Where Are All the New Banks? The Role of Regulatory Burden in New Charter Creation

The number of new bank charters in the United States has declined dramatically in recent years. From 1990 to 2008, over 2,000 new banks were formed, more than 100 per year. From 2009 to 2013 only 7 new banks were formed, fewer than 2 per year. Many industry observers have suggested that the decline is primarily due to regulatory burden, including new FDIC regulations and the 2010 Dodd-Frank Act. But other influences could have played a role, in particular, the current weak economy. Low interest rates and depressed demand for banking services--both of which depress profit for banks, and particularly new banks--may also have discouraged entry. This paper assesses the causes of the decline in new charter creation. We model firms' new charter decisions at the county level with an ordered probit using U.S. data from 1976 to 2013. Our results suggest that even without any regulatory changes following the financial crisis, the weak economy and low interest rate environment would have caused 75-80% of the current decline in new charters.