Michelle W Bowman: The consequences of fewer banks in the US banking system

Speech by Ms Michelle W Bowman, Member of the Board of Governors of the Federal Reserve System, at the Wharton Financial Regulation Conference, Philadelphia, Pennsylvania, 14 April 2023. 

Central bank speech  | 
18 April 2023

It is a pleasure to join you here today to discuss financial regulation. I thought this conference would be a good opportunity to share how I think about the evolution of the financial services landscape, in particular my views on de novo bank formation, or really the lack thereof. As a part of this discussion, I'll identify reasons why policymakers should take a careful look at the lack of de novo activity over the past decade, and the potential impacts on local and regional economies and the broader financial sector should this trend continue, before discussing the potential policy response.

De novo bank formation has essentially stagnated for the past decade during a time when financial services have rapidly evolved. Banks continue to face increasing competition from credit unions and nonbank lenders, and significant consolidation over this time has resulted in a decline in the number of bank charters in the U.S. Many banks have focused more of their activities and services on technology and innovation, with a corresponding increase in risk, including cybersecurity and operational risk. These trends will likely have significant consequences. Some of these are predictable, like limiting the availability of banking services to underserved communities. Others are indirect, like encouraging acquisitions through charter strip applications and pushing activities outside of the federal and state bank supervisory and regulatory perimeter. These trends may signal dysfunction in the de novo formation process that needs to be addressed by policymakers, and highlight the need for consideration of de novo formation as we review the U.S. regulatory and supervisory framework.