost issues. In addition, the majority of interview participants stated that 

they had not discontinued offering products or services because of regulatory compliance, with 

the exception of overdraft protection and certain high-risk mortgage products."20 

Three pieces of more quantitative evidence suggest that compliance costs are not currently a 

major brake on banking activity. 

First, the latest financial results from community banks continue to show improvement. In the 

first quarter of2016, community banks reported $5.2 billion in net income, which was up 7.2 

percent year-on-year. Net operating revenue was up 6.9 percent from the first quarter in 2015. 

Second, there are definite signs of expansion by existing banks. For example, Canadian banks 

are reportedly expanding their presence in the U.S. market.21 Strong regulation in the U.S. is 

seen as a plus, relative to other potential international destinations. 

Third, there is plenty of entry into non-banking parts of finance, for example in what is termed 

"on-line marketplace lending". This product line is currently quite small but growing fast and, at 

least until the recent problems at Lending Tree became public, it was relatively easy to raise 

venture capital in this sector.22 

19 For a recent comprehensive and accurate assessment, see "The Cost of the Crisis: $20 trillion and 

Counting," a report by Better Markets, July 2015. 20 https://www.fdic.gov/regulations/resources/cbi/report/cbi-full.pdf. 21 Jackie Stewart, "What's Next for Canadian Banks Intent on U.S. Expansion" American Banker, July 8, 

2016. 

22 The largest lenders originated over $10bn in loans in 2015. Total consumer credit in the US is around 

$3.5 trillion, which is typically interpreted as room to grow for this sector. See U.S. Treasury, 

Opportunities and Challenges in Online Marketplace Lending. May 10,2016. 

5 
54 

Chairman CHAFFETZ. Thank you. 

Mr. Williams, you’re now recognized for 5 minutes. 

STATEMENT OF GUY WILLIAMS 

Mr. WILLIAMS. Thank you, Chairman Chaffetz and Ranking 

Member Cummings. My name is Guy Williams. I’m president and 

CEO of Gulf Coast Bank and Trust Company in New Orleans, Louisiana. 

My bank was chartered in 1990, at the beginning of a recession, with $1.5 million in capital. Over the last 25 years, we’ve grown 

into a $1.4 billion community bank serving southeast Louisiana. 

We are the largest small business lender in our State, specializing 

in helping to establish and grow new businesses, and we are also 

one of the area’s largest mortgage lenders. 

ABA appreciates the opportunity to testify on the dearth of new 

bank charters. New entrants into any industry are a sign of economic vitality. New banks provide more choices of competitive 

products and services for business and consumers, which translates 

into greater economic activity and growth in local communities. 

The lack of de novo banks is strong evidence that the economics 

of new community banks don’t work. Investors have options. If the 

impediments to starting a new bank are too great, they will invest 

elsewhere. 

Sadly, the forces that have acted to stop new bank charters are 

the same ones that have led to a dramatic consolidation in the 

banking industry: excessive and complex regulations that are not 

tailored to the risk of specific institutions. This, not economic conditions, is often the tipping point that drives small banks to merge 

with banks typically many times larger and is a barrier to entry 

for new banks. 

There are only seven de novos in the last 5 years. More troubling 

is that there are 1,500 fewer community banks than 5 years ago, 

a trend that will continue until changes are made that will provide 

relief tor America’s banks. 

In April, the FDIC announced some welcome but small supervisory changes to help prospective de novos through the process. 

Unfortunately, they do not address the underlying barriers to 

entry: capital hurdles, unreasonable regulatory expectations on directors, funding constraints, and inflexible regulatory infrastructure, and tax-favored competition from credit unions and Farm 

Credit System. 

If it does not make economic sense, no one will start a new bank. 

Look no further than the lack of new charters for proof that something is seriously wrong. When you fix the underlying problem, 

new charters will result. 

Gulf Coast Bank started with $1.5 million of investor capital, 4.4 

million in today’s dollars, and proceeded to create an institution 

that’s helped our community thrive for more than 25 years. The 

current requirement is that it would take $20 to $30 million to 

start a bank. That’s many multiples beyond what successful banks 

needed in the past. It’s doubtful that a new bank today could earn 

enough to cover the cost of that capital. 

There are many banks like mine that pooled local investment 

dollars to start a bank and built it into a strong community partVerDate Nov 24 2008 11:17 Jun 15, 2017 Jkt 000000 PO 00000 Frm 00058 Fmt 6633 Sfmt 6633 H:\25511.TXT APRIL

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55 

ner. I doubt seriously that my bank would be granted a charter 

today due to the capital requirements, the constraint on assets, the 

restrictions on funding. Couple these factors with a suffocating regulatory blanket, and I doubt that our investors would have made 

the investment. 

To ensure the broadest possible range of financial options to our 

communities, we must think creatively to find solutions that simulate new bank entrants. The changes that FDIC has made are a 

good beginning, but much more can and needs to be done. It’s time 

to think differently—to encourage new banks by requiring less capital, reducing regulatory burden, permitting greater flexibility in 

business plans, and lifting funding restrictions. 

Each and every bank in this country has a direct impact on job 

creation, economic growth, and prosperity. Our slow recovery from 

the recession is partly a result of the shrinking pool of community 

banks. We urge Congress to act now and pass legislation to help 

turn the tide of community bank consolidation, create an economic 

environment that encourages new bank charters, and protect communities from losing a key partner supporting economic growth. 

Thank you. I’ll be happy to answer questions. 

[Prepared statement of Mr. Williams follows:] 


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July 13, 2016 

Testimony of 

Guy T. Williams 

On behalf of the 

American Bankers Association 

before the 

Oversight and Reform Committee 

United States House of Representatives 

~I American 

Bankers 

Association 
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July 13, 2016 

Testimony of Guy T. Williams 

On behalf of the 

American Bankers Association 

before the 

Oversight and Reform Committee 

United States House of Representatives 

July 13, 2016 

Chairman Chaffetz and Ranking Member Cummings, my name is Guy Williams and I am the 

President and Chief Executive Officer of Gulf Coast Bank and Trust Company in New Orleans, 

Louisiana. I appreciate the opportunity to be here to present the views of the American Bankers 

Association (ABA) regarding regulatory relieffor small financial institutions. The ABA is the voice 

ofthe nation's $14 trillion banking industry, which is composed of small, mid-size, regional and 

large banks that together employ more than 2 million people, safeguard $11 trillion in deposits and 

extend more than $8 trillion in loans, 

Gulf Coast Bank was chartered in 1990-at the beginning of a recession-with $1.5 million in 

capital. Over the last 25 years, we have used that capital to grow our company into a $1.45 billion 

community bank, serving southeast Louisiana. We are the largest small business lender in our state, 

specializing in helping to establish and grow new businesses. Gulf Coast Bank is also one of the 

largest New Orleans metro area mortgage lenders, making roughly $500 million in residential 

mortgage loans each year. 

ABA appreciates the opportunity to testifY on the nearly complete lack of new bank start-ups 

(de novo banks). New entrants into any industry are a sign of growth potential and economic 

opportunity. New banks help fill gaps in the provision of banking services, increase competition, 

and ultimately strengthen the community banking sector. New banks mean consumers and 

businesses have more choices of competitive products and services which translates into greater 

economic activity and growth in local communities. 

The lack of de novo activity is concerning to our industry and sadly reflects the same forces 

that are driving consolidation-excessive and complex regulations that are not tailored to the risks 

of specific institutions. This-not the local economic conditions-is often the tipping point that 

drives small banks to merge with banks typically many times larger. It is also a barrier to entry for 

~ 1 American Bankers Association 2 
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July 13, 2016 

new banks. The fact remains that there are only seven de novos in the last 5 years. Even more 

troubling, there are 1,500 fewer community banks today than 5 years ago-a trend that will 

continue until rational changes are made to provide some relief to America's banks. 

The FDIC has acknowledged both 

the vital importance of community 

banks as well as the need for changes 

to encourage de novo fom1ations. 

Community banks account for 44 

percent of small business loans. 

According to a 2012 FDIC report, 

there are 600 rural or micropolitan 

counties where a community bank is 

the only financial institution. If that bank disappears, there is no incentive for investors to start a 

new bank to serve that community (and any economic vitality will quickly disappear). 

In April, the FDIC announced welcome supervisory changes, including community outreach, 

establishing a team of people to help prospective de novas through every stage of the process, 

refreshing its answers to key questions, and developing a guide to the deposit insurance application 

process to increase transparency. In addition, the period of heightened de novo supervision and 

strict adherence to the bank's original business plan-what some have referred to as the "penalty 

box''-was shortened from seven years to three years. 

Addressing gaps in knowledge and resources is very important, but it doesn't address the 

underlying issues that create the barriers to entry: capital hurdles, unreasonable regulatory 

expectations on directors, funding constraints, an inflexible regulatory infrastructure, tcclmology 

inveslu1ents, and tax-favored competition from credit unions and the Farm Credit System. The 3-

year penalty box, while better, still acts as a deterrent. If it does not make economic sense, no one 

will start a new hank. Look no further than the lack of new charters tor proof of this. Fix the 

underlying problems and new charters will result. 

Certainly the extraordinarily low interest rates over such a long period have narrowed spreads 

and created considerable economic stress for any existing bank or prospective de novo. But this is 

only part of the story. Community banks are resilient. We have found ways to meet our customers' 
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needs despite the ups and downs of the economy, but that job has become much more difficult due 

to the avalanche of new rules, new guidances and the seemingly ever-changing expectations of the 

regulators. Let me repeat: Fix the underlying problems and you help both existing banks and 

encourage new bank charters as well. 

Each and every bank in this country helps fuel the U.S. economy. Each has a direct impact on 

job creation, economic growth and prosperity. Community banks have always prided themselves on 

being flexible in order to meet the unique circumstances of each customer. This is why it is 

imperative that Congress take steps to ensure and enhance the banking industry's capacity to serve 

their customers, thereby facilitating job creation and economic growth. 

We thank House Financial Services Committee Chairman Hensarling and the members of the 

Committee that have worked to provide some regulatory relief. We urge members of Congress to 

work together- Senate and House-to pass legislation that will enhance the ability of community 

banks to serve our customers and help grow our economy. 

In the remainder of my testimony, I would like to focus on the follow key points: 

:;.. The lack of de novos has its roots in excessive regulation, 

:;.. The constraints on assets, liabilities and capital all conspire to make new charters 

uneconomical, and 

:;.. In order to insure the broadest possible financial options for our communities, we must 

think creatively to find solutions that will stimulate new bank entrants. 

1. The Lack of De Novo Banks Has Its Roots in Excessive Regulation 

In these economic times, the forces that challenge banks every day are the same as those that 

make starting a new bank nearly impossible. Certainly, economic conditions have had an impact. 

The Federal Reserve did admirable work during the recession, but quantitative easing and the zerointerest-rate policies have had real, lasting consequences. The first consequence is that we as a 

nation now favor borrowers and penalize savers. Great if you have good credit and want a home 

loan; horrible if you are a saver or retiree and need to live on your interest income. For banks, 

quantitative easing has compressed margins and forced longer-term lending which has raised 

concerns by regulators about interest rate risk. The near zero-interest-rate policy is challenging 

enough for existing banks, but as I detail later, it makes starting a new bank much more difficult. 

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A common belief is that the economic cycle is 

the primary obstacle for new banks, This is tmtrue, 

When Gulf Coast Bank was started in 1990, it was 

in the middle of the so-called "S&L Crisis" and tbe 

beginning of a recession, Despite these severe 

conditions, there were 193 de novas that year, Over 

the next 10 years, 1,500 new banks started! While 

our bank was started during a recession-in many 

ways not dissimilar to the Great Recession-there were opportunities and investors who were 

willing to risk their 0\\11 money to capitalize a new bank Contrast that with tbe latest cycle: it 

started similarly with 181 new charters in 2007 (the start of the recession) but fell off very quickly 

over the next two years, Since the Dodd-Frank Act was enacted in2010, there have only been 7 de 

novas with three of those started only to facilitate an acquisition of a failed bank and another for a 

credit union to convert to a bank, That means only 3 real new banks in the last 5 years. Even more 

stark is the contrast between the lack of de novo bank formations and the recovery of new business 

fonnations across all industries since the recession, 

Not only have regulation been piled on, even more telling is the regulatory approach that a 

bank should never faiL This is not only an impossible standard, it is also too risk averse, It limits 

new activities and growth, The first chapter in every book on entreprenenrship or economics says 

that capitalism is built on investors putting ideas and money to work, and accepting the very real 

risk that they will fail in the process, 

5 
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There is no question that de novos, like all new businesses, are riskier than existing institutions. 

They have failed at twice the rate of other banks historically. They create losses for the FDIC 

(which banks fund). But most bankers believe that failures are part of any dynamic industry and de 

novos are where new ideas are born. 

When Gulf Coast Bank and Trust Company was started, we used the capital we had to buy two 

failing savings and loan institutions, and quickly boosted capital from the initial $1.5 million to $3 

million and proceeded to create an institution that has helped our community thrive for more than 

25 years. Other de novos may not have fared so well, but without the risk taking by investors, none 

of this would have been possible. I doubt seriously that our bank would be granted a charter today 

due to the capital requirements, the constraints on assets, and the restrictions on funding. Couple 

those factors with a suffocating regulatory blanket, and I doubt that our investors would have made 

the investment. 

2. Constraints on Assets, Liabilities and Capital All Conspire to Make New Charters 

Uneconomical 

On both sides ofthe balance sheet-assets on one side and liability plus capital on the otherthere are constraints that limit the economic potential of any new bank. These are detailed below: 

Earning Assets are Under Stress 

Community banks typically have four broad categories of assets: cash and investments, 

consumer loans, mortgage loans and business loans. Each of these types is under stress. For 

consumer lending (non-real estate), competition from lightly regulated, untaxed credit unions 

combined with an overwhelming and constantly increasing regulatory burden has made these loans 

marginally profitable at best, if not actual loss leaders. For residential mortgage and home equity 

lending, new requirements from the Consumer Financial Protection Bureau with help from the other 

regulators has made this type oflending more risky. The risk comes from an aggressive compliance 

culture that attempts to criminalize minor regulatory violations, combined with an inflexible 

definition of qualified mortgages. This means fewer banks will offer these loans, limiting choices 

and options for consumers. 

As I mentioned, Gulf Coast Bank is one of the largest residential mortgage lenders in our state. 

After the new TRID rules, we found that all of the mortgage service providers raised their costs. 

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The closings now take longer, and because of the TRID mandated closing resets, realtors encourage 

home owners to only take cash offers or offers from borrowers who have locked in financing to 

avoid closing delays. As a result, consumers now pay more, wait longer, and have incentives not to 

shop among lenders because of the delays these things are likely to create. The result is fewer 

options for consumers as many community banks abandon mortgage lending altogether due to the 

added risks and costs that make it uneconomical. 

The last area of profitability for consumer banks is small business lending. This continues to be 

profitable, but it is now under assault from the tax-free credit unions and Fintech non-bank lenders 

who make loans without the same regulatory costs as community banks to remain in the business. 

Every earning asset held by community banks is now less profitable than it was in years past. 

Some of this erosion is caused by regulations, some by the interest rate environment, some by 

unregulated competitors, and some by untaxed and lightly supervised competitors. 

For those considering starting a new bank, these stresses combine to limit potential profitability 

and discourage any investment. Banks compete with ail other capital options, and if returns from 

making good asset decisions are not sufficient to generate a reasonable return, money flows 

elsewhere. 

Funding Constraints Limit Asset Growth 

Even when there are good opportunities to lend, funding those loans is the perhaps the biggest 

hurdle for potential de novos. Banks are funded with deposits. Recent regulations aimed at the 

largest banks, which take a narrow view of"stable" funding, coupled with the FDIC's aggressive 

definition of what constitutes a brokered deposit, have steered the industry into insured retail and 

small business deposits. While these deposits offer low cost funding, this narrow view of stable 

funding constrains banks, which incur a regulatory cost as compared to other types of funding. The 

limited array of acceptable funding sources hits de novo banks acutely because it takes time to build 

the customer relationships necessary to gather these deposits- and de novos can't compete on 

convenience (with few branch locations) or pay high rates. 

There are many other sources of funding available that have proven to be stable and cost 

effective. For example, as de novo institutions build their deposit base, they may need to look for 

funding outside of their local market by using internet-based deposit services or partnering with a 

third party to help market their products and generate deposits. Unfortunately, all these are 

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considered "brokered" by the FDIC and, as such are unlikely to be approved in the de novo's new 

business plan. The bottom line is that unlike most new businesses that can work every available 

option to gain customers and gain market share, new banks are extremely limited in their funding 

and product options, further detracting from the desirability of a new bank charter. 

Capital Thresholds are Too High 

As I mentioned, Gulf Coast Bank started with $1.5 million of investor capital-$4.4 million in 

today' s dollars-and quickly doubled that as part of our two acquisitions. The expectation now in 

banking circles is that it would take $20-$30 million to start a bank. This is many multiples beyond 

what successful banks needed in the past. Can a bank today earn enough to cover the cost of that 

capital? Great investment options don't exist in today's abnormally low-rate environment. But even 

with more normal rates and a steeper yield curve, a new bank probably cannot grow fast enough to 

cover investor expectations. 

The key point is that investors cannot justify illiquid investments at low yields. If de novos 

were a good investment that made economic sense, today there would be a lot more new banks 

started. Besides the enormous regulatory infrastructure that must be covered by capital (with no 

return, of course), the technology investment required in today' s banking world is also large. 

Moreover, while a strong business plan for the new bank is required, there is strong resistance by 

the regulators to any change in that plan. A new business must adjust quickly to the rapidly 

changing reality of its market. But unlike most new businesses, a de novo bank must jump through 

regulatory hoops to chart a new course. With the 3-year penalty box and strong resistance by the 

regulators to any change in the business plans of a new bank, it can be nearly impossible to make 

the necessary adjustments quickly enough to be successful. For investors, it raises questions about 

success and the likelihood and timing of their potential returns. 

The pressure to increase capital levels-including requirements of the Basel Capital 

Standards--increases the hurdle rate for any return to investors. A well-capitalized bank used to 

operate with 6% leverage capital. Now are being pushed to maintain 9% capital. The simple math is 

that earnings must increase by 50% to maintain the same return on equity. These high capital 

requirements mean that new banks are unlikely to make a reasonable return on equity in any 

reasonable time frame. 

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So we are back to the beginning. If investors can't see a way to make a reasonable return on 

investment, they won't invest. No investment means fewer new banks and slower growth for the U. 

S. economy. 

Unreasonable Regulatory Expectations for Directors is Also an Impediment 

Typically investors in a de novo institution become the ftrst directors of the newly formed 

bank. This is because the capital often comes from pooled funding from leaders in the community 

that see a niche that could be ftlled by the new bank. 

The significant regulatory requirements of directors in banks today-which can impose 

personallegalliabilities for them-make it difficult for any bank to ftnd a good director and nearimpossible for new bank. Directors are now expected to know more than can be reasonably 

expected, including maturity matching, hedging strategies, derivative accounting, complex assetliability strategies, and cybersecurity risks and mitigations, to name just a few. They must then tell 

management how to address each of these things. Given the potential liability, the lawyers to these 

investors most certainly would advise against being a bank director. 

3. A Creative Approach is Needed to Encourage New Bank Formations 

The changes the FDIC has made are a start, but more can and needs to be done. It's time to 

think differently to encourage new banks-by requiring less capital, reducing the regulatory burden, 

permitting greater flexibility in business plans, and lifting funding restrictions. Some ideas to 

consider include: 

)> Create a fast track for new banks. 

)> Reduce the minimum initial capital level (e.g., to $10 million) and reduce the required 

capital ratio for the ftrst three years (e.g., to 6% ). The goal is enable the new bank to 

generate earnings and grow quickly enough to become profttable and sustainable. 

)> Further reduce the "penalty box" and enable changes in the bank's business plan. 

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> Allow a new bank to fund itself in the least-cost most efficient way without regard to 

the source. 

> Define any mortgage loan held by the bank on its own balance sheet as a "Qualified 

Mortgage,'' 

> Address the unfair competition from tax-favored providers such as credit unions and the 

Farm Credit System. 

Simply put, Congress can help by eliminating unnecessary impediments which negatively impact 

every community across the United States. This will help stem the tide of community bank 

consolidation and create an environment conducive to new bank charters. The key to changing the 

consolidation trend is to stop treating all banks as if they were large and complex institutions. All 

too often, regulations intended for the largest institutions become the standard that is applied to 

every bank-Basel III capital requirements being the most egregious. (The Europeans who designed 

the Basel Accords are shocked that the U.S. regulators chose to apply them to community banks.) 

Such an approach only layers on unnecessary requirements that add little to improve safety and 

soundness, but add much to the cost of providing services-a cost which customers ultimately bear. 

A better approach to regulation is tailored bank supervision that is responsive to the charter, 

business model, and scope of each bank's operations. This would ensure that regulations and the 

exam process add value for banks of all sizes and types. By facilitating new bank charters, new 

capital will flow into the entire banking system as it would signal the potential for growth and 

success. 

Conclusion 

New entrants into any market reflect the promise of a better tomorrow. For banks, new entrants 

bring new ideas and technologies, expand the fmancial choices and opportunities ofbusinesses and 

consumers, and fill gaps where banking services may not have fully met the needs. 

The lack of de novos banks is strong evidence that the economics no longer work. Investors 

have plenty of choices about where to invest, and if the impediments to starting a new bank are too 

great, they will quickly move their money to opportunities with greater promise. The forces that 

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have acted to stop de novos are the same ones that have Jed to the dramatic consolidation of the 

banking industry. Fix the underlying problems and the future will be brighter for both new and 

existing banks. 

Community banks--whether new ones or old-have a personal stake in the economic growth, 

health, and vitality of nearly every community. A bank's presence is a symbol of hope, a vote of 

confidence in a town's future. When a bank sets down roots, communities thrive. We urge Congress 

to act now and pass legislation to help tum the tide of community bank consolidation, create an 

economic environment that encourages new bank charters, and protect communities from losing a 

key partner supporting economic growth. 

(\.\) I American Bankers Association 11 
67 

Chairman CHAFFETZ. Thank you. Thank you, all. 

We’ll now recognize myself for 5 minutes. 

Chairman Gruenberg, on page 1 of your testimony, you say that 

FDIC institutions are posting record profits, and yet, on page 6 you 

say that the profitability ratios are below pre-crisis levels, making 

it unattractive to start a new bank. Which one is it? 

Mr. GRUENBERG. It’s actually both. The industry, as a whole, as 

we’ve documented over the past several years, has been gradually 

but steadily recovering from the financial crisis. So on most of the 

major metrics of performance—net income, credit quality, and loan 

balances—the industry has been getting better. 

But it’s something of a tribute to the industry that they have 

been able to do that in an economic environment of very low, historically low interest rates, and low net interest margins. So that 

the margins they are able to generate on their loans are narrow, 

but they have actually been able to compensate for it. And this is 

particularly true of community banks by expanding lending activity. 

Chairman CHAFFETZ. I just think it’s inconsistent for you to suggest that there is not—that the profitability ratios are so low that 

it’s unattractive to file an application at the same time you say 

that there are record profits. People do want to get into this business and service the need and the demand that’s in the economy. 

Ninety-four percent of all bank applications since 2009 have not 

been approved—94 percent. Do you really believe that all those 

bank applications don’t meet the needs of the communities? I 

mean, are we really supposed to believe that 94 percent of the applications were insufficient? 

Mr. GRUENBERG. If I may say, Mr. Chairman, 2009 was the second year of the financial crisis, probably the most severe financial 

crisis at least since the Great Depression. 

In 2009, we had—— 

Chairman CHAFFETZ. I know, but to date. 

Mr. GRUENBERG. No, but I’m just—I’m saying—— 

Chairman CHAFFETZ. How many have you approved to date since 

2009? 

Mr. GRUENBERG. What I can say is, between 2000 and 2007 

we—— 

Chairman CHAFFETZ. That’s not what I’m asking you. 

Mr. GRUENBERG. No, but my point is, Mr. Chairman, if I may 

just respond, we’ve had a post-crisis environment really since 2009 

which is in some measure unprecedented. We had the most—severest financial crisis—— 

Chairman CHAFFETZ. You’re not answering my question here. 

Mr. GRUENBERG. Well, I’m trying to explain that we’ve had the 

longest prolonged period of near-zero interest rates in our country’s 

history. 

Chairman CHAFFETZ. At the same time you’re posting record 

profits. 

Mr. GRUENBERG. Yeah. 

Chairman CHAFFETZ. And you’re not approving any applications. 

That’s the problem. 

Mr. GRUENBERG. We’re not—if I may explain—we’re not receiving applications. And the reason for that is—— 


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Chairman CHAFFETZ. Ninety-four percent of the ones you did 

were not approved. You only approved three. 

Mr. GRUENBERG. Well, you have to—we’ve had a small number 

of applications, as you know, and we have an environment in which 

it’s difficult for an institution to demonstrate a viable business 

plan. 

We’ve had established institutions coping with the challenging 

environment by generating larger volumes of loans to generate revenue. 

Chairman CHAFFETZ. You’re not answering my question. 

Mr. GRUENBERG. Well, I’m trying to. 

Chairman CHAFFETZ. I know, but you’re not. That’s what I’m explaining to you. You may be trying, but you’re not answering the 

fundamental question. 

Mr. GRUENBERG. For new institutions to get over the hurdle they 

not only have to be able to generate revenue, but they also have 

to get over the fixed cost of establishing the institution. And in a 

near-zero interest rate environment, that becomes particularly 

challenging. 

Chairman CHAFFETZ. But they’re posting record profits. So you 

can’t have it both ways. And my fundamental challenge is that 

you’ve only approved three, and that’s highly suspicious in a—I 

think there’s more systemic risk, because the cruel irony of all this 

is there are fewer institutions that have more leverage, more of the 

play. 

And so you have very large institutions out there that are trying 

to get into this business. You have applications that are pending 

for a long period of time. One application has been pending since 

2008. Another application is showing pending since 2009. 

I mean, how long does it take to go through these applications? 

You and I have talked about this in my office, and I still don’t understand—that’s why we’re having the hearing—I still don’t understand why it takes so long. 

Mr. GRUENBERG. Well, I think for the—without speaking to a 

specific application, I think—as you know, the ones that are pending relate to investor loan companies. There was a more than 3- 

year moratorium period and an additional moratorium period, I 

think, during—— 

Chairman CHAFFETZ. Is that still in place? 

Mr. GRUENBERG. No, it expired in 2013. 

Chairman CHAFFETZ. And have you approved any since then? 

Mr. GRUENBERG. And I believe the applications you are referring 

to have not really been pursued by the applicants since that time. 

Chairman CHAFFETZ. But they’re still pending? 

Mr. GRUENBERG. They’re still pending. 

Chairman CHAFFETZ. What are they supposed to do? I mean, 

they’re pending. Do they have to come and say, ‘‘Will you please 

continue to do your work?’’ 

I mean, these institutions, they’ve spent seven figures putting 

these things together. Why aren’t you—if they’re still pending, why 

aren’t you taking action on them? 

Mr. GRUENBERG. The applications, as they currently stand, Mr. 

Chairman, I don’t think would meet the standards, and the institutions have not pursued them. 


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Chairman CHAFFETZ. They have pursued them. They’re pending 

before your body. 

Mr. GRUENBERG. But they’re no longer actively engaging with us 

on the application, I believe, Mr. Chairman. 

Chairman CHAFFETZ. So they submit the application, they’ve 

done everything they’re supposed to do, and it’s still pending, and 

they need to show activity? 

You state that you’re going to put out some guidance, right? 

When is that going to happen? 

Mr. GRUENBERG. I think we’re going to do it, I think, before— 

over the course of this year. 

Chairman CHAFFETZ. No, no, no. Give me—come on. Give me a 

date. 

Mr. GRUENBERG. Assuming before the end—— 

Chairman CHAFFETZ. How long have you been working on it? 

Mr. GRUENBERG. As I indicated—— 

Chairman CHAFFETZ. When did you start the process of coming 

up with the guidance? 

Mr. GRUENBERG. We’ve already issued guidance, as I mentioned, 

in 2014 and 2016—— 

Chairman CHAFFETZ. No, no, no. You’re not answering the question. I’m sorry I’m going over time here. But this is a very simple 

question. You put it in your opening statement, okay? 

Mr. GRUENBERG. Yeah. 

Chairman CHAFFETZ. When will you actually complete this exercise? When did you start it and when are you going to publish it? 

Mr. GRUENBERG. I believe we began it earlier this year, and I believe we’ll publish it before the end of the year, Mr. Chairman. And 

if you like, I’ll come back to you with a specific timeframe for doing 

that. 

Chairman CHAFFETZ. That would be great. 

I’ve gone past my time. Let me now recognize the gentleman 

from Maryland, Mr. Cummings. 

Mr. CUMMINGS. Let’s start. Let me make this clear. 

Mr. Browning, what do you think—why do you think people are 

holding up your application? Let me get down to the nitty-gritty. 

Because apparently, I mean—— 

Chairman CHAFFETZ. I don’t think he necessarily said that. 

Mr. CUMMINGS. Well, he’s here testifying. He’s upset. 

Are you not? 

Mr. BROWNING. I am. 

Mr. CUMMINGS. What do you think is the motive? Why would 

they deny your application? I mean, do you think they just don’t 

like you? I’m serious. I mean, what is it? And I’m not trying to be 

smart. I’m just trying to figure out—I’m trying to get to the bottom 

of this. 

Mr. BROWNING. No, I don’t think it’s personal. 

Mr. CUMMINGS. Then what do you think it is? Do you think it’s 

competition, they’re trying to protect competition? 

Mr. BROWNING. I believe the FDIC has yet to come out of crisis 

mode. I believe it’s acting much more as an insurance company and 

less as a regulator governing safe and sound institutions. I think 

it is some lingering shell shock from the crisis and it is loath to 

accommodate new banks, which, historically, new banks are a bit 


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riskier. But in terms of true risk to the Deposit Insurance Fund, 

it’s de minimis. In terms of risk to the system, it’s de minimis. And, in my example, we came forward with $30 million in capital. Our business plan showed profitability at the end of year 1. 

And we were effectively stonewalled for an extended period of time. 

Mr. CUMMINGS. So you think they’re being too careful, basically? 

Is that what you are saying? 

Mr. BROWNING. Yes, sir. 

Mr. CUMMINGS. All right. 

Now, Mr. Chairman, how did the insurance fund fare during the 

financial crisis? 

Mr. GRUENBERG. Well, as you—— 

Mr. CUMMINGS. I can’t hear you. 

Mr. GRUENBERG. As you know, Congressman, over 500 institutions failed since 2008. The Deposit Insurance Fund was actually 

depleted during the course of the crisis and as a result of the failures. 

At the low point, the Deposit Insurance Fund was actually $20 

billion in the red, and we were placed in the position of having, 

first, to impose a special assessment on the industry to bring in liquidity to manage all of the bank failures and then had to impose 

a prepaid assessment on the industry to bring in further liquidity 

to manage the failures and support the fund. 

Since the crisis, we’ve been able to rebuild the fund and—— 

Mr. CUMMINGS. Okay. I’ve got. I only have limited time here. I 

just wanted to get that. You told me what happened. 

The number of new bank charters is significantly lower in the 

years since the financial crisis than in the years before the crisis. 

Professor Johnson, what do you believe accounts for the decline in 

the number of new bank charters? 

Mr. JOHNSON. The primary explanation, Congressman, is the low 

interest rates. And I think the reconciliation of the points Mr. 

Chaffetz was making earlier is, for existing banks, if you have existing loans at relatively fixed rates, yes, there’s some return to 

profitability. 

But if you’re a de novo bank that doesn’t inherit these loans, that 

actually holds a lot more in Federal funds, for example—this is all 

in the Fed paper Mr. Browning was trying to cite—it’s all there. 

It’s all clearly documented. The profitability for a de novo on a forward-looking, prospective basis, as being valued by the FDIC, is 

very low. In fact, it’s lower than it’s ever been in recorded data. 

Mr. CUMMINGS. In an article published on June 24, 2016, by the 

American Bankers Association, the ABA’s chief economist, James 

Chessen, wrote, and I quote, ‘‘Great investment options don’t exist 

in today’s abnormally low rate environment,’’ end of quote. Mr. Williams reiterated that today in his written testimony. 

Professor Johnson, do you agree with the concerns expressed by 

Mr. Williams and the American Bankers Association’s chief economist? 

Mr. JOHNSON. Yeah. I think Mr. Chessen’s article was spot on in 

that regard. Low interest rate environment, very hard for investors 

to make money. And if you’re the insurance company—remember, 

the FDIC is not chartering any banks at all, none. The FDIC provides—agrees to provide you with deposit insurance or not. 


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So from an insurance company perspective, evaluating the risks, 

if they can’t make any money, if they’re not going to be profitable 

because of this low interest rate environment, that’s substantially 

higher risk, and you should, therefore, on a prudent basis be less 

willing to provide them with insurance. 

Mr. CUMMINGS. Mr. Williams also stated in his written testimony 

that he started his bank in 1990, quote, in the middle of a so-called 

S&L crisis and the beginning of a recession; despite these severe 

conditions, there were 193 de novos that year, end of quote. He 

compares that with the current business cycle. 

Professor Johnson, are there differences between that business 

cycle and this one? And how do interest rates compare? 

Mr. JOHNSON. There are huge differences, Congressman. Mr. 

Williams’ achievement is impressive, let me be clear, but there was 

a very different interest rate environment. Interest rates did not 

fall anywhere near the level that they are today or they’ve been 

since the financial crisis. For the past 8 years almost we’ve had extremely low interest rates. There’s a very, very different world than 

anything we have ever seen in the United States. 

Mr. CUMMINGS. The American Bankers Association chief economist also wrote this quote, ‘‘Sure, de novos are risky. They failed 

at twice the rate of other banks, historically. They create losses for 

the FDIC,’’ end of quote. 

Professor Johnson, is Mr. Chessen right? Is that correct? 

Mr. JOHNSON. Yes, I think Mr. Chessen is actually citing the 

same Federal Reserve research that I was talking about. That’s 

what they’ve documented very clearly in the data, a failure rate of 

de novo banks two times established banks. And as Mr. Gruenberg 

already said, there’s a lot of failures between years 3 and 7 in that, 

which is why they heightened or extended the de novo scrutiny period in 2009. 

Mr. CUMMINGS. What trends were observed regarding the failure 

rates of new banks during the crisis? Were adequate safeguards in 

place prior to the financial crisis to ensure that risky new banks 

were not approved? 

Mr. JOHNSON. Well, the FDIC has looked at this carefully, and 

I cite the research in my paper. I think it’s good research. They 

found a lot of de novos failed, including this recent episode. 

Now, the FDIC is not charged with making sure that zero banks 

fail. It’s an insurance company, so some failure is acceptable, as 

long as it’s covered by the premium. 

Another key issue is, over the cycle, what happens to deposit 

funds. That’s a really tangible, you know, hard-to-argue-with measure of how this insurance company did. And as Mr. Gruenberg 

said, they were negative $20 billion. So they were on the side 

slightly of allowing too many banks with not very good prospects 

over the business cycle to enter. 

You know, I think, looking back and seeing how they managed 

to build it up, it’s hard to complain too much. I don’t think the 

FDIC did a bad job on financial regulation. But there’s no way that 

they were shutting out the banks or preventing them from entering, and I don’t think that’s the business they’re in today. 


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Mr. CUMMINGS. My last question. Professor Johnson, if the FDIC 

were to weaken its regulations in an effort to jump-start applications, would that help or harm the insurance fund? 

Mr. JOHNSON. It would create greater risk for the insurance 

fund, and over the cycle you would have bigger losses. Those losses 

would be covered by larger assessments, both on an income statement basis and on a cash basis, from the industry. The taxpayer 

is exposed to some risk. Deposit funds have failed in other situations, in other countries, at other moments of U.S. history. I don’t 

think FDIC would fail. I think it’s the bankers and the banking industry that would ultimately pay. And I don’t think that’s what the 

industry wants, and I don’t think that’s what the economy needs. 

Mr. CUMMINGS. Thank you. 

Chairman CHAFFETZ. We now recognize the gentleman from 

Ohio, Mr. Jordan, for 5 minutes. 

Mr. JORDAN. Mr. Johnson, so what’s going to happen when we 

go to negative interest rates? We’re not going to have anyone apply, 

anyone be approved. Is that right? If the argument is that the Fed 

keeping low interest rates, we’re not getting any more banks, what 

happens when we go negative? Which my understanding is some 

European countries have already done that. 

Mr. JOHNSON. Well, it’s a fascinating hypothetical, Mr. Jordan. 

Certainly—— 

Mr. JORDAN. I don’t know if it’s all that fascinating. It seems like 

it’s pretty realistic right now based on what I’m reading. 

Mr. JOHNSON. Well, it certainly has happened in Europe. I don’t 

think we’re—that’s an imminent development in the United States. 

But, yes, to your point, if interest rates are negative, that is going 

to squeeze the net interest margin further. 

Mr. JORDAN. Hurts competition, hurts the consumer, right? 

Mr. JOHNSON. Well, in terms of net interest margin, it’s certainly 

going to be difficult for de novo community banks. 

Mr. JORDAN. Well, all I’m hearing is about community consolidating, and you’re telling me no new ones are going to be created 

because the FDIC is not going to give them insurance because the 

rates so low and the chances of them making a profit is so low. 

Then, if we go negative, it’s going to be even worse, further hurting 

competition, therefore hurting the consumer, all because the Fed— 

I mean—— 

Mr. JOHNSON. Well, look, if you want to talk about the consumer, 

we should be talking more broadly about all of finance and entry 

into the financial sector, including the impact of fintech, which, as 

you know, is substantial and growing. 

So that conversation about the consumer is not only about community banks. But to the extent we’re focused on de novo community banks, it’s certainly not going to be helpful to the issues that 

the chairman has put before us today. 

Mr. JORDAN. Exactly. 

Let me switch gears. I wasn’t planning on asking that, but you’ve 

got me thinking. 

Mr. Gruenberg, you ever hear of Operation Choke Point? 

Mr. GRUENBERG. Yes, Congressman. 


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Mr. JORDAN. You ever, at FDIC, ever have any interaction with 

the folks over at Justice Department regarding Operation Choke 

Point? 

Mr. GRUENBERG. As you know, Congressman, our inspector general did a review of that, and the finding of the inspector general’s 

report was that the FDIC played an inconsequential role. 

Mr. JORDAN. That’s not what I asked. Did you have interaction 

with the Justice Department regarding Operation Choke Point? 

Mr. GRUENBERG. I think the IG report found that there was some 

legal staff level—— 

Mr. JORDAN. Did some of your lawyers talk to some lawyers at 

Justice about Operation Choke Point? 

Mr. GRUENBERG. No, I think it was about specific institution that 

the Justice Department had questions on. 

Mr. JORDAN. You send out financial institution letters, right? 

Mr. GRUENBERG. Yes, sir. 

Mr. JORDAN. Is there, like, a formal letter that goes out to banking institutions? Am I getting this right? And it’s viewed as formal 

guidance documents, right? The banks take these things seriously? 

Mr. GRUENBERG. I think that’s fair to say. 

Mr. JORDAN. All right. And you said your outreach with Justice 

Department and your working with Justice Department on Operation Choke Point was rather limited, even though your lawyers 

talked to them about it. But I look at this letter that you sent back 

in January of 2012, managing risk and third-party payment processor relationships. Do you remember this letter? 

Mr. GRUENBERG. I don’t know specifically what you’re referring 

to, but—— 

Mr. JORDAN. Page 8 of this letter you talk about high-risk activity, and you give a list—ammunition sales, firearm sales, payday 

loans, travel clubs, to name a few. Do you remember this letter? 

Mr. GRUENBERG. Yes, sir. 

Mr. JORDAN. Yeah. First time I’ve seen the list. The list looks 

very familiar to the same kind of institutions the Justice Department targeted in Operation Choke Point. Would you agree with 

that statement, Mr. Gruenberg? 

Mr. GRUENBERG. I really can’t speak to what the Justice Department program was, since we were not a participant in it. What I 

can say is that back in 2011 there was an article published in a 

Supervisory Insights Journal that the FDIC produces on managing 

third-party—— 

Mr. JORDAN. Well, it sure looks very similar to me what Operation Choke Point was doing, going after the same kind of businesses and telling banks, hey, you want to steer clear of these. I’ve 

talked to folks who say, you know what, the folks we were doing 

business with, our bank, said, we’ve got this notice, and our bank 

said, we no longer want to do business with you; even though 

you’re in a legitimate business selling firearms or in a legitimate 

business providing payday lending, we’re no longer going to do 

business with you because you’re now viewed as high risk and 

we’re getting all kinds of pressure, even though we may have done 

business with you 20, 25 years. 

Mr. GRUENBERG. All I can say is our inspector general did look 

at that issue—— 


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Mr. JORDAN. And all I can say is, here’s the list, and the list 

looks very familiar. 

Mr. GRUENBERG. I understand. And because of the—— 

Mr. JORDAN. And then we have this. I guess, here’s—I’ve got just 

a few seconds. But we just heard from the chairman you’re not approving anybody. We’ve got the interest rate issue as the reason 

you’re citing. But the fact is, you’re not approving anybody and it’s 

different than it’s historically been. 

Then we see this list of folks. I’ll tell you what this looks like, 

Mr. Chairman, it looks—because we’ve dealt with this issue a lot 

in this committee—it looks exactly like what the Internal Revenue 

Service did. They said to folks who were at that applying for taxexempt status, no, we’re going to harass you, you’ve got to fill out 

a bunch of forms, we’re going to keep asking a bunch of questions, 

we’re not going to approve you. 

And they targeted them, just like this list seems to be targeting 

certain types of businesses that you don’t like, and obviously the 

Justice Department didn’t like, as evidenced by Operation Choke 

Point. That’s what it looks like. 

Mr. GRUENBERG. Candidly, Congressman, I don’t believe that 

was the case. And I think the IG—— 

Mr. JORDAN. But do you see the similarities? 

Mr. GRUENBERG. Sir, I can’t speak to that. All I can say—— 

Mr. JORDAN. Well, I can, and I do. 

Mr. GRUENBERG. Our inspector general reviewed this particular 

issue and didn’t find any support for that, I believe. 

Mr. JORDAN. Mr. Chairman, I yield back. 

Chairman CHAFFETZ. I thank the gentleman. 

We now recognize the gentlewoman from New Jersey, Ms. Watson Coleman, for 5 minutes. 

Mrs. WATSON COLEMAN. Thank you, Mr. Chairman. 

Chairman Gruenberg—is that correct? 

Mr. GRUENBERG. Yes. 

Mrs. WATSON COLEMAN. Yes, thank you. I want to follow up on 

a question the chairman asked. There are a couple applications you 

said that are pending for de novo banks, but you said that there’s 

been no action on them. So are they considered dead file? Because 

‘‘pending’’ suggests to me that something is happening with those 

applications or with whatever is before you. 

Mr. GRUENBERG. No, there are a couple of active applications by 

parties interested in establishing de novo banks that are under active consideration. I think the chairman was referring to applications that were actually filed several years ago, prior to the crisis. 

Mrs. WATSON COLEMAN. Before. Right. And so those applications, 

are they pending or are they dead? 

Mr. GRUENBERG. They’re technically still pending, but they’re not 

active because the applicants really haven’t been pursuing them 

since the crisis. 

Mrs. WATSON COLEMAN. Well, pending suggests to me that something—— 

Mr. GRUENBERG. Yeah. 

Mrs. WATSON COLEMAN. Pending suggests that there’s something 

that is expected of them or is expected of you to tell them what 


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they need to do in order to move through the process. And so that’s 

confusing to me. 

Mr. GRUENBERG. No, I think you raise a fair point. And as I indicated, we’re going undertake a review or undertaking a review of 

our application process and procedures. And I think we need to resolve that issue so that an application shouldn’t be outstanding for 

that period of time. 

Mrs. WATSON COLEMAN. Right. It shouldn’t be pending and be 

dead at the same time, right. 

Mr. GRUENBERG. Right. 

Mrs. WATSON COLEMAN. According to reports issued by the FDIC 

in 2013, nearly 8 percent of households in the United States were, 

quote, ‘‘unbanked,’’ meaning that they did not have bank accounts. 

One of five households was, quote, ‘‘underbanked,’’ meaning that 

the household had at least one bank account but also used alternative financial services, with the most common sources for alternative sources being grocery, liquor, convenience, or drugstores, or 

even, I guess, check-cashing stores. 

Dr. Johnson, what challenges do consumers face in obtaining 

basic banking services from these institutions, these alternative institutions? 

Mr. JOHNSON. Well, Congresswoman, as you know, these alternative financial institutions charge very high rates of interest. The 

terms and conditions they provide are not always fully transparent. 

There are many instances of, frankly, predatory behavior in that 

industry. 

And, partly, I think it’s about the consumers not understanding 

what they’re getting into, not realizing how expensive this is. But 

as Mr. Cummings already said, there is an issue of how readily 

available are reasonable financial—affordable financial services in 

that community, and that that’s clearly a big problem. 

Mrs. WATSON COLEMAN. Thank you, Dr. Johnson. 

Mr. Gruenberg, FDIC, you indicated you’re committed to increasing participation of unbanked and underbanked households in the 

financial mainstream. What does that mean? What are you doing 

or what do you propose to do and what is the timeframe for doing 

those things? 

Mr. GRUENBERG. As you indicated, Congresswoman, that’s a significant issue in our financial system. We, the FDIC, actually 

partnered with the Census Bureau on the first survey ever done on 

who’s unbanked and underbanked, and we’ve been focusing on trying to respond to this issue over the last several years. Among a 

number of things we’ve done, we’ve developed so-called model 

transaction accounts, which are low-cost account-based debit card 

accounts with no overdraft fees as a condition of the account. 

And as a result of our work, a number of major financial institutions across the country are now offering these low-cost threshold 

accounts that really reduce the barriers to entry and expand the 

ability of people to get into the banking system, and we think 

that’s actually a very, very important objective to pursue. 

Mrs. WATSON COLEMAN. Thank you. 

In a lot of communities, the impact of the Great Recession is still 

very profound, and many individuals are continuing to suffer from 

it, entrances and exits from the banking system. 


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Mr. Williams, what steps has your bank taken to reduce the 

number of unbanked and underbanked in Louisiana? 

Mr. WHITE. Our bank is a blue collar as opposed to a blue blood 

bank. We operate in a number of parishes from Baton Rouge down 

to St. Bernard, and we provide free checking. So it doesn’t get better than that. We advertise it, promote it, we also provide debit 

cards and payment cards that you can use. But the essential service that we provide is free checking. 

Mrs. WATSON COLEMAN. Thank you very much. 

Thank you, Mr. Chairman. I yield back. 

Chairman CHAFFETZ. Thank you. I now recognize the gentleman 

from Michigan, Mr. Walberg for 5 minutes. 

Mr. WALBERG. Thank you, Mr. Chairman, and thanks to the 

panel for being here. Reading information in preparation for this 

hearing and seeing the fact that we have the lowest number of 

banks in the United States, since records being kept to 1934, is a 

concern. I mean, the reason why this country, as I recollect, is the 

greatest country in the world based upon only a short period of 

time of being alive as a country, 240 years, is because we had the 

ability to take risk and develop reward to get capital into the marketplace, into the hands of people who can generate opportunity for 

people. 

So to hear concerns fostered in the last 8 years about trying to 

protect us against what has really made us great and oversee in 

such a way that we hold back the genius of what compounded interest, capital being freely and relatively easy to gain if you have 

the process in place that says will you take that risk on me is a 

concern. 

Mr. Browning, your testimony says that constantly evolving and 

ambiguous requirements at the FDIC are putting up roadblocks to 

new entrance. Could you expand and describe the situation in a little more detail? 

Mr. BROWNING. Certainly. Congressman, thank you. 

As we engaged in our process, we put forward a plan with great 

detail on our loan programs tapping into an existing client base. 

We brought $30 million in capital, showed profitability in our first 

year. We had an exceptionally stable low cost deposit base built 

into the program and a variety of other things. There were vague 

suggestions that our deposit program was inadequate even though 

we had ready available deposits well in excess of four to five times 

what the bank would need in its first 3 years of life. 

There were additional suggestions of entering new lines of business such as SBA lending. And SBA lending is a great program, 

for sure, but it is not something we contemplated it with outside 

our expertise. We didn’t have the infrastructure staff to originate 

such loans to service them, to sell them. 

Mr. WALBERG. And yet you are not a novice in the field? 

Mr. BROWNING. Not at all, sir. And so it was expanding infrastructure, expanding processes in ways that were outside of our 

core plan, outside of our profile, and to us, introduced increased 

risk and increased cost, and were certainly not part of the statutory requirements of chartering a new bank. 

Mr. WALBERG. Which is not the reason why you’re getting into 

that line of work. You need to develop the risk as you determine 


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as best to meet your agenda, which is, I would assume, to succeed 

and succeed for the people that use your resources. 

Mr. Williams, in your written testimony you mention that regulations are more detrimental to a bank’s profitability than low interest rates. Why is that? 

Mr. WILLIAMS. Regulations cost time and money and hurt both 

the bank and the consumer when they are overburdensome. And 

a good example is the new TRID regulation. We are one of the largest mortgage lenders in southeast Louisiana. 

When TRID came in, all of the service providers raised their cost 

because, under TRID, if there is a change in cost, you have to redisclose and it resets the time period, so every cost went up. When 

TRID went in, the closings were delayed, and when TRID went in, 

the realtors, in particular we have some markets in New Orleans 

right now, Uptown and the Marigny, where they are very active 

markets. Realtors would say to consumers, if you don’t have your 

financing either all cash or locked in, we’re going to tell the seller 

not to take your offer because the TRID delays are just too cumbersome. So it’s a triple play. 

The consumer now has a slower closing, pays more, and has less 

ability to shop. But when CFPB harms the consumer like that, 

there’s nowhere to go because there is no oversight of CFPB. So 

that’s a regulation that cost us money, cost the consumer money, 

and hurts everybody. 

Mr. WALBERG. It takes the natural rhythm that would be in 

place in those types of dealings and puts it on its ear, doesn’t it? 

Mr. WILLIAMS. It does. And I mean, it’s counterproductive. It 

doesn’t help the consumer, it doesn’t help the bank, it was—and it’s 

unfortunate, but that’s an example of an overburdensome regulation that’s unhelpful. 

Mr. WALBERG. And you truly believe that if all of this was in 

place when you started back in 1990, that you probably wouldn’t 

have started up the bank? 

Mr. WILLIAMS. Well, I was a little scared listening to Mr. Browning talk about spending so much money to apply. We put up all the 

money we had, which was a million five. We couldn’t have afforded 

all the consultants that were necessary, and it just wouldn’t be possible. 

And I think of what would be missed. You know, there is a charter school in New Orleans that funds—that has students that are 

all inner city, but yet all 400 students graduate and go to college. 

When that charter school started, they went around the city looking for a line of credit. We were the only bank that would provide 

it. They think that they wouldn’t be open absent our bank. I’m an 

honorary member of the Warren Easton Hall of Fame because of 

that. 

Well, how do you measure the things that don’t occur when you 

don’t charter banks? We’re missing an awful lot of success because 

we want to prevent a small potential failure. 

Mr. WALBERG. Thanks for your service. I yield back. 

Chairman CHAFFETZ. I thank the gentleman. I now recognize the 

gentlewoman from Michigan, Mrs. Lawrence for 5 minutes. 

Mrs. LAWRENCE. Thank you, Mr. Chairman. 


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I understand that part of the application process, there is numerous conversations typically occur between the applicant and the 

FDIC before a formal application is filed. Chairman Gruenberg, 

what types of conversations occur? 

Mr. GRUENBERG. We actually encourage what are called prefiling 

meetings with interested groups looking to establish a new institution to walk them through the application and the requirements, 

to answer questions, and to give them the sense of what’s involved 

in the undertaking. And actually, we may engage in multiple meetings as the group tries to inform itself about the requirements and 

what would be expected. 

Mrs. LAWRENCE. Is this before—is this an interest in an application or there is an official application filed and then you start having these pre-conversations? 

Mr. GRUENBERG. Actually both. Oftentimes we encourage groups, 

before they actually submit the application, to come in and have 

what we call a prefiling meeting so that we can establish up front 

what the requirements are and sort of walk them through the process. And then once the application is actually submitted, we’ll then 

follow up with them in terms of trying to fulfill all of the requirements. 

Mrs. LAWRENCE. Mr. Browning, you have had some concerns. 

Would you say this has been your reality? 

Mr. BROWNING. I certainly appreciate the intent of the chairman 

and believe that to be very genuine, but I think the reality is quite 

different. We went through many months of conversations with regional staff, and that went well, regional FDIC and State regulatory staff. 

Mrs. LAWRENCE. Okay. 

Mr. BROWNING. Once we engage in our prefiling meeting, that 

formal presentation the chairman referenced, things turned very 

differently from there forward. The process was taken from San 

Francisco, the regional office that had jurisdiction, taken back to 

Washington, and that’s when very unusual questions, very novel 

criterion suggestions began to be made. 

Mrs. LAWRENCE. So if I could try to interpret your comments. 

There were conversations, but you felt that they were not productive and the type—— 

Mr. Chairman, you’ve heard that comment. Do additional discussions occur between the applicant and the FDIC, after the application is filed, and where do you think the breakdown is, at least for 

Mr. Browning? 

Mr. GRUENBERG. You know, I can’t speak—— 

Mrs. LAWRENCE. You need to turn on your mike. 

Mr. GRUENBERG. Sorry. I can’t speak to the specific case of Mr. 

Browning. I do think the application process is generally a very 

hands-on process with applicants. 

Mrs. LAWRENCE. Yeah. 

Mr. GRUENBERG. And we do go to great lengths to work with applicants. I can tell you that in terms of the general experience from 

2000 through today, applications are generally processed and decided on in a 4- to 6-month period. That’s the overall experience. 

Obviously there are going to be instances where that may not be 


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the case. That may be the instance with Mr. Browning, but I 

couldn’t speak to that specific circumstance. 

Mrs. LAWRENCE. Mr. Chairman, can you tell me what have you 

done? What can you state that you’ve done to welcome new applicants? 

Mr. GRUENBERG. We are very much focused on this, and we’ve 

done a number of things, as I indicated in my testimony. We 

brought together—you know, in any application process, it’s not 

just the FDIC, but the chartering agency, whether the State or 

Federal agency has to participate, so we brought the other chartering agencies together with us to work through the application 

process. 

We are going to be holding outreach meetings in regions across 

the country where we are going to meet with interested parties in 

the industry to talk about the application process and how we can 

work with them if they’re interested in applying. We are developing 

a manual which will really provide specific guidance on how to go 

through the application process. 

So, you know, we are prepared to do everything we can to lower 

the process procedure hurdle of getting through the application. 

But—— 

Mrs. LAWRENCE. Chairman, I just want to say, on the record, I 

would like to hear this from you. Do you identify that there has 

been a high rate of denials of new applications and that you are 

implementing new practices, or are you stating that the history of 

the applicants not being approved had nothing to do with your 

process? 

Mr. GRUENBERG. I think what we’re seeing, in the period before 

the financial crisis, 2000 to 2007 where there were over 1,000—— 

Mrs. LAWRENCE. Yes, I understand. 

Mr. GRUENBERG. There was a 75 percent approval rate. 

Mrs. LAWRENCE. Okay. 

Mr. GRUENBERG. So there’s a high level of approval. It’s really 

this post-crisis environment in which both, there was a severe economic downturn and a historically long period of almost zero interest rates. 

Mrs. LAWRENCE. So are you doing new innovative things recognizing that has happened? 

Mr. GRUENBERG. You know, we can’t change the economics in 

terms of what interest rates are. We are trying to do everything we 

can within our own process to make it as responsive as we can to 

applicants and to at least lower the barrier of the application process itself. 

Mrs. LAWRENCE. Mr. Chairman, I yield back. 

Chairman CHAFFETZ. I thank the gentlelady. Now recognize the 

gentleman from North Carolina, Mr. Meadows for 5 minutes. 

Mr. MEADOWS. Thank you, Mr. Chairman. 

Mr. Gruenberg, how will you rate the FDIC on a scale of 1 to 10 

with 10 being the highest as a user-friendly organization as it relates to the application process? 

Mr. GRUENBERG. It’s probably not for me to judge. I would like 

to think—— 

Mr. MEADOWS. Well, I’ll judge it if you don’t, so go ahead and 

give me a number. 


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Mr. GRUENBERG. I think we do a pretty good job between 5, 7, 

8, but I think we can do better, and I think that’s going to be a 

priority. 

Mr. MEADOWS. Okay. Let me tell you the reason why I ask that, 

Mr. Gruenberg, because there is a belief that you have a retaliatory 

environment in the FDIC. And I’m here to tell you that the reason 

why I’m not going to give you real examples by banks is because 

they’re afraid that you will come after them. And I’m here to tell 

you that I’m not going to allow that to happen. 

So let me give you some real examples, since you’re talking hypothetically, let me give you some real examples. You’ve heard from 

Mr. Browning and Mr. Williams. Is there any reason why you 

would only have a 4 percent approval rating, in an environment 

that’s encouraging new banks, other than low interest rates, because you’re looking at a business model, and I was a business guy, 

and actually—you know, Mr. Johnson actually was in North Carolina. 

I knew Mr. Fuqua of which the school of where he practiced, I 

knew him personally. And so here’s what I’m saying is, this retaliatory environment is very concerning. So how do you respond to 

that? Do you retaliate or do you not? 

Mr. GRUENBERG. I do not believe we do, Congressman. 

Mr. MEADOWS. Okay. Well, I’m aware of some communications, 

from your FDIC personnel from here in D.C., that says we’re going 

to teach them a lesson, we’re going to go after them, we’re going 

to make them sweat. Would you like copies of those emails in—because let me tell you where I have—from a regulations and a regulatory standpoint, that is inexcusable. Wouldn’t you agree with 

that? 

Mr. GRUENBERG. I would. 

Mr. MEADOWS. All right. So if that happened and you’re going 

after people, what are the consequences for those that have that 

kind of environment and have been sending out those kinds of 

emails? Will you fire them? 

Mr. GRUENBERG. Congressman, you know, I’d be reluctant to 

speak in the general on something like that. You have to look at 

the specific situation and the facts. 

Mr. MEADOWS. But if they retaliated against somebody, will you 

get rid of them? 

Mr. GRUENBERG. Congressman, I would want to be very careful 

to look at the facts of a particular situation. 

Mr. MEADOWS. All right. Well, I’m going the give you the facts 

because let me tell you what I’ve got concerns about. Is I’ve got regulators that come in, and what they do is they say: Well, we need 

to make more loans to people that are underserved. And you tell 

that same bank: Well, you need to watch your aging process because it’s going 30, 90 days. And when the banker tells your regulators that those are two conflicting issues, you know what your 

regulator said? True statement. You’re the banker. You figure it 

out. 

Now, that is deplorable. Wouldn’t you agree? 

Mr. GRUENBERG. The way you describe it, sir, I wouldn’t—I’m not 

taking issue. 


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Mr. MEADOWS. Okay. I’m going to give you the benefit of the 

doubt to believe that somewhere in your organization these kinds 

of things are just not rising to your level. But here’s where I’m 

going to tell you, I’m going to work with the chairman to make sure 

that you understand that we are not going to tolerate this kind of 

chilling effect on this industry, because what it does is it affects not 

the—it doesn’t affect the high income folks. 

It affects the places that Mr. Williams serves. It affects Baltimore. It affects many of the places that, quite frankly, they need 

banks. And Mr. Johnson is talking about too big to fail. Well, this 

whole process will create where we only have a few big banks because you’re not going to approve the community banks. Do you 

agree with that? 

Mr. GRUENBERG. Congressman, candidly, we had a process 

that’s—same set of standards from 2000 to 2007, which large numbers and percentage of applications were approved. 

Mr. MEADOWS. I’m talking about after that, Mr. Gruenberg. You 

keep going back. The pendulum was you approved 75 percent. Now 

you come in to approve 4 percent. Somewhere in the middle is 

where we need to be. Wouldn’t you agree? 

Mr. GRUENBERG. Very much so, Congressman. 

Mr. MEADOWS. So when is the pendulum going to swing back and 

you’re going to start to approve some of these things? 

Mr. GRUENBERG. All I can say, Congressman, is the institutions—and we have to function in the economic environment in 

which we live, and right now that’s a pretty challenging one to—— 

Mr. MEADOWS. Well, here’s what I want. As this hearing, I want 

whistleblowers, in the industry, to let us know—and we’re going to 

give them the same protection because we’re not going to give you 

the names of those—and when we get the emails, do I have your 

commitment that heads are going to roll if they continue this kind 

of process? 

Mr. GRUENBERG. What I can say, if you get emails reporting incidents, we’ll be glad to look into them. 

Mr. MEADOWS. All right. I’ve got one in terms of some lawsuits 

that you’ve got going on right now in discovery, and I found some 

stuff that’s not even from my State. Are you willing to look into 

that as well? Because you’re going after it in a real draconian way 

to try to prove something that, quite frankly, doesn’t serve the 

American people and it doesn’t serve the banking institute. Do I 

have your commitment to look into that? 

Mr. GRUENBERG. I’ll certainly take a look at it. 

Mr. MEADOWS. I yield back. 

Chairman CHAFFETZ. The gentleman yields back. Now recognize 

Mr. Cummings. 

Mr. CUMMINGS. Yeah. I want us to be most effective and efficient. You just made some statements about—and I’m sure you 

have the evidence to prove it. I know—I know—and I’m not knocking it. I’m just trying to make sure we get to the bottom that there 

is some kind of retaliation and there may be some whistleblowers. 

And I just want to know what is your plan to get the information 

to the chairman so we can effectively deal with these issues? Wait, 

wait, let me finish. May I. 

Mr. MEADOWS. Sure. 


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Mr. CUMMINGS. I just want to finish. Because all of us take a 

very strict position with regard to whistleblowers. We want to protect them, and at the same time we want to accomplish what you 

want to accomplish, that is, to address whatever that issue is that 

they may be, rightfully so, complaining about. I just want to know 

what your plan was? That’s all. 

Mr. MEADOWS. Well, and I thank the ranking member, and you 

have my commitment. I’ll clear my calendar this afternoon, tomorrow, I will stay in August if you want to address this, but here’s 

what we need to do. Is we need to take these real examples, and 

we can just take a random sample of all the ones that have been 

denied or inaction, and there is a problem is it’s not even that 

there’s action. 

It’s just that they’re out there in this holding pattern with you 

not making the decision and not making decisions on behalf of it. 

I’m willing to work with the ranking member in a real transparent 

way to address this problem. 

Mr. CUMMINGS. Thank you. 

Mr. MEADOWS. I yield back. 

Mr. CUMMINGS. Thank you, Mr. Chairman. 

Chairman CHAFFETZ. Thank you. I now recognize the gentleman 

from Missouri, Mr. Clay for 5 minutes. 

Mr. CLAY. Thank you, Mr. Chairman. Let me thank the witnesses for being here. 

The FDIC is not subject to annual congressional appropriations 

process. Instead, the FDIC receives its funding from, quote, ‘‘premiums that banks and thrift institutions pay for deposit insurance 

coverage and from earnings on investments in U.S. Treasury securities.’’ 

Some of my Republican colleagues have proposed legislation that 

would subject all financial regulators to congressional appropriations, including the FDIC. 

Professor Johnson, what risk to the financial system do you foresee if the FDIC were to be placed at the whim of congressional appropriations? 

Mr. JOHNSON. Well, Mr. Clay, this is a very serious issue. Indeed, the FDIC, since it was created in the 1930s, has been the 

gold standard for independent regulation, not just in the United 

States but around the world. So you have 80 years of success, and 

of course, there’s a lot of pressures on all kinds of regulators, including through various kinds of revolving doors and other mechanisms that we’ve seen operate all too well. 

Mr. CLAY. Right. 

Mr. JOHNSON. The FDIC has stood under that pressure over decades, and I’m afraid we can’t say the same for other banking regulators. So I think it would be extremely unwise to change the funding basis of the FDIC and to bring it closer to Congress. We’ve had 

some very unfortunate experiences with regulators that are funded 

through the annual appropriation process, and I think it would be 

extremely bad for the banking industry, as well as for the economy, 

if the FDIC were to be moved in that direction. 

Mr. CLAY. So if all financial regulators were subject to the appropriations process like, for instance, the CFPB, what kind of results 

do you think we would get from that? 


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Mr. JOHNSON. Well, I think you would get much less effective 

regulation. I think it’s much harder to have predictable regulatory 

environment when the funding is uncertain, and as various kinds 

of activities increase, this has been a big issue, for example, around 

derivative transactions, for example. We didn’t increase the amount 

of scrutiny of that, in part, because of the constraints of the appropriation process, and you can get very large industries developing 

with almost no regulatory scrutiny, and of course, that hurt us very 

badly in 2008. 

Mr. CLAY. It certainly did. And Chairman Gruenberg, how are 

the FDIC’s annual expenditures approved? 

Mr. GRUENBERG. By our board. 

Mr. CLAY. By your board. And how does the FDIC ensure it does 

not overspend in its activities? 

Mr. GRUENBERG. We have a pretty rigorous budget process that’s 

overseen by our board, which is made up of 5 members, and as you 

know, politically diverse as well, and the—it is acted on in a board 

meeting, a public board meeting, and all of the budget, of course, 

is a matter of public record. 

And actually, since the crisis, we’ve been reducing our annual 

budget as we’ve been winding down from the build up to respond 

to the crisis. 

Mr. CLAY. And isn’t it true that even without being subject to the 

appropriations process, Congress still maintains meaningful oversight of the FDIC’s operations. Is that correct? 

Mr. GRUENBERG. I would say that’s fair to say, Congressman. 

Mr. CLAY. Kind of like this hearing today, and we’re in the Oversight Committee, and so—and which I find it interesting because 

you usually come before the Financial Services Committee, and for 

whatever reason, you have shown up here today. But I appreciate 

that, Mr. Chair, and I will yield back the balance of my time. 

Mr. MEADOWS. [presiding.] I thank the gentleman from Missouri. 

The chair recognizes the gentleman from Georgia, Mr. Hice for 5 

minutes. 

Mr. HICE. Thank you, Mr. Chairman. 

Mr. Gruenberg, let me ask you, your opinion and that overall of 

the FDIC, should banks be national? Or is there a need for local 

community banks? 

Mr. GRUENBERG. Oh, I think community banks play a critical 

function in our financial system and economy, Congressman. 

Mr. HICE. I do, too, and yet they’re closing all over the place and 

they’re not being approved all over the place. Do you believe that 

there are too many banks in this country? 

Mr. GRUENBERG. Certainly not too many community banks, and 

we could use more community banks. 

Mr. HICE. What about banks as a whole? 

Mr. GRUENBERG. No, we have a strong banking system in the 

United States. 

Mr. HICE. Are there too many? 

Mr. GRUENBERG. No, I don’t think so. 

Mr. HICE. Does the FDIC in any way have a strategy, a plan, a 

policy for consolidation in the banking sector? 

Mr. GRUENBERG. No, sir. 


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Mr. HICE. And yet banks are being swallowed up by bigger 

banks? 

Mr. GRUENBERG. You know, there has been a—— 

Mr. GRUENBERG. Are you saying that’s all coincidental? 

Mr. GRUENBERG. There has been a 30-year process in the United 

States of gradual consolidation within the banking industry, both 

at the large institutions as well as at the community banks. 

Mr. HICE. Does the FDIC have any role in that either through 

policies, or in any way would you think FDIC is responsible or has 

a role in that consolidation? 

Mr. GRUENBERG. I think deposit insurance is something that’s 

viewed as actually supportive and beneficial for community banks. 

And going back to 1933, when the FDIC was created, the strongest 

advocates for deposit insurance were by community banks to put 

them in a stronger position to compete with the larger institutions. 

Mr. HICE. Do you believe that competition in the market is important? 

Mr. GRUENBERG. Critical, yes, sir. 

Mr. HICE. Should consumers have options when it comes to 

banks? 

Mr. GRUENBERG. Yes. 

Mr. HICE. They’re getting fewer and fewer options. We’re all certainly watching that. 

Let me for a quick moment, Mr. Browning, let me go to you. 

Your written testimony estimates that it costs nearly a million dollars for the application process. How much would this have cost, 

do you think, had you gone the entire way through the process? 

Mr. BROWNING. Congressman, I think that is an unanswerable 

question, unfortunately. We went through a very protracted process, spending a great deal of time and money. As I mentioned, we 

spent nearly a million dollars. We had $30 million in capital to put 

into the bank showing a plan that was profitable in year one, but 

we came to a conclusion that we could not actually achieve the end 

of the process. 

If we saw a light at the end of the tunnel, we stood ready to 

make reasonable changes, but we felt like we were shadowboxing 

and could not get clarity on what was actually required and did not 

want to pour good money after bad—— 

Mr. HICE. So your experience is that the cost involved certainly 

affected not only you, but other interested candidates out there 

would struggle over the cost of the process? 

Mr. BROWNING. Certainly the cost of the process, but perhaps, 

more importantly, the ambiguity and indeterminate process. There 

wasn’t a clear—— 

Mr. HICE. No light at the end of the tunnel, as you describe. 

Your written testimony also mentions that the FDIC felt like 

there was no community need for your bank. Do you have any idea 

what the definition is of a community need? 

Mr. BROWNING. Well, I certainly know the historical application 

of that, and it’s spelled out in the statutory requirements within 

the Federal Deposit Insurance Act. And for our application, our 

community were clients, retail clients coast to coast, that needed 

basic banking services in conjunction with their brokerage accounts. This was a built-in customer base, and these are just momVerDate Nov 24 2008 11:17 Jun 15, 2017 Jkt 000000 PO 00000 Frm 00088 Fmt 6633 Sfmt 6633 H:\25511.TXT APRIL

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and-pop retail investors. That was our community. The new interpretations or new suggestions were unknown to us. 

Mr. HICE. Did the FDIC explain to you what their interpretation 

of ‘‘community need’’ was? 

Mr. BROWNING. No. They did not give an explicit interpretation 

of what it was. What they suggested what it was not. They suggested that our existing customer base was not adequate, that serving consumer demand for banking services that we had a personal 

relationship with was not a sufficient justification to charter a 

bank. 

Mr. HICE. Who’s best to make that determination, the FDIC or 

those in the local community as to what the community need is for 

a bank? 

Mr. BROWNING. I think those in the local community, and I 

would also look at some of the regional offices of FDIC who have 

experienced expert staff, on the ground, in the local real economies, 

that they have a very good grasp where I think it’s much more difficult to regulate strictly from Washington, but certainly local business people enmeshed in the community are certainly the best testament to what those community needs are. 

Mr. HICE. Thank you, Mr. Chairman. I yield back. 

Mr. MEADOWS. I thank the gentleman. 

The chair recognizes the gentlewoman from the Virgin Islands, 

Ms. Plaskett. 

Ms. PLASKETT. Thank you, Mr. Chairman, and thank you, gentlemen, for being here this morning. I wanted to ask about several 

policies related to keeping the financial system safe. 

Professor Johnson, in 2011, you published an article in the New 

York Times leading up to the financial crisis. Some bankers, and 

I quote, you wrote, understood, to a large degree, what they and 

their companies were doing, and they kept it up until the last 

minute and in some cases beyond because of the incentives they 

might receive. 

Could you explain what you meant by this? 

Mr. JOHNSON. I don’t recall that precise article. I have written 

on that topic many, many times. The general point is that when 

you provide incentives, with some sort of downside protection, so 

too big to fail would be the most notable version of this, but also 

it comes up, by the way, in a lot of the conservative commentary 

about deposit insurance over long periods of time. 

If you’re protecting people from downside risk, and on the upside, 

they do very well, then they are naturally, just as a matter of 

arithmetic applied to incentives, they are naturally going the take 

more risk. 

Now, sometimes you might feel that you can contain that. That 

has been the experience with deposit insurance in the U.S. over the 

years, but unfortunately, with regard to larger financial institutions and some of the largest and they run up to 2008, the risk that 

they took was so big that they ended up having a devastating effect 

on the real economy. That’s why we had this massive recession. 

Ms. PLASKETT. So those risks that they took at the largest financial institutions that you’re speaking about, and the bank executives of those institutions, are they still incentivized in the same 


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manner that they were at that time, and what is their incentives 

today to act in the best interest of the Nation? 

Mr. JOHNSON. I’m afraid that the largest, what are now, bank 

holding companies, they still have an enormous amount of effective 

downside protection provided by the Federal authorities, both the 

Federal Reserve and other parts of the U.S. Government, and we 

have not ended the problems associated with these too-big-to-fail financial institutions. So that’s a distortion of their incentives. 

And as the chairman, Chairman Chaffetz opened the hearing, argued that systemic risk is going up. I think he’s right but for a different reason, which is it’s the effects of these very large financial 

institutions and the distorted incentives. Systemic risk is hardly affected at all by the margin of de novo community banks. That’s just 

a matter, again, of arithmetic. They are very small relative to GDP. 

The largest financial institutions are huge. The largest single bank 

in the country, JP Morgan Chase has a systemic footprint, which 

the Fed calculates to be about 40 percent of U.S. GDP, four-zero 

percent, so dwarfs anything that we’ve been discussing so far this 

morning. 

Ms. PLASKETT. So those systemic issues that you’re discussing 

and the risks that banks are willing to take, and particularly, the 

bank executives in making those risks, do you believe that the 

FDIC should look at compensation and the compensation models 

that these banks have in their application process to determine 

what potential risk that the bank and its executives might make 

in their decisionmaking because of the compensation that they receive based upon those risks? 

Mr. JOHNSON. Yeah. It’s certainly how you compensate your executives is a very important part of the risk profile that your bank 

or any firm adopts. And as I read the FDIC criteria, which frankly, 

I find to be pretty transparent, well explained, and I like the Q&As 

as well, as I read them, that is one of the criteria. There is other 

criteria as specified by Congress, but yes, from a point of view, deposit just the narrow deposit insurance, I think the FDIC does take 

that into account. 

Of course, the FDIC also has additional responsibilities created 

by Dodd-Frank with regards to some of the largest financial institutions, including with regard to living wills, and that, may also be 

a consideration that although, frankly, there’s less transparency on 

that process. 

Ms. PLASKETT. As a lawyer, I guess the living will piece sounds 

really interesting to me. 

But Chairman Gruenberg, could you explain to me how the compensation models might play and how you evaluate that in determining the applications of banks in terms of would the compensation model show that an executive would be willing to take on more 

risk because the output to them, in terms of compensation, would 

be greater if there is a greater risk? 

Mr. GRUENBERG. In reviewing an application for deposit insurance, just to be clear, our responsibility goes to deposit insurance, 

not to the charter for the institution. But certainly one of the key 

components of it would be the management plan and the proposed 

executive leadership of the institution, both management and—— 


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Ms. PLASKETT. Sure, but you’re determining that. You’re determining the insurance deposit would let us know that, hey, they 

need greater insurance because you view them at a greater risk 

than others would. 

Mr. GRUENBERG. And in an appropriate compensation scheme for 

the institution, with not undue incentivizing of risk, would be part 

of the things we look at in terms of reviewing the application. 

Ms. PLASKETT. So because it’s my belief that the compensation 

models must be—and I’m glad to understand, in consideration by 

the FDIC in terms of how much deposit do you believe that they 

should have or what is the insurance compensation that’s needed, 

and I’m thankful for the information that you’ve given us. 

Thank you, Mr. Chairman. I’ve run out of time. I yield back. 

Mr. MEADOWS. I thank the gentlewoman. The chair recognizes 

the gentleman from North Carolina, Mr. Walker for 5 minutes. 

Mr. WALKER. Thank you, Mr. Chairman. Thank you, Panel, for 

being here today. Being from North Carolina, I am concerned that 

over the last 7 years we’ve lost 40 percent of our charters with no 

new banks being chartered during that time. Bank closures and 

consolidations account for most of the loss, but this is still a dramatic trend in banking and threatens the future of community 

banking as a business model. 

And over this time, a new bank has not been chartered in North 

Carolina since 2009, 7 years. The cost of the application and the 

regulatory compliance are cited as early obstacles to profitability as 

everyone testifies today, at least from what I’ve heard, seems to 

agree that community financial institutions have an important role 

in our economy. 

What has the FDIC, Chairman Gruenberg, done or considered, to 

lower the barriers to entry for these new bank charters? 

Mr. GRUENBERG. I think what we have under control, Congressman, is the application process itself, in trying to make that as 

user friendly and responsive as possible, and fair to say, a significant aspect, particularly for smaller groups trying to set up a 

smaller institution, are legal and consulting fees to support the application process. To the extent that we, in the course of working 

with an applicant can help defray those costs, provide them the information and support and organizing group needs, our goal would 

be to try to contain that cost. 

Mr. WALKER. When you say your goal is to contain the cost, is 

that something you’re regularly looking at, reviewing, discussing, 

talking about, and is there any action steps or is it just something 

that’s laid out there as a goal somewhere in the future? 

Mr. GRUENBERG. No, as I indicated and as I outline in my testimony, we are pursuing a number of steps to try to promote new 

applications, including holding meetings in regions around the 

country for interested parties and industry groups to walk them 

through and explain the application process and encourage them to 

engage with us, as well as working with the State and Federal 

agencies who are responsible for chartering new banks and who are 

partners in terms of entry to the system. 

Mr. WALKER. And I appreciate that. Just curious as to maybe for 

me, maybe for the public, what would be the cost or capital needed 


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to charter a bank today, and what are the factors that would affect 

the amount of capital required to grant this charter? 

Mr. GRUENBERG. It’s hard to generalize. I think that the capital 

required of the institution would be related to its business model 

and risk associated with it. It’s generally a minimum of $2 million, 

but I think in practice it’s more $10 to $20 million of capital is 

probably the more general experience. And I think in terms of a 

startup cost for just putting the application together, it probably 

runs close to a million dollars. 

Mr. WALKER. In these meetings and discussions to work for—on 

the cost and some of the startup fees, has the FDIC considered 

streamlining the business plan for a de novo bank applicant? 

Mr. GRUENBERG. I think we’d like to make it as simple and fast 

as we can. You know, we have a balance to strike. That’s really 

what—we want to facilitate the entry. At the same time we have 

to ensure that the institution that’s going to be established is going 

to benefit from Federal deposit insurance, and so we have to be 

sure both that the process is as user friendly as we can but also 

ensure that the new institution established can meet the standard 

so it can be set up. 

Mr. WALKER. Sure. And with the de novo banks, one of the major 

costs is hiring the regulatory attorney. The question is, as this is 

incredibly expensive, could this process be streamlined so that no 

regulatory attorney is necessary? 

Mr. GRUENBERG. I don’t know that I could say or advise a group 

not to have legal counsel. To the extent we can simplify and work 

with the institution to reduce that cost, that would be an objective. 

Mr. WALKER. And what considerations or accommodations is extended to new charters in the area of regulatory oversight? 

Mr. GRUENBERG. I think it’s important in the initial 3 years of 

the establishment of the institution. You can look at it both ways. 

You want to have careful oversight in the initial period as they get 

themselves started up. That’s a period of risk for a new entity. And 

I would view we have more attentive supervision, and I would view 

that as actually supportive of the long-term success of the institution. 

Mr. WALKER. And if I have time, maybe to expound on this last 

question. In North Carolina we have seen successful nontraditional 

creative bank structures like Square One Bank in Durham and 

then Live Oak Bank in Wilmington. Will nontraditional charter applicants still receive favorable conditions from the FDIC, assuming 

all of the boxes are checked, capital management, et cetera? 

Mr. GRUENBERG. We’ll work with any group that has an interest, 

Congressman. 

Mr. WALKER. My concern, from what I’m hearing over in the 

hour or so of testimony today, is that—let me ask you this. How 

long have you been chairman of the FDIC? 

Mr. GRUENBERG. I’ve been—became—I was confirmed as chairman in November of 2012. 

Mr. WALKER. Okay. So we’re coming up on 4 years. I hear a lot 

about, hey, these are our goals, this is something we’re looking 

into, we’re having meetings, we’re checking into this, even some of 

the questions earlier about any kind of pushback on some of the 

whistleblowers. I hope that some of that is actually being processed 


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and some of those goals are being met in the days ahead. I have 

a couple more. My time is expired, so I yield back to the chairman. 

Thank you. 

Mr. MEADOWS. I thank the gentleman. The chair recognizes the 

gentlewoman from Illinois, my good friend, Ms. Kelly. 

Ms. KELLY. Thank you, Mr. Chair. I would like to address two 

issues affecting the ability of the FDIC to keep the financial system 

safe. 

First I’d like to ask about the FDIC’s orderly liquidation authority. The Dodd-Frank Act permits large and complex financial institutions that are failing to be resolved through a process known as 

‘‘orderly liquidation.’’ Mr. Chairman, can you please explain what 

that is and how is it different than bankruptcy 

Mr. GRUENBERG. Thank you, Congresswoman. Just to put it in 

context. Prior to the crisis, the FDIC’s resolution authorities, or authorities to manage the failure of a financial institution, was limited just to the insured institution, the insured bank itself. What 

we saw during the crisis that it wasn’t just the insured bank but 

actually the parent company and the consolidated financial company these very large institutions that got into difficulty as well in 

some cases nonbank financial companies, Lehman Brothers is perhaps the most striking example. And the FDIC had no authority 

to place either the consolidated complex financial institution or a 

nonbank financial company into a public receivership 

The orderly liquidation authority that you mention actually provides us those authorities. So it’s really a threshold capability if we 

were going to try to actually manage an orderly failure of a systemic institution like this. It was a authority we didn’t have in 

2008 and it was—it is an authority we have today 

Ms. KELLY. If another financial crisis were to occur today, we 

hope not, could a failing financial institution be resolved through 

bankruptcy? 

Mr. GRUENBERG. I believe we have the authority and capabilities 

today that we didn’t have in 2008. I would just say, though, until 

we actually do it, and then I would be, you know, a little modest 

about making heroic assertions, but I do think we are in a very different place today than we were back in 2008. 

Ms. KELLY. Professor Johnson, do you agree with that? Is bankruptcy a feasible way to resolve a failing institution at this point? 

Mr. JOHNSON. Well, I want to make sure I understand the question, and the wording is really important. Bankruptcy generally, refers to the process where the FDIC is not involved, you go to the 

courts, and it’s administered as a court run process. That’s the 

standard, obviously, for nonfinancial companies. 

We have attempted that. Sometimes financial companies, for 

smaller relatively simple financial companies, yes, bankruptcy does 

work. For any kind of large complex financial institution, bankruptcy didn’t work in the past, would not work today. It would be 

a catastrophe. You’d be back to Lehman Brothers. That’s why we 

have the OLA, that’s why we have the potential for the FDIC resolution process. I think that could be helpful under some circumstances, but I think that the large complex institutions are still 

a bit too big and too complex and that none of them have produced 

living wills, to the best of my knowledge, that really would assure 


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us that they could be resolved in an FDIC run process without 

major negative effects on the financial system and on the economy. 

Ms. KELLY. Our chair of Financial Services has recently proposed 

legislation to rescind the FDIC’s orderly liquidation authority. 

Professor Johnson, are you familiar with that? 

Mr. JOHNSON. Yes, I am 

Ms. KELLY. And what would be the effects? 

Mr. JOHNSON. I think it would be a disaster. I think that we experienced vivid and horrible detail in 2008 what happens when you 

say large financial institution is failing, let’s have it sorted out by 

bankruptcy. Lehman went bankrupt. Let’s be clear. Lehman went 

through the bankruptcy process, and I don’t think any of us enjoyed the consequences, and I really don’t think we want to go back 

there. 

Ms. KELLY. The chairman also has the CHOICE Act, which will 

require FDIC to calculate and weigh the costs and benefits of new 

regulations. 

Professor Johnson, again, in the financial services arena, how 

credible are quantitative cost benefit analysis? 

Mr. JOHNSON. Look, if you’re talking about the full costs and 

benefits of financial regulation, including avoiding a massive recession with millions of jobs lost, the loss of at least 1 year’s GDP, low 

growth for 8 years, if that’s in the cost benefit analysis, then I’m 

in favor, but unfortunately, that’s not what is put in even the legislative language or in the standards of protection of cost benefit 

analysis. They use a much narrower definition. That frankly is 

deeply, deeply misleading with regard to why we have financial 

regulation, how financial regulation works, and what happens 

when it fails 

Ms. KELLY. Thank you. Chairman, I won’t you to ask you to comment on that, but can you tell us if the FDIC currently conduct any 

analysis of proposed regulations, benefits, and costs? 

Mr. GRUENBERG. Actually we do, Congresswoman, and as you 

may know, we’re in a process required by Federal statute called 

EGRPRA, which requires the Federal banking agencies every 10 

years to review all the rules and regulations that we’ve issued and 

determine whether any of them are no longer necessary or should 

be modified, and we’re actually working on that process now. 

We’re require to issue a report by the end of this year, and I 

think we’ll be—we’ve already made some changes, and we’ll be proposing additional changes in an effort to reduce regulatory burden 

and the costs associated with them. 

Ms. KELLY. From a nuts-and-bolts perspective, how would a 

quantitative cost benefit analysis affect the FDIC’s ability to put 

forward new rules, especially in the midst of a financial crisis? 

Mr. GRUENBERG. It would really determine on how—as Professor 

Johnson indicated, how it was run, and since I’m not really familiar with the legislative proposal, I’d rather not comment on that. 

Ms. KELLY. Yes, sir. 

Mr. MEADOWS. I believe the gentlewoman’s time is expired, but— 

it didn’t inspire 5 minutes and 48 seconds ago, but I think we are 

48 seconds into expiration. 

Ms. KELLY. I was wondering. Okay. Thank you 

Mr. MEADOWS. The gentleman from Tennessee is recognized 


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Mr. DUNCAN. Well, thank you very much, Mr. Chairman. 

Mr. Gruenberg, I have a letter from the Tennessee Bankers Association which says: Among the key factors that are both restricting 

new banks and driving consolidation are the ability to attract the 

very high levels of capital required to start a new bank, and for 

that matter, the high levels of capital required after imposition of 

the Dodd-Frank Act and the new Basel 3 requirements. 

And secondly, the regulatory burden imposed by the Dodd-Frank 

act, which requires significant resources to be directed simply toward compliance issues. And I really heard that second matter for 

many bankers, but you talk about these high capital requirements. 

I heard Mr. Browning say that his people had $30 million they 

were planning to put into this bank, and I’m wondering, can you 

give me a rough guess? I’ve been provided by staff saying that 

there was only one new bank approved in 2013 and one in 2015. 

In the last 3 years, let’s say, or 3 or 4 years, how much capital 

have these new banks that—two or three new banks that have 

been approved, how much capital have they come up with? 

Mr. GRUENBERG. I couldn’t tell you that offhand, Congressman. 

We’d be glad to check on that and come back to you, if that would 

be okay. 

Mr. GRUENBERG. I think in regard to the application standard, 

the capital requirement today is the same capital requirement 

that’s been in place really since 1992. So we do require higher capital for startups for that first 3-year period, and the reason for that 

is in the startup phase of an institution, one, it’s going to be a 

growth period so they need the capital to support the growth; two, 

startups generally experience higher rates of loss as they get their 

business going; and three, they need the initial capital just to get 

the operation—— 

Mr. DUNCAN. Well, how much capital do you require just generally? 

Mr. GRUENBERG. It’s an 8 percent minimum requirement. 

Mr. DUNCAN. Eight percent of what? 

Mr. GRUENBERG. It’s an 8 percent leverage capital requirement 

related to the total assets of the institution, and that’s been the 

minimum requirement since 1992. And you can argue that it’s 

too—some people argue that it’s too high. Others have argued, because of the failure experience during the crisis, it should have 

been even higher. 

We think it’s a reasonable basis to assure a significant probability of success as the institution gets started and tries to get 

through the initial startup period. 

Mr. DUNCAN. Well, you may need to take another look at it if nobody’s applying for new banks anymore or they’re not getting any 

approved. 

Let me ask another question real quick before my time goes out. 

I know when they passed the Dodd-Frank law, and I was here 

then, the people who supported it said they were doing it to get 

back at the big banks and Wall Street firms that led us into the 

recession. Yet 2 years ago, George Mason University released a report that said that since the financial crisis, U.S. banking assets 

and deposits have continued to consolidate in a handful of large 


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banks. The five largest banks now hold 44 percent of U.S. banking 

assets compared to 23-and-a-half percent in early 2000. 

And I’m wondering, Mr. Williams, have you seen that as the— 

are the total deposits continuing to just go to the big giants? And 

is it possible for a small bank—I’ve heard one banker say that it’s 

not possible for a bank under a billion dollars in assets to even survive today. 

And have you seen more of your time and expenses being devoted 

to compliance costs as compared to say when you started in the 

banking business? 

Mr. WILLIAMS. Oh, my goodness, yes. When we started the bank, 

we actually didn’t have a compliance officer, and we treated the 

consumer better than we do today. Now we have a number of compliance officers, we have an unbelievable regulatory burden, and 

essentially all of that cost has to be passed onto the consumer, it’s 

passed onto the investors, but it’s not a productive cost. 

The fundamental factor about compliance is complexity favors 

the large. I’m going to say that again because it’s important. Complexity favors the large. The regulations from Dodd-Frank would 

fill several phone books. Just paying an attorney to read them is 

a significant expense. That’s not a problem for Bank of America, 

but for Gulf Coast Bank, it is a big deal 

Mr. DUNCAN. What are your total assets? What size is your 

bank? 

Mr. WILLIAMS. A billion 450. 

Mr. DUNCAN. Is it possible for a small bank to survive today, or 

it’s certainly becoming much harder, isn’t it? 

Mr. WILLIAMS. It is, but it’s more difficult. It’s a challenge, and 

the more regulation you have, the larger you have to be to succeed. 

And we’ve raised the level of complexity to the point that it’s very 

challenging for the very small banks, the 100- to 200- million to 

make money. And unfortunately, we don’t go back and relook at 

the regulations. 

We say that we will, but we add 16,000 bricks to the wagon, we 

take away three, and as a banking industry, we’re supposed to applaud that effort. The regulations never decrease. They only increase. 

Mr. DUNCAN. The more any industry becomes Federally regulated, the more regulated it becomes, the more it ends up in the 

hands of a few big giants. Thank you, Mr. Chairman 

Mr. MEADOWS. I thank the gentleman. The chair recognizes the 

gentleman from Massachusetts, Mr. Lynch for 5 minutes 

Mr. LYNCH. Thank you, Mr. Chairman. Look, I actually love my 

community banks. Those are the banks that are making the loans, 

doing the mortgages, helping folks out in my community, and I actually have sponsored a regulatory relief bill for community banks 

because they are making the loans and out doing all those crazy 

stuff with derivatives. They’ve got adequate capital, and they are 

engaged as traditional banks. 

But I do want to look at the data here, because I don’t think 

there’s a conspiracy within the FDIC to basically, you know, manipulate the application process to stop banks from coming into existence, and that seems to be the suggestion here today. 


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If you look at the data, in 1985 we had 18,000 banks. Today, 

we’ve got a little over 6,000. It’s almost a two-thirds decline, but 

if you look at what happened, about 85 percent of those banks went 

out of business because they merged with other banks and they became bigger and bigger. As a matter of fact, as my colleague just 

pointed out, the 10 biggest banks back in 1985, they had 19 percent of industry assets, but today, they’re closing in on 60 percent. 

Those 10 banks control almost 60 percent of industry assets. 

So we’ve got these huge whales out there that are basically gobbling up these other banks, and that’s not healthy. But it is not the 

application process that is causing that. At the same time, we’ve 

got a very, very low interest rate environment. We’ve got very, very 

low margins here. Between—you know, if you take deposits, and 

you know, you’re getting very low interest on that and you have to 

lend out your money at a very low interest rate to be competitive, 

there’s a very low margin of interest for banks, so it’s tough to operate in this environment. 

So I don’t think there’s any secret plot out there. It’s just a tough 

environment, and that’s why, not surprisingly, de novo bank applications are down. They’re—it’s just a tough time to try to get into 

the business. 

And I do want to say that, you know, that idea of reducing the 

regulatory burden for community banks is a good one, and I know 

that Tom Hennig from—he’s on the board, right, on your board, 

Mr. Chairman? He’s got some good ideas. He actually sat down 

with a number of the members on both sides of the aisle here, and 

we think that we can come up with a good regulatory relief bill for 

community banks that are doing the right thing and just trying to 

help local small businesses, and that’s the direction we should be 

going in. 

But let me ask Mr. Johnson, is there something I am missing 

here? Apart from what I laid out in terms of the consolidation 

going on, the small number of banks that are in existence today 

and the pressures, or do you really think there is this conspiracy 

out there or some type of nefarious plot to, you know, to stop banks 

from coming into existence? 

Mr. JOHNSON. Mr. Lynch, I don’t think there’s any kind of conspiracy. There’s a longstanding process of consolidation in the industry, which was prompted by Congress, by the way, when it repealed the restrictions on interstate banking. So that’s what happened, historically, and as banks were able to spread across States, 

you got the prospect of consolidation. The one big thing we haven’t 

talked about today, perhaps, is economies of scale in banking due 

to technology. 

So the fact you have pretty demanding information technology 

requirements is another squeeze on the banks under $100 million, 

and this has been looked at carefully by the FDIC, among others. 

Economies of scale, so in terms of what your costs are relative to 

your assets, they come down quite quickly until you get down to 

about $100 million, in assets, and then it flattens out. 

So this is more pressure on that lower—the smaller banks, historically, they were more important than they are today. And from 

a de novo bank, it raises the amount of capital that you need up 


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front because you’ve got to get to that economies of scale. That just 

reinforces what you’re saying, Mr. Lynch. 

Mr. LYNCH. Okay. So we have a list that the FDIC looks at when 

somebody applies to get a charter. The financial history and condition of the depository institution, adequacy of capital, future earnings prospects, general character of fitness of the management, risk 

presented by depository institutions to the deposit insurance fund, 

convenience, needs of the community, and whether its corporate 

powers are consistent with the purpose of the act. 

Do we think any of those are inappropriate that we might be 

able to reduce the number of factors, or do we think those are all 

sound? 

Mr. GRUENBERG. I think our experience is those are pretty much 

basic considerations for a bank application. 

Mr. LYNCH. Okay. My friends at the American Bank Association, 

any of those factors you think are overbearing or—— 

Mr. WILLIAMS. The factors have been the same factors for a number of years. The dilemma is the application where at one time it 

was relatively easy to start a new bank. Now it is incredibly difficult, and I think we’ve use the pendulum example. It’s gone too 

far. If you prevent a single bank failure, you’ll also prevent an 

awful lot of success. You know, in my other life I’m a pilot, and I 

fly medical patients to get treatment. Well, over the 20 years I’ve 

done this, we’ve noticed a significant improvement in cancer treatment. It’s because they’ve tried a lot of things that didn’t work. 

Well, new banks will fail, but they present a trivial risk to the 

system in the fund. But if you stop new banks from failing, you 

also stop banks from succeeding, and a bank like mine doesn’t 

exist, the community is weaker. And in a small town, if you don’t 

have a hometown bank, you really don’t have a vital economy. 

Mr. LYNCH. Right, right, right. So you’re looking to strike that 

balance. 

Mr. WILLIAMS. Yeah, and I think we’ve struck—we’ve gone too 

far the direction of no failure. 

Mr. LYNCH. Okay. I’ve abused my time. I want to thank the gentleman for his courtesy. 

Mr. MEADOWS. I thank the gentleman. The chair recognizes the 

gentleman from Georgia, Mr. Carter for 5 minutes. 

Mr. CARTER. Thank you, Mr. Chairman. I thank all of you for 

being here. I would certainly be remiss if I didn’t comment on 

what—on one of the comments that was just made about the mergers that have taken place in the banking industry here in recent 

years. Let’s keep in mind, a lot of those mergers weren’t necessarily 

wanted. A lot of them were fire sales, a bank selling to bigger 

banks before they went into business. 

You know, full disclosure here. First of all, I’ve served on community bank boards. Full disclosure, I’m a small businessman. If it 

weren’t for a community bank, I would not have been able to start 

my small business. I went into business November 21stof 1988, and 

it was because a small community bank was willing to extend me 

credit to open up my business, so I am a big community bank fan. 

And I will tell you, Mr. Williams, I couldn’t agree with you more. 

When I was serving on the bank board previously to becoming a 

member of Congress 18 months ago, the only new hires we were 


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making were compliance officers. That was all we could do was 

every time we’d make some money, we’d hire a new compliance officer. That was the only thing we could do. 

Mr. Gruenberg, I want to ask you: Do you know what bank 

deserts are? What are bank deserts? Can you just briefly tell me. 

Mr. GRUENBERG. I’m not—I’m sorry I’m not familiar with the 

term. 

Mr. CARTER. When I would refer—it was a term we kind of used 

in Georgia. You’re aware of what’s happened in Georgia? 

Mr. GRUENBERG. Yes, sir. 

Mr. CARTER. I believe Georgia leads the Nation in the number 

of banks that have closed since all this started. You know, and listen, I’ve listened to all of you during the day, and I know you all 

agree that community banks are important and they’re necessary 

and we’ve got to have them, but bank deserts exist in both rural 

and urban areas, particularly in rural areas. 

In the State of Georgia we have 159 counties. We’ve got 48 counties that don’t have a locally chartered bank. That would be referred to as a bank desert. Nationwide, there are 654 bank deserts 

in rural communities and 351 in urban areas. What we don’t have 

a locally chartered bank. 

Chairman Gruenberg, can you tell me, it sounds like what you 

have articulated here today that you’re concerned, that the FDIC 

is concerned about these bank deserts and the need for community 

banks. But I’m still not clear, when we talk about the convenience 

and need to the community, what you mean by that? 

Mr. GRUENBERG. Well, first of all, Congressman. You’re correct. 

I think we’re very concerned about it. Community banks play a 

critical role, but large institutions really cannot fail for exactly the 

point that you were making. 

Community banks do relationship lending, particularly with 

small business. That is very hands on, and that is not the kind of 

business large institutions are interested in. So they really fill a 

critical—let me just come to your—so your question is, if you could 

just—— 

Mr. CARTER. So you acknowledge that. Tell me what you’re doing 

about it. 

Mr. GRUENBERG. Oh, look, the—we want to do everything we can 

to—— 

Mr. CARTER. I know there’s a different in want and in doing. Tell 

me what you’re doing about it. 

Mr. GRUENBERG. Well, so we can’t change the interest rate environment. That’s not under our authority. What we can try to do 

that’s within our authority is at least to try to make the application 

process, the groups interested in forming a bank, as user friendly 

and reduce the cost, and to the extent we can, reduce the reliance 

on what can be expensive consultants for a group to put together 

a new financial institution. I think that’s a contribution we can 

make, and we are looking at ways to do that. 

Mr. CARTER. Okay. I’ve got very limited time, and I’ve got to— 

let me ask you, Chairman Gruenberg, how many bank charters 

were approved last year? How many new bank charters were approved last year? 

Mr. GRUENBERG. I believe just one, Congressman. 


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Mr. CARTER. One? 

Mr. GRUENBERG. Yes. 

Mr. CARTER. Did you say one? 

Mr. GRUENBERG. Yes. No, we—at the end of my testimony, we 

provide a chart listing all the new charters, and what we’ve really 

had is an unprecedented experience in the period since the financial crisis. We really have not seen—we haven’t—we’ve only a 

handful of new charters and only a handful of applications, because 

we have an economic environment that’s extraordinarily challenging to start a new institution. I think that’s the point that was 

made earlier. 

Mr. CARTER. But how are you going to help? I mean, you know, 

we need to help these people. 

Mr. GRUENBERG. I agree, but we can’t—— 

Mr. CARTER. We’ve got 48 out of 159 counties in the State of 

Georgia that do not have a locally chartered bank. If small community banks go away, small business goes away. 

Mr. GRUENBERG. I couldn’t agree more, Congressman. We don’t— 

community banks in particular—— 

Mr. CARTER. But what I’m hearing—I’m sorry, but what I’m 

hearing is that that is the problem. There’s no transparency, that 

the process is difficult, it’s hard it navigate. 

Mr. GRUENBERG. If you look at our Web site, and our application 

and the requirements are there for everyone to see, which I think 

is the bottom line, and we do work actively with any groups, we 

are prepared, and we’ll look at our procedures for deposit insurance 

applications and try to make them as user friendly as we can. 

Mr. CARTER. Okay. Well, my time has expired. But I’ve got to tell 

you, small business is what made America. 

Mr. GRUENBERG. I agree. 

Mr. CARTER. And this is killing us. We have got to have it. And 

we need help. We need to make it easier. 

Now, we need to make sure these de novo banks, we need to 

make sure these community banks survive. If they don’t survive, 

small business is not going to survive. 

Thank you, Mr. Chairman. I yield back. 

Chairman CHAFFETZ. I thank the gentleman. 

I’ll now recognize the gentlewoman from New York, Mrs. 

Maloney, for 5 minutes. 

Mrs. MALONEY. Thank you very much. 

And I would like to discuss the too big to fail and living wills for 

large financial institutions. Professor Johnson mentioned earlier in 

testimony, when we had the crisis that cost this Nation $15 to $18 

trillion in lost homes, lost jobs, the worst—and it was caused by 

mismanagement, the first major financial crisis in our history that 

could have been prevented with better regulation and management 

of banks. And he alluded to the problem that we faced: We could 

either let it fail, like we did with Lehman, or we could bail it out, 

like we did with AIG. Neither response was a good one. 

So in Dodd-Frank, we came forward, saying that the largest financial institutions would be required to submit to regulators, including the FDIC, a resolution plan to be implemented in the case 

that they failed, and these plans were called the living wills. And 

if a bank consistently fails to provide credible plans, Dodd-Frank 


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permits regulators to increase the bank’s capital, liquidity, and leverage ratio requirements, or even to require the bank to divest 

certain assets or operations. 

So, Professor Johnson, could you please explain why Dodd-Frank 

permits these penalties? 

Mr. JOHNSON. Yes, Congresswoman. The point, very simply, is 

exactly what you are referring to, which is we would like every 

firm in this country to be able to go bankrupt, potentially, without 

any kind of government intervention. I think that’s a completely 

shared goal. 

And that is the case of the nonfinancial sector. It is not the case, 

as we learned vividly in 2008, for the financial sector. 

So the living wills are supposed to be a documentation provided 

to the regulators that demonstrates beyond a reasonable doubt, 

presumably, that these large financial firms can fail without the 

FDIC or anyone else being involved. So that’s Title I of DoddFrank. 

Title II, ordered liquidation authority, is a backup in case the 

bankruptcy process doesn’t work. But the FDIC and the Federal 

Reserve are supposed to be completely confident, by reviewing the 

living wills, that these banks can fail without any kind of government involvement or government financial assistance or temporary 

loan or anything. So that’s, I think, a completely reasonable goal 

that should be shared across the political spectrum. 

Mrs. MALONEY. Okay. These penalties are really sticks to encourage banks to file credible plans, but they are effective only if banks 

know regulators will use them. And since 2013, banks have had 

four chances to get this right, but regulators say that most of the 

plans still have shortcomings. This year, the FDIC found the plans 

of five banks are not credible, and these five banks must resubmit 

their plans by October 1. 

So, Chairman Gruenberg, if the living wills continue to be deficient in October, you have the authority to impose penalties at that 

time in order to protect the taxpayers. Is that right? 

Mr. GRUENBERG. Yes, Congresswoman. 

Mrs. MALONEY. And the plans being submitted this October, in 

some cases the fifth attempts by some of the largest banks to have 

credible plans, and the banks have shown that their resolution 

plans are due since the Dodd-Frank—they’ve known that they have 

to do this since 2010, yet five banks are still not getting it right. 

And no penalties have been imposed for their failures to produce 

credible resolution plans. 

So my question, Professor Johnson, how can the public and the 

banks be sure that the FDIC is serious about obtaining credible living wills if they are not, you know, putting these penalties forward? And then I’d also like the chairman to answer. 

So, Professor Johnson. 

Mr. JOHNSON. Yes, Congresswoman, I think it’s a very big question. And, of course, it’s not just the FDIC. It’s the FDIC and the 

Board of Governors of the Federal Reserve System. They act together in this. And I’m afraid, for precisely the reason that you 

identified, because we haven’t seen any of these remedial actions 

required, I’m afraid that public confidence in the FDIC and the Fed 

with regards to having viable living wills that really would keep 


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the taxpayers off the hook and give us much broader financial system stability, I’m afraid confidence in that is low, and I would presume it will decline further. 

Mrs. MALONEY. Chairman. 

Mr. GRUENBERG. Yeah, Congresswoman. So, as you know, the 

eight most systemically important financial institutions submitted 

resolution plans, living wills, last year, and those plans were reviewed jointly by the FDIC and the Fed. And we’ve recently issued 

evaluations of those plans. And of the eight, the Federal Reserve 

and the FDIC jointly found five of them to be noncredible. That’s 

the standard under the statute. And the statute provides that if we 

make that joint determination, we, together, have to issue a notice 

of deficiencies laying out the inadequacies of the plan, which we 

did. And all of that was made public in the course of releasing 

these evaluations. 

And as you indicated, we gave those institutions until October 1 

to submit plans addressing those deficiencies, and we’ll then be at 

the point of having to evaluate their responsiveness. And as you indicated, the law provides this authority, that if the plans don’t address the deficiencies, we have the authority to impose additional 

prudential requirements relating to capital liquidity leverage, as 

well as constraints on activities. And that’s a decision we’re going 

to have to make once those submissions are made October 1. 

Mrs. MALONEY. Mr. Chairman, may I do a follow-up question to 

his answer? 

You’ve had four times to have an evaluation. This is the fifth 

time, correct? 

Mr. GRUENBERG. Yes. 

Mrs. MALONEY. And the other four times that you’ve had an evaluation, you haven’t come in with the penalties that Dodd-Frank 

gives you. And so when my—you know, I was one of the participants in the conference committee on Dodd-Frank, as you know, 

and I support it. But how do we know—and I think people that are 

critical have a right to be somewhat critical—that it’s going to be 

implemented if you’re not implementing it? What’s different this 

time? Are we going to be going to plan 6, 7, 8, 9, 10? 

Mr. GRUENBERG. As you may know, Congresswoman, it requires 

a joint determination. 

Mrs. MALONEY. Yeah, joint, I know, realize. 

Mr. GRUENBERG. And the FDIC in a previous round had failed 

the institutions, but we didn’t reach joint agreement. I do think 

what’s important is that in this round we did reach a joint agreement on five of the plans, and we’re now in a position to see the 

institutions, presumably, address these deficiencies, or if not, then, 

you know, there are authorities under the law that would be available to us. 

Chairman CHAFFETZ. I thank the gentlewoman. 

Mrs. MALONEY. Could I just ask him to submit to you what your 

outcome is, since we are distracted? 

Chairman CHAFFETZ. Sure. That would be good. 

Mrs. MALONEY. This is a very important financial security, safety, and soundness issue, and I think to present your findings, since 

we are—they are not coming to us, they are coming to you. So I 

think to give us those—that information would be helpful. 


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Mr. GRUENBERG. Okay. 

Mrs. MALONEY. Thank you. 

Mr. GRUENBERG. Sure. 

Chairman CHAFFETZ. When will we have those? 

Mr. GRUENBERG. Well, I’m assuming relating to the evaluations 

that were made? 

Mrs. MALONEY. Yes. 

Mr. GRUENBERG. And that’s a matter of public record, and we’d 

be glad to provide that to the committee. 

Chairman CHAFFETZ. We now recognize the gentleman from Wisconsin, Mr. Grothman, for 5 minutes. 

Mr. GROTHMAN. Thank you, Mr. Chairman. 

We’ve had several questions before, but when I talk to my smaller banks, going back to what Congresswoman Carter said, all 

they’re doing is hiring compliance officers, which, obviously, is in 

some cases just is squeezing, you know, the amounts you’ve got to 

in deposits or whatever. In other cases, it’s causing a lot of 

buyouts, because these smaller banks, they just can’t afford to operate and they allow themselves to be bought out and that sort of 

thing. 

Have you kept track of the huge cost to the banking system of 

the additional compliance? Do you have a dollar figure you can put 

on that? 

Mr. GRUENBERG. You know, we’ve actually—it’s tough to quantify. Clearly, it’s meaningful, particularly for the 4,000 institutions 

in the United States with assets under $250 million. I think for 

those institutions the cost of regulatory compliance is significant. 

As a technical matter, it’s tough to quantify, but there’s no doubt 

that it’s meaningful. 

And, look, I think, from the standpoint of the bank regulators, 

we want to find ways to reduce regulatory burden and cost. We 

have been undertaking a review as required by the law. I think 

there are areas we can address, including simplifying capital, riskbased capital compliance, appraisal thresholds. These community 

banks have raised particular concerns about call report burden. 

I think there are a number of areas where we can and are planning to take steps that will actually reduce burden and cost, and 

I think, to the extent we can, we really should do that. 

Mr. GROTHMAN. Thank you. 

Mr. JOHNSON. Congressman, I have some data. Can I give you 

the data on this? It’s actually from Mr. Browning’s testimony. This 

is drawing from the Richmond Fed’s research and the Fed’s research, and it’s consistent with what the FDIC has also published. 

Now, I’m not trying to trivialize these expenses and costs at all, 

including for certain segments of the market, but if you take on average what Mr. Browning’s testimony says, he’s quoting these academics, the increase is relatively small and, more importantly, the 

size of the expense is just too small to have a big effect on bank 

profitability. 

Mr. GROTHMAN. Like too many professors, you’ve got to get out 

of the university and spend more time talking to small bankers. 

Mr. JOHNSON. I’m sorry, this is the data, Congressman, this is 

the data, and I do spend a lot of time working with the private sector, with all due respect, in my university—— 


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Mr. GROTHMAN. That’s okay. We have 5 minutes, and I intended 

to talk to Chairman Gruenberg here. 

There’s been a huge drop in the number of banks. Do you consider that a bad thing? I mean, you know, a lot of local people say, 

and maybe it’s consistent with my experience, you get better service from the small local bank. Do you view that as a bad thing that 

we have such a huge drop in the number of banks we’ve had since 

a few years ago. 

Mr. GRUENBERG. I don’t view it as a good thing. No, I don’t, Congressman. 

Mr. GROTHMAN. Are you doing anything to make sure that these 

smaller banks are able to keep going? Do you view this as a fundamental problem. I realize it’s not all yours. I mean, obviously, the 

people who voted for Dodd-Frank wanted to finish off a lot of these 

small banks too. But what are you doing to make sure that we 

keep these small banks going and they aren’t forced to be bought 

out? 

Mr. GRUENBERG. Well, I think it is part of our responsibility. A 

strong community banking sector has enormous value for the financial system and the economy. 

I think we want to find ways to reduce regulatory burden and 

costs. I think that’s one way we can do it. We have tried to make 

our supervision of institutions risk-based and appropriate to the 

nature of the institution. So for a smaller, simpler bank, we’re able 

to do exams less frequently and try to do it in a way that’s really 

appropriate to the model of the institution. 

So both in terms of trying to reduce regulatory burden and doing 

our supervision in a way that’s responsive to the business of the 

bank, those are the two things we can do. 

Mr. GROTHMAN. Okay. Now, I get a concern, the Consumer Financial Protection Bureau, okay, that insofar as they get involved 

here, standards that were meant for bigger banks are kind of seeping down to the smaller banks. Is there anything you can do about 

that to make sure this doesn’t happen anymore? 

Mr. GRUENBERG. I think this so-called trickle-down issue is certainly one of the things we hear about from the bankers. And we 

work pretty hard to make clear that whatever obligations are imposed on the larger institutions are not expected of the smaller institutions, and we try to make that very clear in our supervisory 

program. 

Mr. GROTHMAN. Okay. I can see, and Mr. Williams wants to 

speak down here, just one second. Would you, Mr. Williams? 

Mr. WILLIAMS. Sure. Yeah. I mean, will all respect, the unfortunate consequence of the trickle down is that the regulations like 

Basel that were intended for the most complex banks are pushed 

down to community banks like ours. And then you have the pernicious effect of best practices. It becomes a best practice, and then 

we have to do it. 

So it may not be a regulation, but then it becomes a best practice, and then it gets pushed down to a billion-dollar bank, then to 

a 500 billion, and then things that don’t make economic sense and 

weren’t intended for banks like ours become realities. 


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Mr. GROTHMAN. Okay. Chairman Gruenberg, could you do something in which you can have a hard rule to make sure this stuff 

doesn’t become best practice or doesn’t affect people? 

Mr. GRUENBERG. I think we have a pretty clear policy. I mean, 

I’ll glad to come back to you on that. But we have to try to make 

it very clear in all of our guidance that expectations for large institutions are not imposed on smaller institutions. 

Mr. GROTHMAN. Well, my experience, talking to my bankers, is 

the same as Mr. Williams. I mean, your expectations aren’t being 

realized. And there’s a lot of fear out there on that. 

I guess I’ve used up my time, but thanks. 

I really hope—you know, maybe people are afraid to talk to you. 

But when I talk to my small banks, well, I think over time your 

people become friendlier. We, right now, there’s a perception we 

hate small banks in this country. It’s not entirely your fault. It’s 

also the fault of the people who put together that Dodd-Frank bill. 

But I wish we’d get back to the days in which we have more 

small banks and they aren’t being forced into being merged. 

Thanks much. 

Chairman CHAFFETZ. I thank the gentleman. 

We now recognize the gentleman from Alabama, Mr. Palmer, for 

5 minutes. 

Mr. PALMER. Thank you, Mr. Chairman. 

I just want to point out, in regard to the impact of Dodd-Frank 

on small banks, that Harvard found that small banks lost 6 percent 

of their share of industry assets during the financial crisis, but 

since Dodd-Frank they’ve lost 12 percent. So I do think that validates that we’re losing community banks as a result of DoddFrank. I think Frank Keating, the president of the American Bankers Association, said we’re losing one bank a day, 7 days a week. 

So it is a problem, and particularly in context to the answer you 

gave Mr. Carter about how many new banks the FDIC approved 

last year. Did you say one? 

Mr. GRUENBERG. Yes, sir. 

Mr. PALMER. That is problematic for a lot of us who represent 

rural counties, and I think practically all of us in Congress have 

some rural counties. I grew up in a rural community, and our community bank was extremely important to us. 

Let me ask you this. Why have you been able to approve—why 

have you been unable to approve the creation of more community 

banks? What’s the holdup? 

Mr. GRUENBERG. This has been a subject of discussion during the 

course of the hearing, but at least it’s—as far as we can tell, we’ve 

had an extraordinarily, nearly unprecedented economic environment, really, in the aftermath of the financial crisis and recession. 

It’s been the longest prolonged period of near-zero interest rates, 

really, in our country’s history. And community banks make money 

by making loans and charging interest. So when you have a very 

low or zero interest rate environment, it becomes a significant obstacle to establishing a new institution. 

We think that’s the core issue. As the economy can continue to 

progress and we see some rise in interest rates, we’re expecting to 

see some increased activity. What is under our control is the process and procedures for submitting an application and working 


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through an application process, and that may be the area where we 

can make a contribution to facilitating those institutions. 

Mr. PALMER. I don’t disagree that the economic conditions are a 

part of the problem. But I think one of the reasons that our economy—for instance, our economy has grown 1.55 percent over the 

last 8 years. The 70-year average is 3 percent. You want to talk 

about something that’s unprecedented. 

And I think a large part of that is due to the regulatory environment. We’ve seen record numbers of proposed rules. I think 2011 

was somewhere north of 84,000. That record was broken in 2015. 

I think we’ll probably break that record again this year. I think 

we’re on pace for that, maybe. And as has been pointed out already, I think the biggest uptick in hiring in banks has been people 

to comply with regulations. 

And one of the things that we’ve got to do in this, I think, in trying to help our banks, but also to help the economy, is untangle 

them from all these regulations. 

Let me ask you this. If the FDIC is open to accepting new bank 

applications, where in the field is the breakdown occurring? And 

are your field examiners or other senior staff meeting with potential applicants expressing other concerns? 

Mr. GRUENBERG. No. Look, I think our people are ready and 

available, and we certainly work closely with the groups that have 

an interest. I can only say that it’s—I think the economic environment remains a challenging one, that’s why we’re actually seeing, 

at least thus far, only a handful of applications. 

Mr. PALMER. Well, one of the things that interests me in this. 

FDIC routinely uses financial institutional letters to announce 

changes for de novo banks. Stakeholders are unable to comment on 

these. And why does the FDIC choose to utilize a financial institutional letter and then not give stakeholders the opportunity to 

come in? You know, that might be a way to improve the application 

process. 

Mr. GRUENBERG. You know, we have just put out our application—existing application for public comment to take comments 

from industry and participants on how we can improve it and simplify it. So we do seek public comment. Financial institution letters 

are a means we used to communicate with the industry and to provide guidance to them. 

Mr. PALMER. Don’t you think more participation by the folks who 

are interested in starting a bank would be helpful? 

Mr. Browning, if I may, I’d like to ask you a question. Did you 

participate in any meetings prior to your filing with the FDIC, and 

would a meeting like that have been helpful? 

Mr. BROWNING. Well, thank you, Congressman. We engaged in a 

long series of conversations before our prefiling meeting. We held 

that prefiling meeting jointly with the San Francisco FDIC as well, 

as Washington, D.C., FDIC. From that prefiling meeting is when 

things got a little curious for us. 

Mr. PALMER. Did you receive any communications from the 

FDIC, you know, on why they would not accept your application? 

Mr. BROWNING. So we never actually formally filed an application, because we could never gain clarity on what was actually required to submit an application that would be deemed complete. 


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We held a series of conversations for many, many months but could 

never gain that clarity. 

Mr. PALMER. So you had trouble getting any clear communications that would have helped you in your process? 

Mr. BROWNING. Yes, Congressman. And the statutory requirements that have been longstanding are themselves clear and, I believe, adequate. What is different today, as Mr. Williams explained, 

the pendulum has swung, is the interpretation and application of 

those requirements and the authenticity that they’re applied within 

certain segments of the FDIC. 

Mr. PALMER. If I may, Mr. Chairman, just one more question. 

It’s my understanding the FDIC does not track prefile meetings 

because these are optional. Is that correct? 

Mr. GRUENBERG. Yeah, I believe that’s—— 

Mr. PALMER. And if it is, why aren’t you documenting this? 

Mr. GRUENBERG. I don’t think we have a problem with doing 

them. They are voluntarily. Some applicants utilize them. We encourage them. But since it’s an informal prefiling process, it’s not 

something we would track as part of the application process. We 

certainly can do that, and as I indicated, at the outset, we’re undertaking a review of our procedures relating to deposit insurance applications. So that’s certainly something we can consider. 

Mr. PALMER. I hope you will. I hope you will implement that. 

Thank you, Mr. Chairman. I yield back. 

Chairman CHAFFETZ. I thank the gentleman. 

We now recognize the gentleman from South Carolina, Mr. 

Mulvaney. 

Mr. MULVANEY. Staying right there, Mr. Gruenberg, on the prefiling of meetings, can you do that on your own initiative or would 

it help if we made the formal request? 

Mr. GRUENBERG. We can certainly do that on your own initiative, 

Congressman. 

Mr. MULVANEY. Got you. 

Here’s why I think you are hearing so many of us pound on this 

lack of new entry into the market. 

And, Mr. Johnson, it’s good to see you, again. 

Mr. Johnson and I have talked several times over in the House 

Financial Services Committee. While he and I don’t agree on many 

things, what we probably will agree on, that if you see an industry 

that is seeing increasing in profits—and certainly one of the criticisms of the financial services industry is they are actually making 

money—typically, Dr. Johnson, what we would see is a flow of new 

entries. New capital will go into someplace that’s actually making 

money. So there’s a disconnect here. 

And I hear what you’re saying about the environment being 

tough for new entrants because of low interest rates, but, clearly, 

somebody is making money. And I don’t have a problem with that. 

Yes, Mr. Johnson, I will, I promise, I’m last, so they will probably 

give me a little bit more time. But I want to stay on this a second. 

Let me ask you. Let’s drill down a little bit more. You don’t track 

your prefile meetings, how many applications did you actually formally begin, say, last year? You said you approved one. How many 

actually formally started the process? 


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Mr. GRUENBERG. I was corrected by our staff. For what it’s 

worth, there were two applications approved last year. 

Mr. MULVANEY. How many actually got started? 

Mr. GRUENBERG. And two—yeah, two applications were received. 

Mr. MULVANEY. So you approved two of two? That’s fascinating. 

Mr. GRUENBERG. I’m sorry. One of those was received in 2014. 

Mr. MULVANEY. Okay. I’m sorry, how long? 

Mr. GRUENBERG. No, one of the applications was received in 

2014. 

Mr. MULVANEY. How long is it supposed to take to get your bank 

approved? 

Mr. GRUENBERG. As I indicated, the average period from 2000 till 

today for approving applications tends to be 4 to 6 months, but it 

can take longer in individual cases. 

Mr. MULVANEY. Out of the two that you approved last year, how 

long did each one of those take? 

Mr. GRUENBERG. Apparently, within that timeframe, Congressman. 

Mr. MULVANEY. Maybe I misunderstood. I thought I heard— 

again, we’re talking over each other a little bit—that one of the applications that was approved this year was received in 2014. Is that 

not right? 

Mr. GRUENBERG. Let us come back to be clear. But I believe it 

was received in 2014 and approved in 2015. 

Mr. MULVANEY. Okay. 

Mr. GRUENBERG. But let us come back to you to get it right. 

Mr. MULVANEY. Let me ask this. Mr. Browning, you said that 

there are some statutory requirements on how long is this supposed to take? Did I hear that correctly? 

Mr. BROWNING. Well, there is clear criteria on how to evaluate— 

on what basis to evaluate an application, and the FDIC’s internal 

guidelines suggest that an application review process should be expeditious. Its track record, as the chairman has stated, is typically 

in the 3- to 6-month range. But it says only in unique or extenuating circumstances should it take longer and certainly no more 

than a year. 

Mr. MULVANEY. I won’t ask the question about whether or not 

everybody believes that new entry into the market is healthy, because I think other folks have asked you that question. And everybody, universally, has said that it is, whether you are running the 

Deposit Insurance Corporation or you’re an academic or actually in 

the business, that new entrance is helpful. 

Mr. Gruenberg, you said you were doing some things to help encourage that, and said you were trying to reduce—you said regulatory burden can act as a barrier to entry. 

By the way, off the top of your head, do you know of any portions 

of Dodd-Frank that, perhaps, shouldn’t be applied to community 

banks? 

Mr. GRUENBERG. We—I don’t know about—I don’t know that I 

have a comment on that, Congressman, off the top. 

Mr. MULVANEY. Well, if you wouldn’t, who would? I mean, I 

think we all admit that Dodd-Frank, even those of us who oppose 

it—I wasn’t here at the time—was designed to supposedly prevent 

another meltdown with the large financial institutions. It was not 


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intended to deal with, necessarily, the community banks that 

weren’t at all involved during the financial meltdown. In fact, some 

places were actually profitable during that time. 

You’ve heard testimony that said there is a trickle-down theory. 

So my question to you is, have you seen the trickle-down theory, 

and can you name any portions of Dodd-Frank that were never intended for, perhaps, smaller financial institutions but that have ultimately impacted them? 

Mr. GRUENBERG. One area we’ve tried to be clear about is that, 

you know, Dodd-Frank does require stress tests for institutions 

over $10 billion. 

Mr. MULVANEY. Right. 

Mr. GRUENBERG. And I think there was a concern that relates to 

this trickle-down issue that we were effectively subjecting the 

smaller institutions to the stress test requirements. 

Mr. MULVANEY. What about the Volcker rule, do you think that 

should apply to small banks? 

Mr. GRUENBERG. The Volcker rule as finally approved, actually, 

for small—if a small bank does not engage in the activities relating 

to the Volcker rule, there’s no compliance. 

Mr. MULVANEY. You’re absolutely right, except they have a regulatory burden to prove that they don’t participate, don’t they? 

Mr. GRUENBERG. Only if—they simply have to have a policy 

statement stating that. And even if they do engage in it, all that’s 

required of them, as I understand it, is a policy statement as to 

how they engage the activity. 

Mr. MULVANEY. You mentioned in response, I think, to Mr. 

Carter that you had taken steps to reduce the regulatory burden 

on small banks. By the way, did I hear you correctly say it costs 

about a million dollars to do this? 

Mr. GRUENBERG. To start a new institution? 

Mr. MULVANEY. Yes, sir. 

Mr. GRUENBERG. I think that’s the average cost, yes. 

Mr. MULVANEY. And I also heard you say that the minimum 

amounts you would like to see in terms of capital are someplace 

about 2 million, but that the average is someplace around $10 to 

$20. 

Mr. GRUENBERG. I think—yes, sir. 

Mr. MULVANEY. Does that ratio bother you at all, that it might 

take up to 50 percent of my working capital to get approved for my 

bank? 

Mr. GRUENBERG. To the extent we can lower the cost in regard 

to the million dollars that you are referring to? 

Mr. MULVANEY. Correct. 

Mr. GRUENBERG. To the extent we can lower that, and a lot of 

that, as you know, is accounted for by legal representation or utilization of consultants, to the extent we can help reduce that, 

that’s—— 

Mr. MULVANEY. Can you give us two or three examples of the 

ways you’ve reduced the regulatory burden or the costs in the last 

year? If we are trying to encourage new entries, can you give us 

two or three real examples of what the FDIC is doing to reduce 

those barriers to entry? 


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Mr. GRUENBERG. Well, we had considerable concern by smaller 

institutions in regard to so-called S Chapter banks and how they 

dividend down, and we were able to adopt a policy to make it clear 

that they can dividend down to their shareholders, which was an 

important—and that’s a large number of community banks. 

Mr. MULVANEY. Yeah, but that only—okay. 

Mr. GRUENBERG. It’s several thousands, I think, are—— 

Mr. MULVANEY. But it hasn’t worked, right? I mean, you’ve only 

got two applications and you got two approvals, it hasn’t encouraged new entry into the market. 

Mr. GRUENBERG. No, I thought you were speaking generally to 

regulatory burden on community banks. 

Mr. MULVANEY. I’m asking what you meant by encourage new 

entry. 

Mr. GRUENBERG. Yeah, I think the—well, probably the most significant thing we’ve done during the crisis, because de novo banks 

were failing at twice the rate of the industry as a whole, we have 

a—had a 3-year monitoring period for new institutions. During the 

crisis we extended that to 7 years in an effort to reduce the number 

of failures. 

Now that we’re past the crisis, earlier this year we were able to 

eliminate that extension and went back to the 3-year monitoring 

period, which is something, I think, the industry thought was 

worth doing. 

Mr. MULVANEY. I could go on, but I’m already way over my time. 

You’ve been very gracious, Mr. Chairman. 

Chairman CHAFFETZ. The gentleman is free to ask another set of 

questions in another round. 

But let me go, first, to Mrs. Maloney of New York. 

Mrs. MALONEY. Thank you, Mr. Chairman. This is really a very 

interesting hearing, and I thank all the panelists. 

Chairman Cummings, regrettably, had to go to another meeting, 

he has a conflict, but he asked me to get some clarification on Mr. 

Browning’s testimony. 

In your testimony, and you talk about your startup on your 

LinkedIn page, and you state that you, and I quote, quote, ‘‘led 

strategy and execution of a de novo bank charter application,’’ end 

quote. 

You also say on your LinkedIn page that you, and I quote, ‘‘halted filing, due to the Volcker rule constraints, at a parent company.’’ 

I would first like to ask our resident professor, Professor Johnson, if you would give us a good definition of the Volcker rule. It 

is thrown around in every discussion. Give us a good definition of 

the Volcker rule. 

Mr. JOHNSON. Well, the Volcker rule, which is complex in its details, is designed to reduce or eliminate—substantially reduce proprietary trading by financial institutions, by banks. So this should 

be—you shouldn’t—you’re not allowed, if you are a bank, to engage 

in more than a small amount of trading in securities for your 

own—using your own capital for your own account. So it’s separation of client activity from proprietary trading. 

Mrs. MALONEY. Thank you. 

So, Mr. Browning, my question is, you said on your, as I said, 

your LinkedIn page, that you halted it due to the Volcker rule conVerDate Nov 24 2008 11:17 Jun 15, 2017 Jkt 000000 PO 00000 Frm 00110 Fmt 6633 Sfmt 6633 H:\25511.TXT APRIL

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straints. Exactly what were the Volcker rule constraints that prevented you from moving forward with Sterne Agee’s FDIC application? It’s a question to Mr. Browning. 

Mr. BROWNING. Yes, thank you, Congresswoman. This simply, 

without getting into the extremely complex mechanics of the 

Volcker rule, which I’m happy to follow up with you on, this came 

down to a business tradeoff. The business, Sterne Agee, had been 

around for a century. It had multiple avenues to pursue. It was 

pursuing actively a bank charter, and that was its primary focus, 

where it was going to dedicate substantial capital. 

As we worked through the process, we felt we would never actually achieve the desired end result of gaining a deposit insurance 

and a bank charter. And, therefore, Sterne Agee made a business 

decision to halt that process, go into another line of business that 

involved the Volcker rule, and as a result of that, we could not pursue the bank charter any further. It basically foreclosed that option 

for Sterne Agee. 

But it was a business decision predicated on the fact of our experience in the application process and the lack of clarity, what we 

deemed an inauthentic application of those statutory criteria, that 

we would never be successful. So decisions at the parent company 

were made to pursue another course that took them down a path 

engaging in Volcker rule activities. 

Mrs. MALONEY. Well, Mr. Cummings is very interested in this, 

and he would like to know, specifically, even though it’s complicated, what prevented you, so you said, your application? How 

did the Volcker rule prevent you from going forward? 

And also, he wanted to note that you did not provide the committee with any documents. The FDIC has produced documents in 

response to the committee’s request. And one of those documents, 

dated May 27, 2014, provides information regarding the Sterne 

Agee. This document states that the bank would be owned by 

Sterne Agee, a brokerage firm, and would, quote, ‘‘be funded via 

sweep accounts from consumer brokerage accounts,’’ end quote. 

So, Mr. Browning, is it correct that your proposed ILC would 

have been funded primarily in this manner? 

Mr. BROWNING. So that is very different from the Volcker rule 

implications. But, Congresswoman, yes, you’re correct. Using sweep 

deposits, these are deposits from Sterne Agee, they have retail oneon-one client relationships with these brokerage account holders, 

those deposits are swept into other banks today. Having that primary account relationship, we were to take a small portion of those 

deposits to sweep them into this bank. 

All of those deposits are FDIC insured in other banks today. 

There were roughly four to five times the volume of deposits in 

that program that this bank needed, so we were planning to take 

a small portion of those deposits. 

Mrs. MALONEY. Okay. 

Professor—my final question—Professor Johnson, what are bank 

sweeps, and are they as stable a source of capital for a bank or 

other sources? 

And if I may, because this is a deeply debated issue before Congress, if you could get back to us in writing, even though it’s comVerDate Nov 24 2008 11:17 Jun 15, 2017 Jkt 000000 PO 00000 Frm 00111 Fmt 6633 Sfmt 6633 H:\25511.TXT APRIL

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plicated and intricate, exactly how the Volcker rule would have 

prevented you. 

Mrs. MALONEY. But the last question is to Mr. Johnson. Yes. 

Mr. JOHNSON. So Mr. Browning can correct me, but my understanding of this in general would be these are funds that clients 

have made available for trading, buying, and selling securities. And 

you, obviously, have some cash available, because you’ve sold something or because you’re planning to buy something and you haven’t 

yet bought it. I believe what they’re going—what they’ll be doing 

is sweeping that out of an account, which perhaps was held at another bank—I’m not sure about that—and sweeping it into their 

bank. 

And the bottom line, Mrs. Maloney, would be this is less stable 

as a source of funding than a typical retail deposit, which is not 

subject to daily decisions that people are making. Should I buy securities? Should I sell securities? Those are big decisions relative 

to the underlying amount of funding. We don’t do that, obviously, 

in our day-to-day retail financial transactions. 

Mrs. MALONEY. Thank you. 

Does Mr. Browning want to respond? 

Mr. BROWNING. We could debate the technical aspects of the program we planned to use, which we’ve laid out in great detail to the 

FDIC, to show that these were actually dedicated deposit funds not 

used for other purposes. They were put into savings account deposit programs to be FDIC insured, and that there was a structure 

in which these were the last funds to ever be touched. And so it 

would be mathematically proven to actually be more stable than retail checking accounts. 

Chairman CHAFFETZ. I thank the gentlelady. 

Mr. Johnson, did you ever review, prior to this hearing, the information in Mr. Browning’s application? 

Mr. JOHNSON. I did have a chance to look at his testimony that 

was available on the table, and I am quite a quick reader, Mr. 

Chairman, yes. 

Chairman CHAFFETZ. Yeah, I think it’s pretty cavalier for you to 

pass judgment on the entire process by which Mr. Browning was 

trying to interact with the FDIC and for you to pass judgment on 

that. But that’s my judgment. 

Mr. JOHNSON. I’m sorry, Mr. Chairman, I didn’t speak to that at 

all, in anything—— 

Chairman CHAFFETZ. I think you did. I think the record will reflect it. And I think you were very cavalier about that. 

We now recognize Mr. Meadows for 5 minutes. 

Mr. MEADOWS. Mr. Johnson, we will have a follow-up discussion 

about the security of sweep accounts versus a traditional deposit 

relationship at some particular future time. But I can assure you, 

being very familiar, I don’t know that your statement is accurate 

100 percent of the time. Would you agree with that? 

Mr. JOHNSON. Well, I look forward to discussing these details 

with you further, Mr. Meadows. 

Mr. MEADOWS. But would your statement be accurate 100 percent of the time that sweep accounts are not as secure as traditional banking relationship deposit accounts, 100 percent of the 

time, your sworn testimony? 


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I would challenge you, I would be careful, because it’s sworn testimony. Is it 100 percent of the time? Is that an accurate statement? 

Mr. JOHNSON. Look, I understand it’s sworn testimony. The 

chairman has already said something about my sworn testimony 

that I believe is not accurate, Mr. Meadows. 

Mr. MEADOWS. Mr. Johnson, yes or no? 

Chairman CHAFFETZ. You were asked a direct question. We expect a direct answer. 

Mr. MEADOWS. A hundred percent of the time? 

Mr. JOHNSON. I feel that you are trying to trap me here, Mr. 

Meadows. 

Mr. MEADOWS. No, I’m trying to get—— 

Mr. JOHNSON. I think it’s unfair, and I think it’s unreasonable, 

Mr. Chairman, for you and for Mr. Meadows to put me in this position. 

Mr. MEADOWS. Well, it is unreasonable for you to challenge the 

integrity of someone sitting to your right when your statement may 

not be accurate 100 percent of the time. 

Mr. JOHNSON. Mr. Meadows, I’m not challenging Mr. Browning’s 

integrity, and there’s nothing in the record today that will demonstrate to any fair reader that I have challenged his integrity. 

Mr. MEADOWS. Well, I would invite you to come to my office, and 

we’ll have a long economic and perhaps financial discussion over 

coffee that I’ll be glad to provide, Mr. Johnson. 

Mr. JOHNSON. Mr. Meadows, I will be delighted to have that conversation. 

Mr. MEADOWS. All right. Thank you. 

Mr. Gruenberg, let me come back to you, because there’s three 

different areas that we need to clear up. 

One is, you have laid out in very, what I would classify as ambiguous terms, how you’re going to make sure that new bank applications improve. You’ve talked in generality, and in the sales environment we would say that’s like vaporwear. 

What I need from you is a business plan. If you were a bank applying for an application for a new charter, based on the ambiguous 

nature of your plan to improve it, it would be denied. 

And so I guess what I need are specific timeframes. What can a 

consumer, wanting to establish a new charter, expect if they have 

a prediscussion? Because there are comments that you have a 

don’t-call-us-we-will-call-you mentality on those pre-application 

meetings as it relates—which provides a chilling effect in terms of 

new application. 

And I guess the results speak for themselves. If we only had two 

applications last year, there is a problem somewhere. Wouldn’t you 

agree with that. 

Mr. GRUENBERG. I agree with that. 

Mr. MEADOWS. Okay. So here’s what I need are specific deadliness, that if someone contacts you—and I don’t want to go over historical, because it was much faster prior to 2007 than it is from 

2010 to current timeframes—what kind of timeframe can a new 

charter application expect to get a real response from you? And 

what are those benchmarks? And so I’d like a business plan. And 

can you get that to this committee in the next 120 days? 


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Mr. GRUENBERG. I think we probably can. 

Mr. MEADOWS. Thank you. 

All right. Further, on all the applications that are either pending 

or have been denied, do you know what the total market cap that 

we’re looking at? I mean, what would be the capital requirement 

for all of these? Because Mr. Browning said his was $30 million 

that he was going to provide, and you said that you can approve 

most that are $2 to $3 million. What are we looking at? 

Mr. GRUENBERG. I don’t think I can tell you off the top of my 

head. 

Mr. MEADOWS. Well, we need to find that, and so that’s why I’m 

asking whether it’s in the pre or the official filing. We need to 

know. Because when we’re talking about saving the American taxpayer’s dollar, you could potentially approve 100 percent of these, 

and we’re talking about a gnat on an elephant’s back in terms of 

other regulatory compliance issues in the banking industry. 

Wouldn’t you agree? That these are small potential risk to the 

American taxpayer. 

Mr. GRUENBERG. Let us see if we can get back to you on that. 

Mr. MEADOWS. Would you agree that it’s small relative to the entire financial institutions? 

But you can get me a market cap on what we’re looking at, the 

potential? 

Mr. GRUENBERG. I think that’s what we’ll try to do. 

Mr. MEADOWS. All right. In that same 120-day timeframe? 

Mr. GRUENBERG. We’ll try to do that. 

Mr. MEADOWS. Okay. Then the last thing that I would ask from 

you, Mr. Mulvaney was asking about potential Dodd-Frank compliance issues that should not apply to small or medium-sized banks, 

and you didn’t want to give an official response to that. Here’s 

what I would ask you to do, is officially respond to this committee 

in writing what Dodd-Frank compliance issue should not come all 

the way down to the smaller midsize or community banks and 

what should Congress look at to, perhaps, amend the Dodd-Frank 

regulations, because it is, perhaps, too onerous on those smaller institutions that do not provide the same risk that a larger institution perhaps. Can you provide three of those within the next 30 

days? 

Mr. GRUENBERG. Well, I mean, let us go back and take a look at 

it and we’ll come back to you in 30 days with some thoughts on 

it, if that would be okay. 

Mr. MEADOWS. All right. 

I’ll yield back. I thank you. 

Chairman CHAFFETZ. Will the gentleman yield to the gentlelady 

from New York for a moment, please? 

Mr. MEADOWS. Sure. 

Mrs. MALONEY. I would also like to add to the gentleman’s question Basel III. Now, the complaints that I get from the community 

banks are the requirements of Basel III, which is international 

banking. And they say to me, and it makes all the sense to me in 

the world, we’re not involved in international banking. We are involved in helping a community. We’re not over in Basel, Switzerland, or any other place. 


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And why do all—and they complain, believe it or not, Mr. Meadows, more in my district, and I have a lot of community banks that 

saved the city during the financial crisis. They were the only ones 

providing loans. But in any event, their major concern to me is the 

Basel III requirements that is just killing them. 

And I don’t see—maybe this is too simplistic—why you can’t just 

say, if you’re not involved in international banking, then you don’t 

have to do Basel III requirements. I think that’s a simple way to 

look at it, but then I’m always told, oh, you can’t do that. 

But I am very sympathetic to it. When somebody needs a college 

loan, when they need a house loan, when they need a small business loan, as Mr. Williams talks about, it’s usually 100 percent the 

community banks that are providing it. And so I’m very sympathetic to the statements of Mr. Mulvaney and Mr. Meadows on 

this. 

But I would like to add that too, if Mr. Meadows would allow 

that, to why—what are the things that you think are in Basel III 

that are needed for safety and soundness for community banks? It 

doesn’t make any sense to me at all. 

Mr. GRUENBERG. And I think it’s fair to say as part of this GPRA 

review process, the review of the regulatory—regulations issue, one 

OF the issues that the agencies, the three banking agencies are focused on is simplifying risk-based capital, which would be Basel 

III, for community banks. To do that it would require a joint rulemaking, so the three of us would need to get together on that. And 

we are working on that, and I’m hopeful we can come up with a 

joint proposal in regard to that. 

Chairman CHAFFETZ. Thank you. 

Mr. GRUENBERG. A joint proposal. 

Chairman CHAFFETZ. We now recognize the gentleman from 

South Carolina. 

Mrs. MALONEY. He’s got his hand up, the community bank. 

Chairman CHAFFETZ. Hold up. Let me allow Mr. Williams to add 

to that, and then we will allow Mr. Mulvaney of South Carolina. 

Mr. WILLIAMS. Just to further your comments on Basel III. I was 

in Europe this spring. The Europeans are shocked that we apply 

Basel III to community banks. They said it should really only apply 

to the 12 or so banks in America. 

Chairman CHAFFETZ. I thank the gentleman. 

We now recognize the gentleman from South Carolina, Mr. 

Mulvaney. 

Mr. MULVANEY. To follow up, and I appreciate the opportunity, 

Mr. Chairman. 

When we left off, Mr. Gruenberg, we were talking about two or 

three things that you all have done to try and encourage new 

entry. And I don’t think we finished that conversation. So can you 

name two or three things you’ve done in the last, I don’t know, 2 

or 3 years to try and encourage more entry into this space? 

Mr. GRUENBERG. As I mentioned, we’ve reduced the monitoring 

period from 7 to 3 years for de novos. We are holding meetings in 

regions around the country with interested industry and organizing 

groups to inform them about the application process. 

We have—are going to be releasing before the end of this year, 

and I owe the chairman a report on the date on this, a handbook 


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laying out, essentially a guidebook for applicants interested in accessing deposit insurance. We’ve issued guidance in a couple of instances trying to clarify the application process itself. 

Mr. MULVANEY. Okay. 

Mr. GRUENBERG. And we’ve worked with the State and Federal 

regulators responsible for chartering institutions, because deposit 

insurance has to go with the charter as well, so we need to work 

together if we are going to make the process—— 

Mr. MULVANEY. I appreciate that and don’t want to, and won’t, 

diminish that. But looking at the appendix from your testimony, it 

seems like maybe we could be doing more, because it doesn’t seem 

to be working, that the numbers seem to be there have been 49 

total applications received since 2009 and only 3 have been approved. I’m not real good on math, but that’s really close to, like, 

6 percent approval. 

What does return mean in your world, Mr. Gruenberg, on an application? If an application is returned, what does that—that’s not 

an approval, right? 

Mr. GRUENBERG. No. It’s generally when an applicant is unable 

to satisfy all the application requirements. 

Mr. MULVANEY. And then a withdrawal would be similar to a return or—— 

Mr. GRUENBERG. When the applicant itself decides to—chooses to 

withdraw the application. 

Mr. MULVANEY. All right. So return is the closest thing to a rejection that you guys do then, I guess, is what it comes down to? 

Mr. GRUENBERG. In order to make a decision on an—— 

Mr. MULVANEY. It’s not that big a deal, because you haven’t done 

one since 2010, so I’m just trying to get the nomenclature right. 

Mr. GRUENBERG. And this is, as you can see from the chart, from 

the appendix, both of these things occurred in the early part of the 

decade as well. 

Mr. MULVANEY. Correct. Okay. And there are two pending, apparently? 

Chairman CHAFFETZ. Will the gentleman yield? 

Mr. MULVANEY. Absolutely. To the chairman, I’ve learned that 

that’s usually a good practice. 

Chairman CHAFFETZ. How many have you rejected? 

Mr. GRUENBERG. Well, I think—the way—— 

Mr. MULVANEY. If return equals rejection—— 

Chairman CHAFFETZ. No, I don’t think it does. 

Mr. GRUENBERG. I think with—the general experience is that 

when an application is going to be rejected, we give the applicant 

an opportunity to withdraw the application, because as a general 

matter they prefer that than a formal rejection, which could have 

some consequence for them. And we try to give them that accommodation. 

Chairman CHAFFETZ. But a rejection would have a consequence 

for you too. 

Mr. GRUENBERG. Yeah. And, look, Congressman, I think, as we 

talked about, in terms of reviewing the process here, I take your 

point on that. I think that’s something we could look at. 

Mr. MULVANEY. I thank the chairman. 


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Dr. Johnson, thank you. It’s good to see you again. Let’s talk 

about barriers to entry and talk about new capital formation. 

It’s healthy, right? You and I would agree? You and I typically 

disagree on a lot of thing, but we’d agree new entrants into this 

space is a good thing. I think you said that earlier. So, in your 

mind, what could we be doing? If you and I both agree on an end 

goal, we might disagree on how to get there, but what are your 

ideas on how to encourage new entrants into this market? 

Mr. JOHNSON. So I think we completely agree on this point, Mr. 

Mulvaney. Just to be clear, though, on the data, you made a very 

important point at the beginning. You said it’s a highly profitable 

industry, we should expect a lot of entry. That’s totally correct. But 

as we were discussing earlier, the profitability of de novo banks is 

rather low as an unfortunate, you could say, side effect of the very 

low Federal funds rates and the low 10-year Treasury rate. 

Mr. MULVANEY. Yes. 

Mr. JOHNSON. Now, as interest rates go up, that will help. 

Mr. MULVANEY. But let me cut you off there, and I’m sorry to do 

that, but I get to do that, because I’m on this other side of the 

aisle, right? I apologize. 

But you said something else, which is regarding economies of 

scale. One of the reasons that the small banks can’t be as profitable 

is because they don’t have economies of scale. You mentioned specifically technology. Would you agree with me, sir, that there’s an 

economy of scale when it comes to compliance and that it’s easier 

for the big banks to meet the compliance regulations and requirements than it is a small bank? 

Mr. JOHNSON. Absolutely. And I think a lot of the discussion here 

and a lot of the suggestions you’re making to the FDIC are completely appropriate. I think we should be asking, are there compliance requirements that are unfair, unreasonable, out of proportion 

to the risks that are posed? I think that’s an entirely reasonable 

question. 

The only point I was trying to make was there are other factors 

which according to the research are very important in the current 

situation, so don’t be too hard on them given the interest rate environment. But as interest rates come back up, we should, to your 

point, Mr. Mulvaney, exactly expect more entry into the sector. 

And to also support you, Mr. Mulvaney, if we look at Fintech, so 

other kinds of financial services where it’s not generally funded by 

an insured bank, right, that’s a typical characteristic of fintech, we 

see a lot of entry into that sector, we see a lot of risk capital, we 

see a lot of people wanting to provide loans to—particularly away 

from mortgages to consumers in different ways. So that’s—— 

Mr. MULVANEY. Capital is trying to find a way into this space. 

Mr. JOHNSON. Exactly. Exactly. So there are impediments in this 

sector, no doubt. The impediments are about the structure of banking. The impediments are about the nature of the economies of 

scale and potentially also the compliance. Fintech, you know, is an 

end run around some compliance. Maybe that’s appropriate. Maybe 

we should have some concerns about it, separate discussion. But I 

think we’re agreeing, Mr. Mulvaney, more than anything else here. 

Mr. MULVANEY. And I think it’s rare, so I’m enjoying it while it’s 

lasting. 


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114 

I guess my primary point is this, is that if we boil it down to just 

three barriers to entry, and we know that’s not the case, but if the 

three that we’ve talked about today were the low interest rate environment, the high regulatory burden, and the technology component, there’s really only one that anybody at that table can do anything about, and it’s Mr. Gruenberg. And he could help lower the 

regulatory burden. 

We can’t—technology is market driven. And the Fed has more to 

do—as much as I’d like to think we have more influence over them 

than do, we don’t. So we don’t have much influence over the interest rate environment, but we do have influence over the regulatory 

burden to new entry into this marketplace. And I’m hopeful that 

maybe as a result of this hearing we can try and do something 

about that. 

I thank the chairman for the opportunity. 

Chairman CHAFFETZ. I thank the gentleman. 

As we conclude here, you could see people filing in for the next 

hearing, which starts in 7 minutes. 

This has been very productive. I appreciate all the participants. 

Mr. Gruenberg, for both the ILCs and the community banks, can 

we by the end of the month, can you give us a good listing of what 

you are going to be working on to provide for this committee? Is 

that fair? 

Mr. GRUENBERG. Yes, sir, I think we can do that. 

Chairman CHAFFETZ. That would be great. 

And then, Mr. Meadows was pretty generous on saying 120 days. 

But I think we have several of those items, including Dodd-Frank 

and others, that we would like to see. So if you can provide it to 

us by the end of the month, that would be most helpful. I appreciate it. 

Thank you all for your participation. It’s an important segment, 

important to our economy, and affects more Americans than most 

people realize. And we thank you all for your participation. 

The committee stands adjourned. 

[Whereupon, at 12:54 p.m., the committee was adjourned.] 


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APPENDIX 

MATERIAL SUBMITTED FOR THE HEARING RECORD


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Response to questions from the Honorable Jason Chaffetz 

Prepared by the Division of Risk Management Supervision 

Federal Deposit Insurance Corporation 

Question: When did you start work on the applications guide and when will the work be 

completed? 

Response: The deposit insurance application handbook was initiated in March/April of2015, 

and drafting began in earnest in July 2015. The FDIC will issue the handbook for public 

comment by the end of2016. 
117 


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Response to questions from the Honorable John Duncan 

Prepared by the Division of Risk Management Supervision 

Federal Deposit Insurance Corporation 

Question: For the deposit insurance applications approved during the timeframe 2013-

2015, how much capital were the applicants required to raise? 

Response: Please see the following chart. 

f 1;.:.1~~s::i~~:···.· '·. l~ate Date Capital Capital Requirl*t capitat~oo ;·t:·{:; •;.··. Recel<Y:oo Approved J!t'oj:I()~OOby in~proval · · 

AI>Piieant Otder; .. :. 

Bank of Bird-In-Hand 01/09/2013 11/27/2013 $16,000,000 $16,000,000 $17,110,000 Bird-In-Hand, PA 

Primary Bank 10/31/2014 03/09/2015 $25,000,000 $25,000,000 $30,435,000 Bedford, NH 

Core Commercial Bank 05127/2015 12/29/2015 $25,000,000 $25,000,000 TBD Newport Beach, CA 
118 


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Response to questions from the Honorable Mick Mulvaney and Gary Palmer 

Prepared by the Division of Risk Management Supervision 

Federal Deposit Insurance Corporation 

Question: Would the FDIC consider implementing a system to track pre-filing meetings? 

Response: The FDIC plans to implement an internal system that will document and track prefiling meetings held with parties interested in forming a newly insured depository institution. 

Formal implementation will be through guidance to professional staff, which will be issued by 

August 31. 

In the interim, FDIC will issue a reminder to staff, by electronic mail, that pre-filing meetings 

should be documented in writing. 
119 


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Response to questions from the Honorable Mick Mulvaney 

Prepared by the Division of Risk Management Supervision 

Federal Deposit Insurance Corporation 

Question: For the deposit insurance applications approved during the timeframe 2013-

2015, provide the date of receipt and the date of approval for each of the applications. 

Response: Please see the following chart. 

,, 

Nalt\e of Jl;utity ' " D~te lteeetved • • Df!te Appr:o'Ved' " ';":';,, 

Bank of Bird-In-Hand 01/09/2013 11/27/2013 Bird-In-Hand, PA 

Primary Bank 10/31/2014 03/09/2015 Bedford, NH 

Core Commercial Bank 05/27/2015 12/29/2015 Newport Beach, CA 
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Response to questions from the Honorable Mark Meadows 

Prepared by the Division of Risk Management Supervision 

Federal Deposit Insurance Corporation 

Question 1: Provide timeframes of when an applicant can expect to get a response; what 

are the FDIC's benchmarks? 

Response 1: The general timeframes within which an applicant can expect a response from the 

FDIC are listed below. FDIC will include these guidelines in the handbook to be issued for 

public comment by year end. In the interim, FDIC will share the guidelines with staff by 

electronic mail. 

• Within 3 days of receiving an application, provide a letter to the applicant acknowledging 

receipt and discussing publication of the filing in a local newspaper, if publication has not 

already been addressed. 

• Within 30-45 days of receiving an application, provide a letter to the applicant noting 

either that the application is complete, or that additional information is needed. If 

additional information is needed, the Jetter will include specific questions and requests, 

and will include a timeframe within which information should be submitted. Applicants 

are normally provided approximately 30 days to respond to such requests. 

• If the application is complete, a field investigation will be coordinated among the relevant 

agencies, including the chartering authority and, if appropriate, the local Federal Reserve 

Bank. Following the field investigation, the FDIC will address any identified issues or 

concerns. This communication may occur by formal letter, or may occur through a 

presentation to the proponents. While the duration of each of these steps is dependent on 

the nature and complexity of the underlying proposal, the process should generally be 

completed within 60 to 90 days of the applications being deemed substantially complete. 

• Following resolution of any identified issues or concerns, the FDIC will continue the 

review process, notify the applicant in writing of any proposed non-standard conditions, 

seek the applicant's written concurrence, and finalize the recommendation to the 

Regional Director. This process should be completed within 30 to 60 days of the FDIC's 

Jetter immediately above regarding issues or concerns identified during the field 

investigation. 

Question 2: What will be the capital requirement for the pending de novo applications? 

Response 2: Capital requirements for the pending applications, should the applications be 

approved, will be established in accordance with the applicable statutes, regulations, and 

guidance. The following chart presents the applicants' proposed capital. 
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' · ... ·•·. .. Date Approv~ • ·. • capital Ptl\pbsed ~allli\ 1lfEntlty •.. . by APPllCl!nt ~·~ . 

FMCC Auto Bank Pending $850,000,000 Draper, UT 

Power Capital Bank Pending $265,000,000 Las Vegas, NV 

Blue Gate Bank Pending $30,000,000 Costa Mesa, CA 

International Bank of 

Commerce Oklahoma Pending $345,370,000 

Oklahoma City, OK 

Question 3: What provisions ofDFA should not apply to small and medium sized banks? 

Provide three ways Congress could amend DFA to reduce regulatory burden. 

Response 3: Changes to legislative requirements applying to banks generally affect the 

achievement of multiple objectives involving bank safety-and-soundness, consumer protection, 

and compliance costs. Two significant statutory changes affecting small banks, relating to 

consolidated capital requirements of bank holding companies and statutory safety-and-soundness 

examination frequencies, were supported by the FDIC and have already been implemented. 

These are described below. Another possible change more relevant to mid-sized banks, 

regarding the statutory requirements for company-run stress tests, is also discussed below. 

Company-run stress testing 

Section 165(i)(2) of the Dodd-Frank Act requires the federal banking agencies to issue 

regulations requiring financial companies with more than $10 billion in total consolidated assets 

to conduct annual stress tests. Stress testing requirements are an important risk-assessment 

supervisory tool. The stress tests conducted under the Dodd-Frank Act provide forward-looking 

information to supervisors to assist in their overall assessments of a covered bank's capital 

adequacy and to aid in identifying downside risks and the potential impact of adverse outcomes 

on the covered bank. 

That being said, the statutory language governing stress testing is more detailed and 

prescriptive than the language covering other prudential standards, leaving the regulators with 

less discretion to tailor the stress testing process. Congress could consider simply requiring 

banking organizations with assets greater than $10 billion to conduct company-run stress tests 

subject to regulations promulgated by the agencies, while leaving it to the agencies to determine 

the details of those regulations. 

1 At the request of the applicant, the application has been held in abeyance since 9/1812009. 2 Original application filed on I 0/20/2009, which was returned to the applicant because it was materially incomplete. Applicant 

refiled on 12/28/2009; the resubmitted tiling was subject to the Dodd Frank Act moratorium. 
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Small bank holding company policy statement 

Section 171 of the Dodd-Frank Act requires that the federal banking agencies' generally 

applicable capital requirements serve as a floor for other capital requirements the agencies 

establish. As it was originally enacted, section 171 did not apply to bank holding companies 

subject to the Federal Reserve's Small Bank Holding Company Policy Statement in effect on 

May 19, 2010. The result was that bank holding companies with assets greater than $500 million 

were subject to the agencies' generally applicable capital requirements. 

Public Law 113-250, enacted in December 2014, directed the Federal Reserve to increase 

the asset size threshold in its Small Bank Holding Company Policy Statement to $1 billion, and 

amended section 171 to exempt bank holding companies subject to this new size threshold. The 

Federal Reserve announced its final rule implementing this change in April2015. As a result, 

most bank holding companies with assets less than $1 billion are no longer subject to the 

agencies' generally applicable leverage or risk-based capital requirements. This legislative 

change was supported by the FDIC. 

Statutory examination frequency 

Pursuant to Section 83001 of the Fixing America's Surface Transportation Act (FAST 

Act), the agencies are permitted to employ an 18-month examination cycle (instead of a 12-

month examination cycle) for insured banks with assets of less than $1 billion meeting defined 

criteria. This represents an increase from the previous asset size threshold of $500 million. The 

FDIC supported this statutory change. On February 29,2016, the FDIC and the other federal 

financial institution regulatory agencies jointly issued interim final rules that implement this 

statutory change. The new rules increase from $500 million to $1 billion the total asset threshold 

below which an IDI may qualifY for an 18-month (rather than 12-month) on-site safety-andsoundness examination cycle. 
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Response to questions from the Honorable Jason Chaffetz and Mark Meadows 

Prepared by the Division of Risk Management Supervision 

Federal Deposit Insurance Corporation 

Question: Would the FDIC provide a business plan (i.e., planned activities and 

timeframes) to promote the formation of de novo financial institutions? 

Response: The FDIC has undertaken a multi-step approach to promote de novo banking. The 

following chart summarizes initiatives completed and in process. For each initiative, guidance 

for professional staff will be issued in conjunction witb public releases. The culmination will be 

tbe release of the deposit insurance handbook, which will be issued by year end. 

Initiatives to Promote the Formation of De Novo Institutions 

Completed Initiatives 

Date Completed Initiative 

• Issued "Questions and Answers" (Q&As) associated with 

the FDIC's Statement of Policy on Applications for Deposit 

November 2014 Insurance to provide transparency and aid applicants in 

developing proposals. Topics included pre-filing meetings, 

processing timelines, capitalization, and initial business 

plans. 

• Provided overview of the deposit insurance application 

March2015 process during a conference of state bank supervisory 

agencies. 

• FDIC hosted an interagency training conference to promote 

September 2015 coordination among state and federal agencies in tbe review 

of charter and deposit insurance applications. Attendees 

included the State banking agencies, FRB, OCC, and FDIC. 

• FDIC returned tbe period of enhanced supervisory 

monitoring of newly insured depository institutions to three 

April2016 years from seven years. 

• Issued additional Q&As to supplement the November 2014 

Q&As. This supplement addressed multiple issues related 

to business plans. 

[continued on next page] 
124 

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Initiatives In Process 

Target Completion Date Initiative 

By end of August 2016 . Issue guidance to staff regarding the maintenance of a 

central repository for documentation of pre-filing meetings. 

. Conduct industry outreach meetings in San Francisco 

(9/28), New York (10113) and Atlanta (11129). The events 

During Third and Fourth are being developed to ensure that industry participants are 

well informed about the FDIC's application review process, Quarters of 2016 as well as the tools and resources available to assist 

organizing groups. 

• Include successful de novo banker panel in each session . 

• Issue deposit insurance application handbook for public 

comment. The publication is intended to serve as a practical 

guide for organizing groups, and will incorporate lessons 

By end of December 2016 shared by the de novo banker panelists during the 

aforementioned roundtables, as well as the timeframes 

within which applicants may expect communication from 

the FDIC regarding the status of their submission. 

In addition to the above activities, the FDIC will undertake a review of its internal 

processes and procedures for deposit insurance applications. As part of this internal activity, an 

interdivisional team will review the deposit insurance application process, including: 

• the application form, references (including regulations, Statement(s) of Policy, and other 

guidance), and resources available to the general public for completeness, transparency, 

clarity, and consistency; 

questions or issues raised by applicants as difficulties or problems; 

internal processes and delegations; and 

• internal guidelines regarding the timing of FDIC activities and action. 

Action plan timeline: 

Identify working group members by August 5, 2016. 

• Develop review plan for presentation to the Chairman by September 9, 2016. 

Conduct review. 

Present findings and recommendations to the Chairman by November 18, 2016. 

As appropriate, incorporate findings into the handbook to be issued for public comment 

by year-end 2016. 

• Incorporate other findings and recommendations into a procedural manual for staff to 

follow in processing and evaluating applications for deposit insurance. Issue the internal 

procedural manual publicly by June 30, 2017.