The FDIC Isn't Helping the Banking System

Wait a minute. I was under the impression the FDIC wants new private capital to enter the banking business. And I was also under the impression the agency prefers it be supplied by actual bankers (as opposed to, say, private equity investors). So someone please explain to me this:

Federal regulators have derailed First Financial Bank’s ambitions to be the next new bank in the Washington, D.C., area, allegedly for reasons that have at least one local economist scratching his head.

Federal Deposit Insurance Corp. staffers told the startup that the agency was recommending its application for deposit insurance be declined due to “the economy in Northern Virginia,” said First Financial Chairman Charles Curtis.

“It’s unbelievable,” he said. “It really is.”

In fact, “unbelievable” doesn’t begin to describe the nuttiness of the FDIC's decision to turn down First Financial’s application. Say what you will about President Obama’s vision of the proper role of government, in the near-term his plans for government expansion on all fronts mean that the economy in Northern Virginia figures to be among the most robust in the country for the next several years.

And as a de novo entering the market at the bottom of the cycle, First Financial a) doesn’t have a dollar’s worth of bad loans on its balance sheet, and b) should have plenty of pricing power. What exactly is the problem?

This is a typical example of a regulator zigging when it should be zagging. The FDIC denied 21% of insurance applications at the cycle’s peak in 2007, the Baltimore Business Journal reports. Last year, it denied 35%.

That’s backwards. If the agency had rejected more applications when things were overheated two years ago, the subsequent hangover wouldn’t have been as bad as it was. Now that the industry needs new capital (and sanity has returned), the FDIC shouldn’t be raising unreasonable barriers to it.

The notion that the economy in Northern Virginia can’t support a new bank makes no sense to Stephen Fuller, director of the Center for Regional Analysis at George Mason University in Fairfax, Va.

“Every indicator shows that Northern Virginia is among the strongest economies in the country,” he said, pointing to low unemployment and high household income.

Of course. There simply isn’t any reasonable rationale for blocking the bank’s formation. Once again, a regulator does more harm than good.

Comments

[R Carlson:]

Obvious example of Regulatory Capture. The FDIC is trying to protect existing banks (the ones it already insures) from competition from new "Clean" banks. New banks would suck business from the old banks who are already teetering on the edge of insolvency. Local borrowers and the local economy would benefit from new banks, but the FDIC would would have to bailout even more old banks. FDIC wins but the economy loses by discouraging new banks.

Sep 10 11:58 AM