Government Is Stopping Formation of New Banks

In this difficult economy when capital is tight, one would think the government would welcome the formation of new banks to provide more capital.

One would be wrong.

Over at RealMoney, a paid site that I can recommend to investors over at TheStreet.com, David Dvorchak posted the following:

I met a couple weeks ago with a good friend who has been in the process of starting a new bank over the last year. This is a community bank in Tennessee. Everything is ready to go-- investors lined up, senior staff, etc. Yet he is dead in the water, because the state hasn't awarded the charter yet. The state officials freely admit to him they don't have the time, because their staff is overloaded with the shutdowns they are processing.

His situation may or may not be widely prevalent, but it does illustrate an ironic problem. Much needed capital formation in the banking system is being blocked by bureaucratic sluggishness. Shutdowns must be processed, of course, but in this situation shouldn't new bank formations be the highest priority?

The answer, of course, is “YES!”

But later came this tidbit from Geoff Johnson:

Gary Dvorchak notes earlier today that the state of Tennessee is effectively blocking bank start ups due to lack of time to address their applications. Unfortunately, even if the entrepreneurs get past the Tennessee red tape, they are very likely to get blocked by Sheila Bair and the FDIC.

I've been sitting on a copy of the January 12 American Banker for weeks with a post half-tapped out on just this matter. In that issue is a front-page article noting how the FDIC officially has an unofficial policy of not approving new bank start ups for deposit insurance. Featured in the article was a group in Atlanta that spent $2M trying to launch their bank and already had approval by the Office of Thrift Supervision, but was shut down by the FDIC. I've been saving the article because I find it frustrating that the government is making a point of keeping fresh capital from entering the bank market.

So the powers that be that should be encouraging new banks and the capital they would provide are blocking their formation. Instead, taxpayers are forced to shovel out more capital into rat holes. Because Government knows best, after all.

More economic stupidity brilliancy in the Age of Obama.