The U.S. banking industry faces a significant hurdle: an overly complex authorization process for new banks. This bureaucratic obstacle hinders competition and innovation, particularly in the rapidly evolving fintech landscape. A group of lawyers recently addressed this issue in a letter to incoming banking agency leadership, urging for simplification and a more streamlined approach to bank chartering.
The current system presents a “nearly impenetrable barrier to entry,” stifling the formation of new banks and potentially hindering economic growth. As the Supreme Court has noted, concentrated banking power can lead to broader economic concentration. Michele Alt, co-founder of Klaros Group, spearheaded this initiative, emphasizing the vital role banking plays in driving the economy. This call for regulatory reform aligns with the expectation of a pro-business environment under the current administration, focused on reducing red tape.
Obtaining a new bank charter in the U.S. involves a protracted process, often exceeding a year and requiring navigation through multiple agencies—the FDIC, the Federal Reserve, and the Office of the Comptroller of the Currency. This complexity contrasts sharply with the agility of non-bank fintech entities, which have gained traction, particularly with the pandemic-driven surge in digital finance adoption.
Recognizing the need for change, FDIC acting chair Travis Hill recently highlighted the importance of encouraging new bank charters to maintain a healthy influx of entrants into the sector. The three primary banking regulatory agencies have yet to comment on the lawyers’ recommendations.
Data reveals a stark decline in new bank charter approvals. Between 2010 and 2023, an average of only five new charters were granted annually, a significant drop from the 144 per year average between 2000 and 2007. While low interest rates impacting industry profits contributed to this decline, burdensome regulations and heightened concerns about bank failures following the 2008 financial crisis also played a crucial role.
The lawyers advocating for reform argue that regulators must adopt realistic expectations, acknowledging that failure is an inherent risk for new ventures. They criticize the current system for demanding an almost guaranteed success from applicants, deeming it an unreasonably high standard. The banking industry has long contended that regulators often use failures, like the three bank collapses in 2023, as justification for imposing stricter regulations, creating a vicious cycle.
Beyond simplifying requirements, the group also urges for greater transparency in the application process and a commitment to a 120-day review period. This would provide clarity and predictability for prospective banks, fostering a more conducive environment for innovation and competition. Ultimately, streamlining the bank chartering process is essential to ensure the U.S. banking system remains adaptable and resilient in the face of technological advancements and evolving market dynamics. A modernized approach to regulation will not only encourage new entrants but also strengthen the overall financial landscape.
