FDIC Staff Speaks Out on New Bank Risks
For those directors of banks that are in formation or have been formed within the past five years, recent studies performed by the staffs of the Federal Reserve Banks of Chicago, Atlanta and San Francisco should be of interest.
During the recession in the early 1990s, new or relatively new banks were twice as likely as established banks to fail or have poor examination ratings. New banks in urban areas were twice as likely to be poorly rated than new banks in rural areas. The heightened risks for new banks appear to extend beyond the traditional three year period following the opening of the bank, and can extend until a bank’s first experience with a recession. The Atlanta FDIC staff urges bank organizers and those managing new banks to consider the risks “that are innate in the early life cycle of a start-up and how changes in the economy could affect their institutions.”
Among the risks for new banks are:
- Decline in equity cushions several years before new banks’ earnings justify the relatively low levels of capital
- Higher exposure than established banks to commercial real estate loans
- Payment of higher interest rates on deposits
- Higher reliance on volatile funding sources
- Competition, particularly in urban markets
AABD is developing a section on our Web site which will be devoted to issues affecting directors of de novo banks. Dan Hudson, a consultant who has assisted in the formation of dozens of banks, will be AABD’s Advisor on the new section. He can be reached at www.nubank.com.