Prior to the 2008 recession, de novo banks, or banks less than five years old, were quite common. It was not unusual to see between 100 and 200 of these small banks popping up each year. However, in 2009 the number of de novo banks in the United States dropped to 25, and in 2010, there were only two.
Reasons for the rapid decline of de novo banks center around the financial crisis of 2008, which substantially weakened the economic markets and alarmed Congress, bringing about major regulatory reform. Mortgage-backed securities contained a large number of non-performing and devalued mortgages. The relaxed trend of mortgage related regulations also played a key role in the collapse of the economy. In an attempt to mitigate the liquidity crisis, the Troubled Asset Relief Program of 2008 created a $750 billion dollar bailout fund to assist the largest 20 banks in the nation. The bailout fund did not provide any assistance to de novo banks or other, smaller banks.
Before the recession, RLR Management Consulting Inc. (RLR) assisted between 75 and 100 de novo banks that successfully opened their doors. It is possible to get back to those numbers, but it will take the financial industry learning two essential things; the importance of resurrecting de novo banks and how to keep them in business once they’re here.
When one thinks of a de novo bank, they typically imagine a small, startup-like environment. This is a far cry from the massive, national banks that we see taking over the industry today. While larger banks have some great qualities, it is the smaller banks that tend to deliver exceptional customer experiences on a consistent basis. And, in today’s world of quality customer service getting overpowered by automated voice systems and computer messages, a positive customer experience goes a long way.
In addition, the financial industry is finally at a place where it is ready to accept de novo banks again, especially after purging the majority of poor performers over the past eight years. According to FDIC Chairman Martin Gruenberg, “We are very committed to working with and providing support to any group with an interest in starting a community bank. There is ample room for new community banks with sound funding and well-conceived business plans to serve their local markets.”
The number of community leaders in search of a local, trusted bank versus a bank that is “too big to fail” is growing, and with the FDIC on board, it seems that the resurrection of de novo banks is within reach. Of course, once the banks are established, it is important to note some critical steps that must be taken in order to ensure long term success.
First, the bank must be focused on one or two key areas in which it can excel. Simply granting loans and gathering deposits is not enough to keep a de novo bank alive. It needs to be concentrated on a few core competencies such as SBA lending or wealth management. Based on the chosen core competencies, the bank must ensure it has developed comprehensive policies and procedures detailing exactly how it should be run. To take this a step further, it is vital that the bank has expert leadership at the board and executive levels, to effectively navigate these core competencies and properly guide employees.
In addition, a de novo bank needs to have a viable technology plan that addresses internal and external concerns, risk and risk mitigation, speed and soundness of delivery channels and scalable technology solutions. The plan must be as detailed as possible; because there is no loan portfolio to review, regulators turn instead to the technology strategy. Most de novo banks select outsourced technology solutions. These types of platforms are able to be maintained by newer banks while still remaining competitive with the larger, national banks.
Finally, de novo banks need a detailed enterprise risk management program upon inception. This program must include things like risk assessments, audits and an audit schedule, vendor management and cyber security. Often, this type of program is difficult to get off the ground when working in a de novo environment. A good option for these banks is to engage with a third party to take care of all risk management matters. The right consultant can handle everything from audits to cybersecurity strategies to mobile banking guideline compliance, and ensure the safety of both the bank and its customers.
De novo banks once had a bright future in the financial industry, and fortunately it looks like it could be that way again soon. In order to keep up the current momentum, industry experts must realize the necessity to bring back de novo banks, and prepare themselves with the appropriate tools to keep them in business. With concentrated focus, a viable technology plan and a detailed risk management plan, the resurrection of de novo banks is right around the corner.