NCPA - National Center for Policy Analysis

New Banks Need Not Apply

September 4, 2015

'Too Big to Fail' banks are more entrenched than ever. Five years after Dodd-Frank was enacted, most reforms still have not addressed the heart of the problem: a lack of competition from new banks. In the financial crisis of 2008, American industries took a beating. But the only industry offered a lifeline by the government was the financial industry.

The concept of "Too Big to Fail" is the idea that some firms must be bailed out in order to save the broader economy. Despite having worked its way into common parlance, "Too Big to Fail" is still the exception rather than the rule, but the sentiment still runs strong among regulators of the financial industry.

  • Before 2010, the FDIC approved an average of 170 new banks per year.
  • New regulations imposed since the financial crisis have created a de facto moratorium on the approval of new banks.
  • During the Savings and Loan (S&L) crisis of the 1980s, 1,800 banks failed while 196 new banks were created.

Still, the question remains, what makes banks so special that they require government gatekeepers to stop new competitors from entering the marketplace? New regulations imposed since the financial crisis -- including but not limited to Dodd-Frank -- have created a de facto moratorium on the approval of new banks. Since 2010 only one new bank has been approved by federal regulators, the Bank of Bird-In-Hand in the Amish country of Pennsylvania.

To really tackle Too Big to Fail, the discussion needs to broaden to opening financial services to new types of entrants that can bring the technology and management expertise of both startup businesses and leading American firms to the banking field. In the financial industry, as in any other industry, greater competition can help bring stability, innovation and choice.

Source: John Berlau, "A Bird in the Hand and No Banks in the Bush," Competitive Enterprise Institute, July 16, 2015.

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