Something unusual will happen in New Hampshire in the next few months: a bank will be born.
With conditional approval for insurance from the Federal Deposit Insurance Corporation, Primary Bank will soon be able to open its doors—bringing a new source of credit and financial security to the greater Manchester area.
In most industries, a startup doesn’t make national news. But not in the banking industry, where regulators have approved charters for only one new bank since 2010. That new bank startups have slowed to a trickle should worry anyone who cares about economic growth.
Startups are the hallmark of America’s entrepreneurial economic model. Banks are critical to financing these ventures—figures from Harvard Kennedy School researchers, for example, show that community banks provide more than half of all small business lending. Other studies have found that startup businesses are in turn responsible for nearly all net job creation.
In recent years, scholars have been puzzled by the slow pace of job creation since the end of the recession. We have only recently recovered the jobs lost after the financial crisis—and we have some way to go to account for growth in population.
Meanwhile, others are worried about declining startup activity. “Business dynamism and entrepreneurship are experiencing a troubling secular decline in the United States,” a Brookings Institution report found last year. The scholars found that the long-term trend of more firms starting than failing reversed in 2008. Depressingly, it’s a statistic that has persisted.
What we know about the virtuous cycle of credit, entrepreneurship and job creation suggests that these data points aren’t a coincidence. Do fewer bank startups mean there is less funding for startups in other sectors?
It wasn’t always like this. As late as 2009, you could see several dozen new, or “de novo,” banks formed each year. The average from 2002 to 2008 was closer to 100. Even in slower years during the early 1990s, the number of new banks never dipped below 25.
There is still plenty of demand for banks’ services. But investors are reluctant to shoulder the cumulative regulatory burdens—both from new laws and from a more stringent approach by regulators themselves—and the rising legal risks associated with running a bank these days.
I hear this message from bankers all too often. A 35-year veteran banker told me that now “the first thought that comes to my mind is how the regulators will look at the loan transaction—not the thought of how I can help my customers achieve their dreams.”
Regulators have also raised the capital requirements to charter a new bank. For example, figures from the Federal Reserve Bank of St. Louis show that the initial capital-to-assets ratio for new banks rose by about 50 percent from 2002 to 2008. That increases the hurdles for bank entrepreneurs.
To be sure, the low interest rate environment is challenging for bank startups. And the number of banks has been steadily falling for decades due to a wave of mergers and acquisitions. But this M&A pattern has historically been accompanied by significant numbers of new startups. Not anymore.
The lack of startups is accelerating the shrinking number of banks. According to recent research from the Federal Reserve Bank of Richmond, had the historical de novo trend persisted, between 2007 and 2013 we would have lost a net of just 269 commercial banks instead of 836.
I thus salute the Primary Bank team for bucking the trend. The people of southern New Hampshire will soon enjoy a new bank competing for their business. I hope regulators see the benefits new banks bring to their hometowns—and allow innovative bankers, with new ideas and solid business plans, to serve their communities, promote entrepreneurship and create jobs.
Keating was Oklahoma governor from 1995 to 2003. He is president and CEO of the American Bankers Association.