De Novo Class of 2019; ILCs Need Not Apply

This year is shaping up to have the most de novo bank activity in a decade. Ten banks  opened their doors during the first three quarters of the year and eight more are on deck (see page 7). At least 17 others are seeking provisional approvals (page 2).

A disproportionate number (4 out of 17 or 24%) are seeking Industrial Bank Charters in Utah. (They are notated with (ILC) next to the name.) Two, Rakuten Bank America and Square Financial in particular, look like they will have a tough time gaining FDIC approval. Rakuten, the Japanese version of Amazon, is conjuring memories of Wal-mart’s several attempts to own a bank, which spanned from 1999 to 2007, when it finally gave up. We wrote about that saga many times.

Back then it was House Financial Services Committee Chairman, Barney Frank (D-MA), taking the lead to block the application. Today, Industrial Bank hopefuls have a new foe, Senator John Kennedy (R-LA). Sen. Kennedy introduced legislation on Tuesday 11/12/19 to amend the Bank Holding Company Act of 1956 to enable regulation of Industrial Bank Holding Companies.

As it stands now, non-financial companies are allowed to own and operate an industrial bank. Although  the full text is not yet available, our understanding is that this bill would close that loophole once and for all.

Square Financial has already run into resistance to FDIC approval. Its first application, submitted on 9/7/17 was withdrawn on 4/6/18. A second application, submitted on 12/19/18, is still pending. After 11 months, it appears the FDIC is just sitting on it.

We expect there will be a lot of debate in regards to these Industrial Bank applications and we won’t see any approvals anytime soon. But that still leaves 13 other banks seeking preliminary approvals.

If and when they receive the preliminary approvals, each bank still has additional steps to take before opening. First and foremost is the raising of capital, which can take several months. Three banks that received FDIC approval last December have yet to open their doors. A number of others have withdrawn their de novo applications in favor of acquiring existing banks. It has proven to be an easier avenue.

In the end, Walmart opted to pull its application and decided to partner with banks for financial services instead of forming one. The issue was largely abandoned and became a nonissue during the financial crisis.

What happens this time around will have to be more decisive. You can bet that  Fintechs and ecommerce companies are watching carefully. The separation of banking from commerce was created to protect depositors by protecting the deposit insurance fund. The reach of some of these companies easily dwarfs Walmart.