Want To Start A Bank? You Might Have a Chance Now

We talk about how easy it is to start a software startup these days.  It’s cheap.  Two people in a garage.  Of course, academic studies have shown despite the ease, starting an entrepreneurial business is on the wane.  There are several reasons for that, but one big one is what college students are majoring in-and the debt they are assuming to get their degrees.

A tangent to the decline of entrepreneurship has been the death of the banking sector.  Community banks were basically put out of business by Dodd-Frank.  They were not big enough to be able to afford that level of scrutiny and regulation.  For mom and pop businesses that used to go to them for capital, it was killer.  For the big mega banks, it helped a lot because a lot of their competitors were swallowed up or put out of business.

Last December, the Office of the Comptroller said they were going to try and issue more licenses.   However, the actual implementation of that statement is unclear and remains to be seen.  At least it’s a step in the right direction.

For a capitalist economy to succeed, there has to be access to capital.

If the market for capital is too highly regulated, access gets cut off.  Communities suffer. Jobs aren’t created.  Only the big mega corporations can afford to do business with the big mega banks.  Loan standards are tougher, and the process longer.  It looks like that might change.

In today’s Wall Street Journal there is an article with a chart that shows an uptick. It’s small, but it’s an uptick. Let’s hope it starts a trend.  (I’d copy and paste it, but can’t so you will have to hit the link)  Community banks reported their small loans to businesses totaled $298.3 billion in the third quarter, up $1.6 billion, or 0.5%, from the second quarter, the FDIC said. Noncommunity banks reported a decline of $1.7 billion, or 0.4%.

The hope is with the new Trump administration, the banking sector will be deregulated and more banks will startup. For those that fear another 2008, I’d urge them to read John Allison’s book, “The Financial Crisis and the Free Market Cure: Why Pure Capitalism is the World Economy’s Only Hope”.

One problem with banking regulation is this. When a regulator shows up to check out a bank, there are some things they look for. If the bank has adopted new technology to more efficiently operate their business, the regulator will go over every detail with a fine tooth comb. If the bank uses old technology, the regulator will check the box. That creates a disincentive for innovation in the banking sector.

At the same time, the regulator is responsible. So, I see the tension and balance here. I am not sure what the solution is. But, I have seen a lot of really cool technology that would make banking a lot cheaper in the US if banks weren’t so risk adverse to utilize it. Certainly, the responsibility of their business, and their personalities make them risk adverse. But add to that the amount of government oversight they get and it doesn’t make them risk adverse. It makes them scared to take any risks.