After nearly 18 months gliding on cruise control with a target Fed Funds Rate at an attractive 5.25%, the Fed cut rates a half point at an emergency meeting. That was September 2007, and we all know what followed. Several more cuts, ranging from a quarter point to three-quarters of a point until, by the end of 2008, the target Fed Funds rate was about as low as it could go (between zero and 0.25%).
And there it stayed… for seven long years. Then, there was light. Between December 2015 and December 2018, the Fed was able to bring the rate back up at least a little. Had it not done so, we would be in particularly dire straights right now. Last year three rate cuts had already brought the target rate down to between 1.5% to 1.75% and now it sits between 1% and 1.25%. Will it be enough?
"A rate cut will not reduce the rate of infection. It won't fix a broken supply chain. We get that," said Jerome Powell, Chairman of the Federal Reserve. "But we do believe that our action will provide a meaningful boost to the economy." We at Bauer hope that's true, but understand the Fed has limitations.
Congress understands this too. Emergency spending bills are being floated for everything from development of treatments to helping small businesses and workers who lack sick leave. While we are in uncharted territory, there is one thing we know for sure: community bankers will do everything in their power to help customers that experience short-term disruptions.
Every decade or so, bankers (and the rest of us) seem to be faced with a new challenge, some more difficult to overcome than others. But we do overcome. We are fortunate to be going into this challenge with a very strong banking industry (last week's list notwithstanding). We are also fortunate that we have seen a renewed interest in de novo banks over the past couple of years. De novo applications ceased completely after the 2008 crisis, but that was a very different situation than now.
In 2008, banks-Big Banks in particular-caused the problem, which in turn, created distrust of the entire banking system. Today, confidence in U.S. banks (for the most part) is high and this virus was not of their own making.
Enough about that, though. Let's turn our full attention to de novo bank activity (which was supposed to be this week's topic). Last November we wrote "ILCs Need Not Apply" (JRN 36:44) but after the FDIC released new procedures for deposit insurance applications from "Non-Traditional Community Banks", we may eat those words.
In fact, the timing of the release just happened to coincide with the approval of Varo Bank, N.A.'s application on February 10th. The Fintech, once believed to be a longshot, is now waiting to open its doors. It will mark the first Fintech entrant into the insured banking system. It will not be the last.
The Varo Bank approval opens the door for others on the list, including AmeriNat Bank in Las Vegas, Interactive Bank in Jordan, Utah, and Nelnet Bank and Square Financial, both in Salt Lake City. These Fintech's are all applying for Industrial Loan Charters (ILCs), as is Rakutan Bank America (the Japanese version of Amazon). Does this open the door for them as well? Will Wal-Mart resubmit a bank application? Only time will tell.
Of the 45 de novo applicants listed on page 7, the majority are community banks. With so much industry consolidation, the principals saw a need, and are trying to fill it. We applaud them. In fact (ILCs aside) if you scroll down the state column on page 7, you will notice a lot of activity in states that have been hit particularly hard by both bank failures and consolidation. These states include Georgia, Florida and Arizona.
More good news: Some Native Americans, long under-represented by the nation's banking system, seem to be looking for a new way into banking. Legacy Bank in Temecula, CA is not just proposing to fill a community bank need; the Soboba Tribe of Luiseño Indians plans to form and run a holding company for the bank. The bank will offer consumer and business banking to the tribe.
Also, in the spirit of community banking, the proposed CEO of another de novo, TYME Bank, Farmers Branch, TX, Joseph Hansen, was quoted saying "We don't close loans-we open relationships."-American Banker
...And that is what community bankers do.