By Niket Nishant
(Reuters) -U.S. regulators must simplify the authorization process for setting up new banks, a group of lawyers wrote in a letter to the incoming leadership of banking agencies, emphasizing the industry's need to adapt in the fintech era.
Current "bureaucratic inefficiencies" had led to a "nearly impenetrable barrier to entry" and regulators need to encourage the formation of new banks to enhance competition, the group said in the letter set to be released on Monday, a copy of which was seen by Reuters.
"Banking is a recognized driver in our economy. The Supreme Court has articulated that concentrations in banking lead to concentrations in the economy," said Michele Alt, co-founder of financial advisory firm Klaros Group and leader of the initiative.
The letter comes at a time when corporate executives are hoping for a pro-business regulatory climate under U.S. President Donald Trump, who has pledged to cut excessive red tape.
It also highlights the complexity of securing a new bank charter in the U.S., where the process can drag on for more than a year and requires the involvement of multiple agencies.
In recent years, traditional lenders have ceded some ground to non-bank entities such as fintechs, especially after the pandemic accelerated the adoption of digital alternatives to access cheap financing.
Earlier this month, the Federal Deposit Insurance Corporation's (FDIC) acting chair Travis Hill said encouraging more firms to pursue bank charters would be a focal point for the regulator in the coming months, to guarantee a healthy pipeline of new entrants in the sector.
The FDIC, the Federal Reserve and the Office of the Comptroller of the Currency - the three main agencies tasked with oversight of the banking system - declined to comment on Monday.
REALISTIC EXPECTATIONS
Between 2010 and 2023, an average of only five new bank charter applications were approved annually, compared with 144 per year between 2000 and 2007, the letter noted.
While the low-interest rate environment — which squeezed industry profits — was a key factor behind the drop, burdensome regulation and a heightened fear of bank failures post the 2008 financial crisis also played a part.
To promote innovation, regulators must set realistic benchmarks and recognize failure as an inherent risk for new banks, the lawyers said.
"The agencies currently expect an application to practically guarantee success, which is an unreasonably high standard," they said.
Banking industry players have long criticized authorities for using failures, such as the collapse of three lenders in 2023, as a pretext to impose more stringent regulation.