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Where Are All the New Banks? The Role of Regulatory Burden in New Bank Formation


New bank formation in the U.S. has declined dramatically since the financial crisis, from over 130 new banks per year to less than 1. Many have suggested that this is due to newly-instituted regulation, but the current weak economy and low interest rates (which both depress banking profits) could also have played a role. We estimate a model of bank entry decisions on data from 1976 to 2013 which indicates that at least 75 % of the decline in new bank formation would have occurred without any regulatory change. The standalone effect of regulation is more difficult to quantify.

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  1. By “new bank” we mean a de novo enterprise, rather than a newly-formed subsidiary of an existing bank.

  2. Evidence of this is presented later in this paper.

  3. Interest rates could be considered “regulation” in that the Federal Reserve Board sets the federal funds rate. However, this is not the sort of prudential regulation that is generally meant by “regulation” and “regulatory burden.”

  4. Such as interest rates, regulation, and local measures of population, income, unemployment, and credit worthiness.

  5. The table begins in 1994 when all series are available in regulatory filings.

  6. In this table (and other tables and figures) banks are considered “new charters” only in their first year of operation.

  7. Other studies have also found differences between entrants and incumbents in non-banking contexts. For instance, Foster, Haltiwanger, and Syverson (2008) document that in certain manufacturing industries entrants are, on average, more productive than incumbents.

  8. Some figures and tables begin in 1984 when all data are available in regulatory filings.

  9. These include regulatory requirements mandated by the Dodd-Frank Financial Reform Act, and new requirements for de novo banks seeking deposit insurance from the FDIC. Admittedly, some regulations may also be expected to affect interest margins, such as new rules for mortgage lending that have been instituted by the Consumer Financial Protection Bureau, and increased capital and liquidity standards established by the Basel Committee.

  10. The annual correlation since 1990 between national de novo entry and national expansionary entry is 0.93. In the 1980 s there was proportionally higher de novo entry likely due to 1980 deregulation, though apart from this level shift the two series also moved together in these years.

  11. Of course, the other factors could be regulations that affect both expansion and de novo entry (such as rules on mortgage lending and capital requirements). The point is that some regulations (those only affecting de novos) do not seem likely to be the whole story.

  12. As confirmation of this, robustness specifications that use leading values of independent regressors change the results very little.

  13. These also represent fewer than 20 % of county-year observations with entry, and tend to occur in counties with dozens of competitors (where one would expect an additional entrant to affect competitors’ profits by a smaller amount than where fewer competitors were present).

  14. This variable is 1 in the year of entry, and 0 for later years (unless there is another entrant). We also run ordered probit specifications to capture additional information contained in county-year observations with more than one entrant, but the parameters and predictions of the model are very similar (see Tables 69). This is unsurprising since so few observations have more than one entrant (see Table 4 and footnote 13).

  15. In our main specification, we do not include regressors reflecting the presence of competitors due to their endogeneity. However, we do run some robustness specifications with such regressors and the results change very little (see Tables 69).

  16. Appendix” contains a description of major national banking regulatory reforms since the start of our sample period. These variables are 0 before the regulation, and 1 in perpetuity after the regulation.

  17. See Group of Ten (2001), Adams and Amel (2007), Adams, Brevoort, and Kiser (2007), and Feinberg (2009) for further discussion.

  18. Our new charters include both banks and thrifts. They do not include credit unions, which may have different entry considerations than for-profit institutions, and have also not been the focus of the discussion of regulatory burden. It is worth noting that the number of new credit unions has declined significantly in recent years, as well, according to the National Credit Union Administration.

  19. An additional purpose of the SOD data is to calculate local HHIs and percentages of deposits in small banks. In calculating HHIs, we exclude urban branches with greater than $1 billion in deposits and rural branches with greater than $500 million in deposits due to the likelihood that a significant portion of these deposits are allocated to the branch for legal or tax purposes. We weight thrift deposits at 50 %, consistent with Federal Reserve Board antitrust practice, to reflect their limited competitive influence.

  20. For a more complete discussion of the data, see Lee and van der Klaauw (2010).

  21. Our unit of observation is a county-year pair. We use county and county equivalents in the United States, of which there are approximately 3100. This number has changed slightly over time, and we lose a small number of observations which do not report demographic data in certain years.

  22. “S” is for short sample, “L” is for long sample. The short sample runs from 1999 through 2013 and includes controls for unemployment and credit worthiness; the long sample runs from 1976 through 2013 and does not include those controls.

  23. Alternative specifications (not shown) use the 10-year Treasury note rates, the yield curve (the 10-year Treasury note rate minus the FFR), and various functional forms of these interest rate variables. The results change very little. In the interest of space we did not report all of these robustness specifications here.

  24. In a separate specification, not shown, we tried using national unemployment data in a long panel (because county-level unemployment data are unavailable before 1990). The coefficient was not significant, and the model predictions changed very little.

  25. Sarbanes–Oxley (2002) was the only regulatory regime without a significant effect on new charter creation, which is unsurprising because the reform dealt with publicly-traded companies which are typically much larger than de novo entrants.

  26. The Dodd-Frank Act was signed into law in July 2010, was initially proposed in June 2009, and was preceded by Lehman Brothers’ collapse in September 2008. These three months were the peak months for Google searches of “regulatory reform.” The FDIC increased restrictions on de novo banks in August 2009.

  27. Model (S1) cannot make predictions before 1999 because certain regressors in that model are not available.

  28. The only specifications in which the percentage is lower are those that are intended to be lower bounds. These are specifications 8, 9. Specification 8 uses a linear interest rate effect. Specification 9 uses a linear interest rate effect and only a partial interest rate decline (to 1.1 %, the lowest pre-crisis interest rate level) in predicting new charters. Specification 10 also predicts a lower percentage decline in entry, but is a less reasonable specification. The specification is built on a somewhat implausible assumption (that prospective entrants are forced to use 12-month lagged profitability determinants, including for interest rates), and also makes an implausible prediction (that, in the short sample, weak profitability determinants caused an entry increase).


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Correspondence to Jacob Gramlich.

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The analysis and conclusions set forth are those of the authors and do not indicate concurrence by the Board of Governors or other staff.



Table 10 Selected requirements to apply for a new state bank charter
Table 11 Major banking regulation

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Adams, R.M., Gramlich, J. Where Are All the New Banks? The Role of Regulatory Burden in New Bank Formation. Rev Ind Organ 48, 181–208 (2016).

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  • Bank competition
  • Bank entry
  • Regulation