Nobody Started a New Bank for Almost a Decade

A Statistic That Surprises People

For decades the United States created between one hundred and two hundred new banks a year. That was just the background hum of the industry. Old banks failed or were bought out new ones opened to replace them and the total count remained more or less stable

Then came the financial crisis and the number of new de novo Charters that is new banks built from scratch rather than purchased fell to almost zero. For several years only a few approvals were obtained nationally. In at least one year the count was practically zero

Meanwhile consolidation never stopped. The total number of U.S. banks fell by thousands over the same period. Losing institutions while gaining almost none is a strange way for an industry to age and it has consequences that took years to manifest

Why Entry Stopped

Three things happened at once and they fed off each other

Regulators became cautious. After a wave of bank failures supervisors had good reason to slow down the approval of new institutions since de novo banks had performed especially poorly during the crisis

Rates fell to almost zero. A bank's core business is earning a spread the difference between what it pays to depositors and what it earns on loans and securities. Over a long period of near-zero interest rates that spread contracted sharply. A completely new bank with no cheap deposit base created and no scale to spread the costs was the worst-positioned player in exactly that environment

Compliance became more expensive. The fixed cost of running a conforming bank increased substantially and fixed costs hit smaller institutions hardest. There is a minimum size a bank needs before a compliance department is no longer a rounding error and that minimum size continued to increase

How a Bank Actually Gets Chartered

This is what setting up a bank really requires because the mechanics explain why the drought was so complete

You can't open a bank with a handshake and a vault. Organizers file an application usually with the Office of the Comptroller of the Currency for a national charter or with a state banking department for a state charter plus a separate application with the Federal Deposit Insurance Corporation for deposit insurance since no depositor will show up without it. Both applications ask for the same thing: proof that the bank will be safe

The security test begins with capital. Organizers have to raise the full amount of initial capital in cash from investors before the bank is allowed to open its doors. Uncommitted. Uncommitted pending a future increase. It is actually sitting in an account verified by examiners before the first day. A multi-year business plan must show that the bank achieves profitability under conservative assumptions and management must be examined individually. None of this is unusual by industry standards.regulated. All of this takes time and time is what turns a mediocre business case into a bad one

When I first read what a de novo app actually verifies what caught my attention wasn't any single requirement. It was about how much of the list has nothing to do with banking skill and everything to do with proving that you can survive years of scrutiny before you're even allowed to start

Here's the part that rarely appears in a casual description of "getting chartered": the capital has to sit there raised and largely dormant for the entire approval period. If approval takes two years instead of six months investors' money will generate almost nothing for two years before the bank opens its doors. Lengthen the approval timeline and you'll have worsened the investment without touching a single interest rate

A Worked Example: Five Years of a Bank That Does Not Exist

The numbers make this concrete faster than the description. Nothing that follows is a real bank. Each figure below is a labeled guess chosen to be realistic in shape and not to match any specific institution

Suppose a group of organizers raises $20 million in capital and overcomes all regulatory hurdles. The bank opens its doors. It can't lend or invest that $20 million in anything risky right away and it doesn't yet have a sufficient deposit base to finance a larger balance sheet so its earning assets the loans and securities that actually generate income start small and grow only as depositors appear and trust is built

Let's call the fixed cost of running the bank examiners core banking software compliance staff occupancy $3 million a year. That figure barely varies whether the bank has $25 million or $250 million in assets. It's the price of existing as a regulated institution and it's about the same bill for a bank one-tenth its final size as it is for a large-scale one

Now let's say this bank opens during a period of near-zero rates so it earns a spread again the gap between what it pays on deposits and what it earns on assets of just 1.5 percent. Here's what five years looks like

Add up the losses for years one through four: 2,625,000 plus 2,100,000 plus 1,350,000 plus 450,000 equals $6,525,000 a little less than a third of the original $20 million in capital which was lost before the bank made its first dollar of profits in year five

Now rerun the same bank with a spread of 3 percent instead of 1.5 closer to what a bank could earn when rates are not set near zero. The first year revenues are $750,000 against the same $3 million in expenses a loss of $2.25 million instead of $2.625 million. The second year is a loss of $1.2 million instead of $2.1 million. For the third year thespread income of 3.3 million clears the cost line of 3 million and the bank becomes profitable two years earlier than in the low rate version

Doubling the spread doesn't double the result. It roughly halves the time spent underwater. That's the entire regulatory and economic story condensed into a single table. The capital requirement sets how much money must be committed before anything is opened. Fixed cost sets the size the bank must reach before breaking even. The rate environment sets how many years that takes. Change any of the three and the arithmetic of starting a bank will be completely different

Why It Matters

The disappearance of new banks is not just a curiosity about the structure of the industry. Small banks do something that large banks structurally do less

I used to assume that "community bank" was mostly nostalgic talk a phrase in a campaign speech. The lending data changed my mind. Relational loans It depends on local knowledge: a loan officer who knows the borrower has judgment about his character and prospects and sits close enough to the client to make that decision. Large institutions underwrite primarily by template. That works well for standardized credit. It works much less well for a small business with a profile that doesn't fit a template

Research has repeatedly found that community banks originate a disproportionate share of agricultural and small business loans relative to their share of industry assets and that markets that lose their community banks see the availability of small business credit decline

New banks are important for a specific reason besides that. De novo institutions disproportionately make loans to small businesses in their early years more so than established banks of similar size. Therefore the absence of new entrants not only eliminates a number of statutes. It eliminates a particular type of credit that mostly does not appear anywhere else

Case Study: Varo Bank and the Long Way to a Charter

If you want to see how a well-funded highly motivated applicant executes the de novo challenge in real time Varo is the example. Varo started as a mobile banking app the kind of business that in a previous decade would have simply quietly partnered with an existing bank behind the scenes and never bothered to sign a charter. Instead in 2018 Varo applied to the Office of the Comptroller of the Currency for a national banking charter in addition to a parallel application to the FDIC for deposit insurance

It wasn't quick. The OCC granted preliminary conditional approval but final approval and deposit insurance took about two more years to work out and Varo continued running its existing product through a partner banking arrangement for as long as it waited. Varo Bank finally opened in 2020 as an FDIC-chartered and insured national bank about two years after the initial application and years after the company itself first launched its app

I think what makes Varo useful as a case study is not that something went wrong. Nothing did by process standards. It's that a company with real funding real regulatory advice and a simple digital banking model exactly the kind of applicant regulators should want to approve still needed years to approve. If the best-case scenario takes that long the drought of de novo ordinary applications in the years after the crisis will no longer seem like a mystery. It seems like the expected outcome of a process designed to move slowlyapproving very few applicants

What Changed

Inflow has restarted albeit at a fraction of the previous pace

Regulators relaxed the situation. The period of enhanced supervision for new banks was reduced again to three years. Application guidance became clearer and regulators began to offer pre-filing participation essentially allowing organizers to sit down and learn what examiners really expect before committing capital in a formal application

Rising interest rates helped the economy enormously as a bank that earns a larger margin reaches profitability more quickly exactly the mechanism that the example above shows in reverse

New types of charters also opened up. Fintech companies found several routes into banking: national charters tailored to specific business models industrial lending company charters that allow a commercial parent company to own a bank without being subject to bank holding company regulation and outright buying an existing small bank as a shortcut in the years-long de novo process

That last route deserves a flag. It produces no net increase in the number of institutions. Purchasing a contract transfers a bank from one owner to another. It does not create a new one

The Charter Question

The industrial loan company route has been contested for precisely this reason. It allows a business or technology company to own an insured depository institution without the parent being overseen as a bank holding company. Banking trade groups argue that creates an uneven playing field and mixes banking with commerce in a way that American policy has long resisted

Applications under this type of letter have been approved denied and withdrawn in different administrations. The underlying political question whether a technology company should be allowed to own a bank without being regulated as such is still unresolved. I don't think it will be resolved cleanly in any way. Both sides are right which is probably why it has dragged on so long

Where the Regulatory Story Breaks Down

All of the above treats the charter drought as a regulatory and economic story and for the most part it is. But the honest iron man on the other hand is that the drought is not purely regulatory. Much of the demand for banking charters simply evaporated because fintech companies discovered they didn't need them

Chime is the clearest example. It built one of the largest consumer banking brands of the last decade with tens of millions of customers and has never had its own banking charter. Instead it partners with existing FDIC-insured banks banks that already passed the charter challenge years or decades ago that hold deposits and conduct regulated banking behind the scenes while Chime builds the app brand and customer relationship

This is generally called a bank-as-a-service arrangement and it changes the calculus entirely. Why spend years and tens of millions of dollars chasing a charter going through examiner interviews and running at a loss for half a decade when you can rent the regulatory infrastructure from a bank that already has it and be up and running in months instead of years?

This is a true substitute and it means that a significant portion of the "missing" cards were never out of demand. They were fintech companies that rationally chose the partnership route rather than the ownership route because the partnership route is faster and cheaper even though it limits the share of the economy they can keep. Varo ultimately decided that the destination was worth the several years' detour. Most fintechs so far have decided that it is not

If that is correct then even a full regulatory fix faster approvals and lower capital hurdles would not fully restore the old charter rate. Some of the entrants that used to become banks now have a cheaper way to appear to be one without having to apply

How I Actually Think About This

My read is that the charter count is one of the most underrated leading indicators in financial services and I didn't appreciate it when I first read about it either. It sounds like a bureaucratic detail. In reality it's a clear read of three separate variables: regulatory stance interest rates and industry incumbents' appetite to sell rather than compete all pointing at the same time

The way I would actually use this is as a sentiment test about the broader banking sector not as a tradable signal in and of itself. When charter applications increase I read that the market is telling me that the spread business has become attractive enough that well-capitalized people are willing to endure several years of losses to get into it. This is a true vote of confidence made with real money as opposed to an analyst's price target

I also use it to test how much weight to give to "fintech disruption" narratives in the banking sector specifically. It's easy to read the last decade of neobank growth and conclude that charters almost don't matter anymore as Chime and its peers got huge without one. My honest opinion is that this is only half true. Clearly the barrier didn't stop fintechs from reaching consumers. This stopped most of them from capturing the entire economics of banking the net interest margin onYes that still corresponds to the authorized bank that supports the application. When I read the presentations of a fintech one of the first things I check is if it has its own statutes or rents one because that answer tells you who really earns the spread

I will say that I find that the industrial loan company fights really hard to have a strong opinion. I can see the case that mixing banking and commerce is dangerous and I can also see the case that the current line primarily protects incumbents from competition disguised as prudence. I have talked about it more than once while writing this article and I wouldn't be surprised if I change my mind again

What to Watch

For anyone who follows the sector the count of charter applications filed and approved each year is a true indicator of how attractive the industry looks for fresh capital. It responds to rate levels regulatory stance and how much consolidation opportunities exist elsewhere and it tends to move before any of that shows up in the lending data

A sustained return to double-digit annual charters would say the economy has normalized. Single digits along with continued consolidation say the opposite: an industry that is concentrating without replenishing

The Bottom Line

The formation of new banks stopped almost entirely after the financial crisis because capital requirements increased approval slowed and near-zero rates made the spread business unprofitable for a subscale entrant all at the same time. The example above shows why that combination is so punishing: A new bank can lose money for years even with a modest fixed cost base simply because it takes years to grow to a balance sheet large enough to cover that cost. The consequences fell hardest onloans to small businesses as new small banks provide a disproportionate share of them. Entry has resumed at a modest pace as rates rose and regulators eased the way although some of the old demand for charter flights never returned because fintechs like Chime discovered they could rent banking infrastructure rather than build it. Varo shows the path still taken when the premium is worth it. Most companies so far have decided that it is not