Another Great Time to Start a New Bank…?

It definitely could be, but let’s start with some not so ancient history.

Back in late 2008-09, the Great Recession was beginning to cause serious headaches for many banks, even the strongest ones. Earlier that year I had committed to move forward with the business plan to start a new community bank, thanks to the support of a large health insurance company supplying the initial capital.  In retrospect, I doubt we could have raised individual investor capital in a market back then without them. 

I’ll never forget that feeling in my stomach as things got progressively uglier in the market, especially the momentous mid-September of 2008. The Treasury declined to bail out Lehman Brothers causing their bankruptcy filing; Merrill Lynch had sold to Bank of America for half its value a year earlier. AIG, the world’s biggest insurer, had its ratings downgraded causing the federal government to seize control, lending them $85 billion and taking an 80% equity stake. Reserve Primary, the oldest money-market fund, broke the dollar-in, dollar-out standard to cause its investors to lose money. LIBOR overnight rates rose a record 3.33%, the biggest increase ever as banks didn’t trust what other banks assets were worth. 

Given that backdrop, I really thought our de novo bank application was dead in the water. After all the hard work to put the plan together and recruit the executive team, I was frankly feeling deflated. You can only imagine the shock when I saw a light on the fax machine in the office and pulled out a couple pieces of paper – our approval for deposit insurance from the FDIC. I vividly recall my stunned reaction because I knew it represented a small miracle at that point in time. During our pre-opening board meeting with the regulators in early January of 2009, they told us ours was the last charter they would issue that year.

Looking back now, as we find ourselves in the midst of another financial upheaval, it was actually a great time to start a bank. We were able to make the most of numerous opportunities; primary among them was having the capital and a clean balance sheet. While other banks were pre-occupied working out their troubled loans and making no new commitments, we had money to lend (part of our brand promise) and a focus on new business development. Asset and collateral values had been reset lower to more reasonable, less exuberant levels. Most importantly, we could recruit good bankers from banks experiencing extreme stress who worried about their future prospects. Finally, we could acquire and deploy the latest technology to serve our customers without all that legacy system overhead. Oh, and for the first time in many years we could actually price loans for risk!

That was then, but what about now? Does the pandemic environment represent a similar opportunity today? 

Yes – and here’s why.

There are many similarities and also some focused challenges. There’s no question that economic losses will likely cause some failures, although it’s early in the game now and the Fed and the federal government are pumping money into the system to avoid a major catastrophe. Some industries and sectors will be severely hurt and banks with concentrations in commercial real estate may be most impacted. At least bank earnings and capital going into this COVID-19 crisis were at historically strong levels which could mitigate long-term damage. 

Where I see major changes are in the digital disruption and strategic vision for how banks will be engaging with customers and the distribution of products and services going forward. The pandemic and related risk mitigation for health factors just re-programmed bank platforms and branches permanently. Bankers will also need to consider just how this will impact the workforce and equipment required to serve this new normal since many bank employees were operating from remote locations. I see a significant re-allocation in the capital and other resources to meet the rising expectations of customers experiences with other digital platforms like Amazon, for example.

Even though capital requirements have risen in the decade since we formed our de novo bank, this is another unique market opportunity to start a new bank or to reimagine how the organization can deliver a great customer experience more efficiently and continue to adapt to improve shareholder value.

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