FDIC Expands De Novo Period: Guidance for State, Nonmember Banks That Are Fewer Than Seven Years Old

Author:Ms Kathryn Edge
Profession:Miller & Martin

On August 28, 2009, the FDIC issued new supervisory guidance advising the banking industry that the agency is extending the de novo period from three (3) to seven (7) years. Nationwide, the FDIC asserts that "newly formed insured institutions pose an elevated risk to the FDIC Deposit Insurance Fund," prompting the FDIC to unilaterally revise the Orders issued to new banks over the last few years that set out capital and allowance for loan and lease losses requirements, as well as other opening restrictions. At this time, we do not have definitive information about what, if anything, the state regulators, the Federal Reserve, or the Comptroller of the Currency may do to complement or contradict the FDIC's new supervisory position. We suspect that financial and personnel resources will be key to other agencies' decisions. When that information is available, we will notify our clients accordingly.

Capital Under existing policy, newly insured FDIC-supervised banks are subject to higher capital requirements during the first three years of operation. The new supervisory guidance expands that period from three to seven years, which the FDIC says is consistent with the deposit insurance assessment rules. In Tennessee, the FDIC and the Commissioner of Financial Institutions have required that a new bank operate with not less than 8% Tier 1 Leverage capital for the first three years of operations. We are currently assuming that a bank that is five years old, for example, would be placed back under the 8% requirement even if its capital had dropped to under 8% in the years since its third anniversary. Nothing in the guidance suggests otherwise.

Examinations The FDIC is also revising its visitation and examination schedules for risk management, compliance examinations, and CRA evaluations for newly insured nonmember banks. New FDIC-supervised banks will undergo a limited-scope examination for risk management within the first six months of operation and a full-scope examination within the first twelve months. Subsequent to the first full examination and through the seventh year of operation, the bank will remain on a 12-month examination cycle. No 18- month interval examinations will be applied during the first seven years of operation. We do not yet know how this will affect joint examinations conducted by state regulators and the FDIC.

All new banks will undergo a full-scope compliance examination and a CRA evaluation within the first 12 months of...

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