[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]


               OVERSIGHT OF THE FDIC APPLICATION PROCESS

=======================================================================

                                 HEARING

                               BEFORE THE

                         COMMITTEE ON OVERSIGHT
                         AND GOVERNMENT REFORM
                        HOUSE OF REPRESENTATIVES

                    ONE HUNDRED FOURTEENTH CONGRESS

                             SECOND SESSION

                               __________

                             JULY 13, 2016

                               __________

                           Serial No. 114-139

                               __________

Printed for the use of the Committee on Oversight and Government Reform


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              COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

                     JASON CHAFFETZ, Utah, Chairman
JOHN L. MICA, Florida                ELIJAH E. CUMMINGS, Maryland, 
MICHAEL R. TURNER, Ohio                  Ranking Minority Member
JOHN J. DUNCAN, Jr., Tennessee       CAROLYN B. MALONEY, New York
JIM JORDAN, Ohio                     ELEANOR HOLMES NORTON, District of 
TIM WALBERG, Michigan                    Columbia
JUSTIN AMASH, Michigan               WM. LACY CLAY, Missouri
PAUL A. GOSAR, Arizona               STEPHEN F. LYNCH, Massachusetts
SCOTT DesJARLAIS, Tennessee          JIM COOPER, Tennessee
TREY GOWDY, South Carolina           GERALD E. CONNOLLY, Virginia
BLAKE FARENTHOLD, Texas              MATT CARTWRIGHT, Pennsylvania
CYNTHIA M. LUMMIS, Wyoming           TAMMY DUCKWORTH, Illinois
THOMAS MASSIE, Kentucky              ROBIN L. KELLY, Illinois
MARK MEADOWS, North Carolina         BRENDA L. LAWRENCE, Michigan
RON DeSANTIS, Florida                TED LIEU, California
MICK MULVANEY, South Carolina        BONNIE WATSON COLEMAN, New Jersey
KEN BUCK, Colorado                   STACEY E. PLASKETT, Virgin Islands
MARK WALKER, North Carolina          MARK DeSAULNIER, California
ROD BLUM, Iowa                       BRENDAN F. BOYLE, Pennsylvania
JODY B. HICE, Georgia                PETER WELCH, Vermont
STEVE RUSSELL, Oklahoma              MICHELLE LUJAN GRISHAM, New Mexico
EARL L. ``BUDDY'' CARTER, Georgia
GLENN GROTHMAN, Wisconsin
WILL HURD, Texas
GARY J. PALMER, Alabama

                   Jennifer Hemingway, Staff Director
                    Andrew Dockham, General Counsel
Sean Hayes, Health Care, Benefits and Administrative Rules Subcommittee 
                             Staff Director
                          Corey Cooke, Counsel
                    Sharon Casey, Deputy Chief Clerk
                 David Rapallo, Minority Staff Director
                            
                            
                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on July 13, 2016....................................     1

                               WITNESSES

The Hon. Martin J. Gruenberg, Chairman, U.S. Federal Deposit 
  Insurance Corporation
    Oral Statement...............................................     4
    Written Statement............................................     7
Mr. Matthew Browning, Former Board Member, National Association 
  of Industrial Bankers, Testifying on Behalf of the National 
  Association
    Oral Statement...............................................    29
    Written Statement............................................    31
Dr. Simon Johnson, Professor of Global Economics and Management, 
  MIT Sloan School of Management
    Oral Statement...............................................    47
    Written Statement............................................    49
Mr. Guy Williams, President and Chief Executive Officer, Gulf 
  Coast Bank and Trust Company, Testifying on Behalf of the 
  American Bankers Association
    Oral Statement...............................................    54
    Written Statement............................................    56

                                
                                APPENDIX

 2016-08-02 Gruenberg-FDIC- Hearing Follow-up Responses..........   116

 
               OVERSIGHT OF THE FDIC APPLICATION PROCESS

                              ----------                              


                        Wednesday, July 13, 2016

                  House of Representatives,
              Committee on Oversight and Government Reform,
                                                   Washington, D.C.
    The committee met, pursuant to call, at 10:01 a.m., in Room 
2154, Rayburn House Office Building, Hon. Jason Chaffetz 
[chairman of the committee] presiding.
    Present: Representatives Chaffetz, Mica, Duncan, Jordan, 
Walberg, Amash, DesJarlais, Farenthold, Massie, Meadows, 
Mulvaney, Buck, Walker, Blum, Hice, Carter, Grothman, Hurd, 
Palmer, Cummings, Maloney, Clay, Lynch, Kelly, Lawrence, Watson 
Coleman, Plaskett, DeSaulnier, Welch, and Lujan Grisham.
    Chairman Chaffetz. The Committee on Oversight and 
Government Reform will come to order. And without objection, 
the chair is authorized to declare a recess at any time.
    I appreciate you being here. This is an important topic, 
the role of banking, and what it plays in the American economy 
cannot be understated.
    The FDIC, the Federal Deposit Insurance Corporation, was 
created by Congress to help maintain stability in the financial 
sector. Several things are currently happening with the FDIC 
that raise some concerns. Importantly, since 2013, the FDIC has 
not had a Senate-confirmed inspector general. I do think that 
this needs to be put in place sooner than later. That is far, 
far too long.
    In May, the FDIC reported it suffered five--five--major 
data breaches since October of 2015, all involving taxpayer 
personal identifying information. In the banking sector, this 
is particularly of concern, to have it happen five times that 
we know about.
    But today's hearing will highlight an area truly 
undermining our country's financial future. Our local financial 
institutions continue to drown in a sea of red tape.
    There has to be regulation, don't get me wrong. There need 
to be rules of the road. But they need to be fairly 
administered and they need to be predictable so that new 
entrants can also come into the marketplace.
    Since passage of Dodd-Frank and the implementation of 
additional policies by the FDIC, we haven't seen our financial 
sector getting stronger. What we have seen is a drastic 
decrease in the formation of new banks and an increase in bank 
mergers and acquisitions.
    I think, my own personal opinion is the systemic risk is 
greater, not less.
    As of March 2016, the United States had 6,122 banks. This 
is the lowest number of banks since the Federal regulators 
began keeping track in 1934. The lowest number. It's a huge 
drop from 25 years ago when the United States had over 14,000. 
Some will claim that that was too many. They didn't have the 
financial strength and the proper deposits in order to cover 
their potential losses.
    But this decrease in banks does matter. Competition fosters 
innovation, consumer-responsive products, and provides more 
options for individuals who need access to credits. We've had a 
growing population in the United States of America, and yet, 
less institutions in proportion to that population than in the 
past.
    The FDIC is responsible for issuing deposit insurance to 
new industrial loan companies, or ILCs, or de novo banks 
outside of the Federal Reserve System. Proof of deposit 
insurance is a standard requirement for new community banks to 
receive their State banking charter.
    Put in simpler terms, just like the State requires 
motorists to have car insurance to register a car, you can't 
run a bank without proof of deposit insurance. But unlike car 
insurance companies who will compete for your business, the 
FDIC doesn't appear to want consumers to have any new banks.
    The decline in applications for new banks is unsettling. 
Between 2011 and 2015, the FDIC processed an average of three 
applications per year--per year. This is a drastic decrease 
from an average of 219 applications per year between 2004 and 
2008.
    Using the same car analogy, if States suddenly had no one 
registering their cars because citizens were unable to obtain 
car insurance, we would all wonder what was going on with those 
insurance companies.
    Since 2011, the FDIC has only approved three--three, since 
2011--de novo bank applications, and no, not one, ILC 
application. Not one of them has been approved. This stands in 
stark contrast to even 2008 when the FDIC approved 48 de novo 
banks.
    Further, the banks the FDIC has approved seem only to meet 
very small niche markets rather than broad community needs. For 
example, one of the three approved banks--this is a good thing, 
don't get me wrong, this is a good thing--was located in the 
heart of the Pennsylvania Amish country, meant to serve only 
that market instead of creating opportunities for competition 
in more diverse areas.
    Today's hearing is an attempt to understand why this 
radical decline in new bank formation. I would like to 
understand if the FDIC is truly open to receiving and accepting 
applications or if red tape is resulting in interested parties 
just throwing up their hands and walking away.
    I'm sure we can all agree that we want secure and stable 
banks. Don't get me wrong, we have to have the safety and 
security of stable banks. But we must be sure that the 
regulator who's charged with allowing new banks to enter the 
market is not circumventing the process. This results in 
weakening the financial sector and limiting options to 
households in underserved markets across the United States of 
America.
    We thank the witnesses for being here today. Already, the 
information that was provided in the written testimonies are 
insightful and very helpful, but we do have some serious 
questions and look forward to the hearing.
    I would like to now recognize the ranking member, the 
gentleman from Maryland, Mr. Cummings, for his opening 
statement.
    Mr. Cummings. Thank you very much, Mr. Chairman.
    Neighborhood banks are the lifeblood of local communities. 
They can be a key source of capital for small businesses. They 
can help working families save for the future.
    No one knows this better than my constituents in west 
Baltimore, where banks are outnumbered by alternative financial 
services that sometimes offer the most basic products on 
abusive and extremely predatory terms. The lack of basic 
banking services is one of the key challenges for families 
trying to climb out of poverty in this Nation.
    A discussion about what more can be done to ensure that all 
communities are adequately served by community banks is, 
indeed, long overdue. Some suggest that communities lack banks 
because the FDIC is inappropriately blocking the approval of 
new community banks. But this claim does not appear to be 
supported by the facts.
    The Federal Reserve has reported that a key factor 
explaining a lack of new bank applications is our current low 
interest financial environment. A bank's income, particularly a 
new bank without an established lending portfolio, is closely 
tied to the Federal funds rate, which has been close to zero 
since the Great Recession. That is why the FDIC received only 
10 applications for deposit insurance between 2011 and 2015 
compared with more than 1,000 applications between 2004 and 
2008, when the financial crisis began.
    Our Nation relies on the FDIC to protect the Deposit 
Insurance Fund, which repays depositors if an insured bank 
fails. The FDIC approves only those applications that meet 
strict standards and that are built around realistic business 
plans that are likely to ensure profitability. That's because 
if the fund fails, taxpayers will be on the hook to pay for the 
bank's mistakes.
    Many other regulators failed in their duties prior to the 
Great Recession, but the FDIC's stewardship of the fund before 
the financial crisis meant that the FDIC did not have to draw 
on taxpayer funds to repay the customers of failed banks.
    These protective measures are not preventing community 
banks from succeeding. In fact, the net income earned by 
community banks in the first quarter of 2016 grew by 7 percent 
over their income in the first quarter of 2015, according to 
the FDIC's most recent quarterly banking profile.
    By comparison, the net income of noncommunity banks 
actually fell by nearly 3 percent in the first quarter of 2016 
compared to the first quarter of 2015.
    Yet, the FDIC has reported that over the past 12 months, 
and I quote, ``Almost 62 percent of community banks improved 
their net income,'' end of quote. As a result, the percentage 
of unprofitable community banks fell to its lowest level since 
1998.
    As our Nation has seen firsthand, without rigorous 
standards banks could take outsized risks, assuming that the 
insurance fund would clean up their losses. Sadly, I am 
concerned that today's hearing is only the latest in a series 
of efforts by my Republican colleagues to roll back essential 
safeguards and put the financial system back at risk.
    In 2014, the Republican Congress repealed a portion of the 
Dodd-Frank Act relating to swaps pushouts, allowing large banks 
to gamble with FDIC-insured funds. Last year, Republicans 
introduced legislation to repeal the Volcker rule, which stops 
banks that are too big to fail from trading for their own 
profit.
    And then this year, the Republican chairman of the 
Financial Services Committee has proposed a bill to prohibit 
the FDIC from ensuring that large banks do not cause another 
financial crisis if they fail. Rather, in trying to put the 
taxpayer back on the hook for risky practices, Congress should 
be trying to understand why, given that the community banks 
appear to be thriving, critical and basic banking services are 
not being provided in some communities, like the one I live in.
    I look forward to the testimony, and I thank our witnesses 
for being here today.
    With that, Mr. Chairman, I yield back.
    Chairman Chaffetz. I want to thank the gentleman.
    We'll hold the record open for 5 legislative days for any 
members who would like to submit a written statement.
    We'll now recognize our panel of witnesses.
    We are pleased to welcome the Honorable Martin J. 
Gruenberg, chairman of the United States Federal Deposit 
Insurance Corporation.
    Mr. Matthew Browning, former board member of the National 
Association of Industrial Bankers. Mr. Browning is testifying 
on behalf of the National Association of Industrial Bankers and 
the Utah Bankers Association.
    Dr. Simon Johnson is professor of global economics and 
management at the MIT Sloan School of Management.
    And Mr. Guy Williams is the president and chief executive 
officer of the Gulf Coast Bank and Trust Company. Mr. Williams 
will be testifying on behalf of the American Bankers 
Association.
    We welcome you all. We thank you for being here.
    Pursuant to committee rules, all members are to be sworn 
before they testify. So if you'll please rise and raise your 
right hand.
    Do you solemnly swear or affirm that the testimony you are 
about to give will be the truth, the whole truth, and nothing 
but the truth?
    Thank you.
    Let the record reflect that all witnesses answered in the 
affirmative.
    We would appreciate it if you limit your oral comments to 5 
minutes. We'll give you a little latitude, but try to keep it 
to 5 minutes. Your entire written statement will be entered 
into the record.
    Chairman, you are now recognized for 5 minutes.

                       WITNESS STATEMENTS

                STATEMENT OF MARTIN J. GRUENBERG

    Mr. Gruenberg. Thank you. Chairman Chaffetz, Ranking Member 
Cummings, and members of the committee, thank you for the 
opportunity to testify today on de novo banks and industrial 
loan companies.
    The FDIC encourages the formation of new financial 
institutions and welcomes applications for deposit insurance. 
New institutions help preserve the vitality of the community 
banking sector, fill important gaps in local banking markets, 
and provide credit services to communities that may be 
overlooked by other financial institutions.
    While we have seen a broad-based improvement in bank 
financial performance over the past several years, the 
prolonged period of low interest rates that has followed the 
financial crisis has narrowed industry net interest margins 
substantially from precrisis levels.
    Margin pressure remains a challenge for existing 
institutions and new entrants and appears to be the leading 
factor in the sharp decline in new institutions since the 
crisis.
    As the economy continues to improve and interest rates 
rise, we anticipate that interest in new charters will 
increase. Over the past several quarters, the FDIC has seen 
indications of increased interest from prospective organizing 
groups.
    By statute, any proposed depository institution seeking 
Federal deposit insurance must file an application with the 
FDIC. Before filing an application, the FDIC encourages 
organizing groups to participate in a prefiling meeting. The 
goal is to inform applicants about the information needed to 
facilitate the review process.
    The FDIC imposes certain standard conditions on all 
institutions that are granted Federal deposit insurance. These 
conditions include minimum initial capital, State charter 
approval, disclosure of insider transactions, financial audit 
requirements, among others.
    The FDIC may also impose nonstandard conditions when 
additional controls are appropriate or necessary to either 
mitigate risks that are unique to the proposal or to ensure 
actions or activities in process at the time of approval are 
completed before the insurance becomes effective.
    In August of 2009, the FDIC extended from 3 to 7 years the 
period during which de novo State nonmember banks were subject 
to higher capital maintenance requirements and more frequent 
examinations. We also require de novo State nonmember banks to 
obtain prior approval for material changes in business plans.
    The FDIC made these changes because the failure rate of de 
novo institutions chartered between 2000 and 2008 was more than 
double the failure rate for established small banks. Many of 
these failures occurred between the fourth and seventh year of 
the de novo period.
    Given the ongoing improvement in post-crisis industry 
performance, the FDIC recently rescinded this policy, returning 
to a 3-year de novo period in April of this year.
    As State-chartered federally insured institutions, ILCs 
must meet the same standards as any FDIC-insured bank. Since 
parent companies of ILCs are not generally subject to Federal 
banking supervision, the FDIC has included prudential 
considerations in its supervisory approach designed to ensure 
the independence of the ILC separate and apart from its parent.
    The FDIC has recently announced a number of initiatives to 
support the efforts of organizing groups to establish new 
banks. In November of 2014 and again in April of this year, the 
FDIC issued deposit insurance questions and answers to eight 
applications in developing proposals to obtain deposit 
insurance.
    In March of last year, the FDIC provided an overview of the 
deposit insurance application process during a conference of 
State banks supervisory agencies.
    In September of last year, the FDIC also hosted an 
interagency training conference promoting coordination among 
State and Federal regulatory agencies in the review of charter 
and deposit insurance applications. The FDIC is also preparing 
a practical guide for organizing groups. This resource will 
address topics such as developing a sound business plan, 
raising financial resources, and recruiting competent 
leadership.
    We are also planning outreach meetings in several regions 
around the country to ensure that industry participants are 
well informed about the FDIC's application review processes and 
the tools and resources available to assist organizing groups.
    Finally, the FDIC is using this period of low application 
activity as an opportunity to review our current application 
processes for transparency and timeliness. As this review 
continues, we will look for opportunities to solicit public 
comment from the industry and groups interested in organizing a 
de novo bank about the steps that the FDIC could take to 
enhance or clarify the application process.
    Mr. Chairman, that concludes my opening statement. I'll be 
glad to respond to questions.
    [Prepared statement of Mr. Gruenberg follows:]
     [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
    
    Chairman Chaffetz. Thank you.
    Mr. Browning, you are now recognized for 5 minutes.

                 STATEMENT OF MATTHEW BROWNING

    Mr. Browning. Good morning, Chairman Chaffetz and Ranking 
Member Cummings. My name is Matt Browning, and I'm here on 
behalf of the National Association of Industrial Bankers and 
the Utah Bankers Association.
    Why are we here today? We are here today because the FDIC 
is not following its direction from Congress and is preventing 
the chartering of new banks.
    Congress set forth the approval process for new banks in 
the Federal Deposit Insurance Act. However, the FDIC has 
unilaterally adopted a no-growth policy of not allowing new 
bank charters and uses vague nondenial denials as a backdoor 
means to pursue this policy. In order to avoid the mandates of 
the Federal Deposit Insurance Act, the FDIC simply avoids 
calling an application complete and, instead, asks endless 
open-ended questions and makes vague suggestions of needed 
changes in a prospective bank's plan.
    I would like to share my own experiences with the committee 
that leads me to conclude the FDIC is blocking the formation of 
new banks.
    In 2012, I led the effort on an application for a new 
bank's charter and Federal deposit insurance. We modeled our 
bank on the needs of our clients. It was very similar to the 
banks owned by our competitors. We were following a proven 
conservative model with a long history of exceptionally low 
risk.
    Our introductory discussions with local FDIC and State 
regulatory officials went well. We were then surprised when 
FDIC's Washington, D.C., staff suggested that serving our 
client needs and demands for banking services was, in fact, not 
a sufficient reason to charter a bank. The staff began making 
vague demands for modifications that would make our bank 
markedly different and force us outside our areas of expertise.
    FDIC officials never mentioned any deficiency in our plan 
relating to safety and soundness, no deficiency in our 
compliance, no deficiency in our capital. Our board, 
management, loan programs, and control systems were never 
criticized. By all objective measures, our plan met the 
requirements for approval under the long-articulated statutory 
requirements.
    We were ready to make reasonable changes. But the FDIC 
imposed novel, unwritten, and unacknowledged standards on us, 
and these continued to evolve as we progressed.
    After 18 months of ongoing discussions, after repeated plan 
revisions, after spending more than $800,000 in direct expenses 
and many thousands of hours, we concluded we were engaged in an 
exercise in futility. We abandoned the process without filing 
an application.
    Sadly, I understand these outlays are modest compared to 
those of many other applicants who have received similar 
treatment.
    Our plan could not proceed because it was impossible to 
truly understand the new arbitrary requirements of the FDIC. We 
experienced denial by attrition. We unwittingly played rope-a-
dope with the FDIC, wasting a great deal of time and money in 
the process.
    Earlier this year, Chairman Gruenberg stated, quote, ``The 
FDIC welcomes applications for deposit insurance, and we 
clearly have a role to play in facilitating the establishment 
of new institutions,'' end quote.
    Sadly, the common perception among particular applicants is 
the FDIC's claim is mere posturing. The FDIC's many years of 
conduct directly contradict its public statements. The actions 
speak loudly and continue to affirm the widely held industry 
impression that agency staff in Washington is adversarial, 
uncooperative, evasive, and at times belligerent. This was 
certainly my experience, as it has been for many others.
    Potential applicants will not commit the substantial time 
and money needed for an application until the FDIC has really 
seen to change its unilateral no-growth policy.
    The FDIC should rightly have broad discretion on approving 
new banks; however, it does not have the discretion to 
arbitrarily shut down the formation of new banks altogether or 
to covertly use attrition to deny bank applications.
    Policymaking should not be done in the dark. Regulators 
should not create policy without a clear understanding of the 
effect on the economy and should ensure alignment with 
Congress. The FDIC must not only tolerate but truly accommodate 
innovation within the banking sector. This accommodation must 
extend not only to new products and services in existing banks, 
but accommodation must also be made for new banks and new bank 
models designed to serve the evolving needs of American 
consumers and businesses.
    Thank you, and I'm happy to answer your questions.
    [Prepared statement of Mr. Browning follows:]
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    Chairman Chaffetz. Thank you.
    Mr. Johnson, you are now recognized.

                   STATEMENT OF SIMON JOHNSON

    Mr. Johnson. Thank you very much, Mr. Chairman.
    I would like to make three points. The first is to strongly 
agree with what Mr. Cummings said at the beginning with regards 
to effective overall interest rates in the U.S. economy on new 
entries. And I'm afraid--and I think this is absolutely the key 
fact for this hearing, and I hope we can establish those 
facts--I'm afraid there is an issue--perhaps it's an issue of 
omission--in Mr. Browning's testimony. He had some slides 
prepared by people at the University of Utah, and they seemed 
to have read a Richmond Fed research paper on this issue of 
interest rate spreads.
    The Richmond Fed paper itself references and is based on a 
Federal Reserve Board of Governors paper. I have that paper 
with me, and I have the figure to which they seem to be 
referring. They say interest rate spreads have remained 
relatively stable for banks. That statement applies to 
established banks, Mr. Chairman, not to de novo banks, the 
point made by Mr. Cummings, because they have a different loan 
portfolio, they don't inherit loans that already have interest 
rates at a certain level.
    So the evidence is clearly, from the Fed's research, which 
is being referenced by Mr. Browning, the evidence is clearly 
that the net interest spread for de novo banks is much lower 
than it has ever been in recorded U.S. history. That's a major 
disincentive to create community banks.
    The second point I would like to make, Mr. Chairman, builds 
on what you said at the beginning, which I think is also 
fundamental to this hearing, which is the FDIC is an insurance 
company--a strange insurance company, an insurance company 
chartered by the Federal Government, backed ultimately by the 
taxpayer. But as you know, Mr. Chairman, if the FDIC faces 
losses or the deposit fund faces losses, those are covered by 
premiums paid by other banks.
    Now, we can, I think, reasonably look at the FDIC's 
performance as an insurance company over the past couple of 
cycles. And what we see, including in the most recent 
experience, is that the FDIC's deposit fund almost ran out of 
money.
    Now, if you think that the FDIC is being overly cautious 
over the business cycle, the credit cycle, you'd expect that 
fund to always be positive, maybe even highly positive. That 
was not the experience.
    If the FDIC was being reckless, and we're asking the FDIC 
to take bigger risks today--well, you're asking any insurance 
company to take bigger risks, they're going to have bigger 
losses over the cycle, you're going to have bigger negatives in 
that insurance fund--those premiums are not, Mr. Chairman, that 
deficit is not ultimately going to be paid by the taxpayer. 
We're the backstop. We're the line of credit through the 
Treasury. It's the people sitting behind me representing the 
banking industry who are going to pay a high premium.
    So the question, I think, comes down to--and I hope we can 
get to this--do established bankers want to pay a higher 
premium to run their existing business? Because that's 
basically what the ask is today, if you're asking the FDIC to 
take more risk.
    Now, as Chairman Gruenberg said, the FDIC has attempted to 
move its rules recently, and they have relaxed or reduce the de 
novo supervision and intensive scrutiny period from 7 years 
back to 3 years. I think that's a responsible move, and I'm 
supportive of that. I really do not see a case for asking the 
FDIC to take greater risks with their deposit fund unless the 
bankers are all adamant that they want to pay higher insurance 
fees, because the taxpayer certainly does not want to be on the 
hook here and will not be on the hook.
    The third and final point I would like to make is with 
regard to what are and are not the big issues here. I think Mr. 
Cummings put his finger exactly on one of the big issues, which 
is the lack of affordable, responsibly provided financial 
services to low-income communities. There's a huge gap in the 
United States, and many of the alternative financial services 
that currently exist are, frankly, predatory. If you look at 
all the different ways that credit is provided to those 
communities, it's not acceptable. There's big issues there of 
consumer protection, and I hope we can discuss those to some 
degree.
    But if we're talking about entry and what affects entry and 
what distorts competition in this market, Mr. Chairman, I think 
we have to talk about the big banks. We have to talk about the 
unresolved questions around too big to fail. The very largest 
banks in this country have an unfair, distortive, implicit 
subsidy from the taxpayer, because they are not allowed to fail 
and the creditors would ultimately be protected.
    The FDIC is involved in trying to improve that situation, 
and there is a living wills requirement, as you know, for all 
these big banks. But, frankly, 6 years after that requirement 
was created, we have not made enough progress with those living 
wills.
    So, you know, if we want to talk about entry, we should be 
talking about fintech, we should be talking about new ways that 
finance is provided in the United States. There's a lot of risk 
capital going into finance. Yes, it is relatively hard to get 
insured deposits, but that's because the FDIC has 
responsibility not to impose bigger effective taxes on the rest 
of the banking industry.
    Where are we on too big to fail, and how can we possibly 
create a level playing field for community banks before and 
until we really make sure that no bank and bank holding company 
in the United States is too big to fail?
    Thank you very much.
    [Prepared statement of Mr. Johnson follows:]
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    Chairman Chaffetz. Thank you.
    Mr. Williams, you're now recognized for 5 minutes.

                   STATEMENT OF GUY WILLIAMS

    Mr. Williams. Thank you, Chairman Chaffetz and Ranking 
Member Cummings. My name is Guy Williams. I'm president and CEO 
of Gulf Coast Bank and Trust Company in New Orleans, Louisiana.
    My bank was chartered in 1990, at the beginning of a 
recession, with $1.5 million in capital. Over the last 25 
years, we've grown into a $1.4 billion community bank serving 
southeast Louisiana. We are the largest small business lender 
in our State, specializing in helping to establish and grow new 
businesses, and we are also one of the area's largest mortgage 
lenders.
    ABA appreciates the opportunity to testify on the dearth of 
new bank charters. New entrants into any industry are a sign of 
economic vitality. New banks provide more choices of 
competitive products and services for business and consumers, 
which translates into greater economic activity and growth in 
local communities.
    The lack of de novo banks is strong evidence that the 
economics of new community banks don't work. Investors have 
options. If the impediments to starting a new bank are too 
great, they will invest elsewhere.
    Sadly, the forces that have acted to stop new bank charters 
are the same ones that have led to a dramatic consolidation in 
the banking industry: excessive and complex regulations that 
are not tailored to the risk of specific institutions. This, 
not economic conditions, is often the tipping point that drives 
small banks to merge with banks typically many times larger and 
is a barrier to entry for new banks.
    There are only seven de novos in the last 5 years. More 
troubling is that there are 1,500 fewer community banks than 5 
years ago, a trend that will continue until changes are made 
that will provide relief tor America's banks.
    In April, the FDIC announced some welcome but small 
supervisory changes to help prospective de novos through the 
process. Unfortunately, they do not address the underlying 
barriers to entry: capital hurdles, unreasonable regulatory 
expectations on directors, funding constraints, and inflexible 
regulatory infrastructure, and tax-favored competition from 
credit unions and Farm Credit System.
    If it does not make economic sense, no one will start a new 
bank. Look no further than the lack of new charters for proof 
that something is seriously wrong. When you fix the underlying 
problem, new charters will result.
    Gulf Coast Bank started with $1.5 million of investor 
capital, 4.4 million in today's dollars, and proceeded to 
create an institution that's helped our community thrive for 
more than 25 years. The current requirement is that it would 
take $20 to $30 million to start a bank. That's many multiples 
beyond what successful banks needed in the past. It's doubtful 
that a new bank today could earn enough to cover the cost of 
that capital.
    There are many banks like mine that pooled local investment 
dollars to start a bank and built it into a strong community 
partner. I doubt seriously that my bank would be granted a 
charter today due to the capital requirements, the constraint 
on assets, the restrictions on funding. Couple these factors 
with a suffocating regulatory blanket, and I doubt that our 
investors would have made the investment.
    To ensure the broadest possible range of financial options 
to our communities, we must think creatively to find solutions 
that simulate new bank entrants. The changes that FDIC has made 
are a good beginning, but much more can and needs to be done. 
It's time to think differently--to encourage new banks by 
requiring less capital, reducing regulatory burden, permitting 
greater flexibility in business plans, and lifting funding 
restrictions.
    Each and every bank in this country has a direct impact on 
job creation, economic growth, and prosperity. Our slow 
recovery from the recession is partly a result of the shrinking 
pool of community banks. We urge Congress to act now and pass 
legislation to help turn the tide of community bank 
consolidation, create an economic environment that encourages 
new bank charters, and protect communities from losing a key 
partner supporting economic growth.
    Thank you. I'll be happy to answer questions.
    [Prepared statement of Mr. Williams follows:]
     [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
    
    Chairman Chaffetz. Thank you. Thank you, all.
    We'll now recognize myself for 5 minutes.
    Chairman Gruenberg, on page 1 of your testimony, you say 
that FDIC institutions are posting record profits, and yet, on 
page 6 you say that the profitability ratios are below pre-
crisis levels, making it unattractive to start a new bank. 
Which one is it?
    Mr. Gruenberg. It's actually both. The industry, as a 
whole, as we've documented over the past several years, has 
been gradually but steadily recovering from the financial 
crisis. So on most of the major metrics of performance--net 
income, credit quality, and loan balances--the industry has 
been getting better.
    But it's something of a tribute to the industry that they 
have been able to do that in an economic environment of very 
low, historically low interest rates, and low net interest 
margins. So that the margins they are able to generate on their 
loans are narrow, but they have actually been able to 
compensate for it. And this is particularly true of community 
banks by expanding lending activity.
    Chairman Chaffetz. I just think it's inconsistent for you 
to suggest that there is not--that the profitability ratios are 
so low that it's unattractive to file an application at the 
same time you say that there are record profits. People do want 
to get into this business and service the need and the demand 
that's in the economy.
    Ninety-four percent of all bank applications since 2009 
have not been approved--94 percent. Do you really believe that 
all those bank applications don't meet the needs of the 
communities? I mean, are we really supposed to believe that 94 
percent of the applications were insufficient?
    Mr. Gruenberg. If I may say, Mr. Chairman, 2009 was the 
second year of the financial crisis, probably the most severe 
financial crisis at least since the Great Depression.
    In 2009, we had----
    Chairman Chaffetz. I know, but to date.
    Mr. Gruenberg. No, but I'm just--I'm saying----
    Chairman Chaffetz. How many have you approved to date since 
2009?
    Mr. Gruenberg. What I can say is, between 2000 and 2007 
we----
    Chairman Chaffetz. That's not what I'm asking you.
    Mr. Gruenberg. No, but my point is, Mr. Chairman, if I may 
just respond, we've had a post-crisis environment really since 
2009 which is in some measure unprecedented. We had the most--
severest financial crisis----
    Chairman Chaffetz. You're not answering my question here.
    Mr. Gruenberg. Well, I'm trying to explain that we've had 
the longest prolonged period of near-zero interest rates in our 
country's history.
    Chairman Chaffetz. At the same time you're posting record 
profits.
    Mr. Gruenberg. Yeah.
    Chairman Chaffetz. And you're not approving any 
applications. That's the problem.
    Mr. Gruenberg. We're not--if I may explain--we're not 
receiving applications. And the reason for that is----
    Chairman Chaffetz. Ninety-four percent of the ones you did 
were not approved. You only approved three.
    Mr. Gruenberg. Well, you have to--we've had a small number 
of applications, as you know, and we have an environment in 
which it's difficult for an institution to demonstrate a viable 
business plan.
    We've had established institutions coping with the 
challenging environment by generating larger volumes of loans 
to generate revenue.
    Chairman Chaffetz. You're not answering my question.
    Mr. Gruenberg. Well, I'm trying to.
    Chairman Chaffetz. I know, but you're not. That's what I'm 
explaining to you. You may be trying, but you're not answering 
the fundamental question.
    Mr. Gruenberg. For new institutions to get over the hurdle 
they not only have to be able to generate revenue, but they 
also have to get over the fixed cost of establishing the 
institution. And in a near-zero interest rate environment, that 
becomes particularly challenging.
    Chairman Chaffetz. But they're posting record profits. So 
you can't have it both ways. And my fundamental challenge is 
that you've only approved three, and that's highly suspicious 
in a--I think there's more systemic risk, because the cruel 
irony of all this is there are fewer institutions that have 
more leverage, more of the play.
    And so you have very large institutions out there that are 
trying to get into this business. You have applications that 
are pending for a long period of time. One application has been 
pending since 2008. Another application is showing pending 
since 2009.
    I mean, how long does it take to go through these 
applications? You and I have talked about this in my office, 
and I still don't understand--that's why we're having the 
hearing--I still don't understand why it takes so long.
    Mr. Gruenberg. Well, I think for the--without speaking to a 
specific application, I think--as you know, the ones that are 
pending relate to investor loan companies. There was a more 
than 3-year moratorium period and an additional moratorium 
period, I think, during----
    Chairman Chaffetz. Is that still in place?
    Mr. Gruenberg. No, it expired in 2013.
    Chairman Chaffetz. And have you approved any since then?
    Mr. Gruenberg. And I believe the applications you are 
referring to have not really been pursued by the applicants 
since that time.
    Chairman Chaffetz. But they're still pending?
    Mr. Gruenberg. They're still pending.
    Chairman Chaffetz. What are they supposed to do? I mean, 
they're pending. Do they have to come and say, ``Will you 
please continue to do your work?''
    I mean, these institutions, they've spent seven figures 
putting these things together. Why aren't you--if they're still 
pending, why aren't you taking action on them?
    Mr. Gruenberg. The applications, as they currently stand, 
Mr. Chairman, I don't think would meet the standards, and the 
institutions have not pursued them.
    Chairman Chaffetz. They have pursued them. They're pending 
before your body.
    Mr. Gruenberg. But they're no longer actively engaging with 
us on the application, I believe, Mr. Chairman.
    Chairman Chaffetz. So they submit the application, they've 
done everything they're supposed to do, and it's still pending, 
and they need to show activity?
    You state that you're going to put out some guidance, 
right? When is that going to happen?
    Mr. Gruenberg. I think we're going to do it, I think, 
before--over the course of this year.
    Chairman Chaffetz. No, no, no. Give me--come on. Give me a 
date.
    Mr. Gruenberg. Assuming before the end----
    Chairman Chaffetz. How long have you been working on it?
    Mr. Gruenberg. As I indicated----
    Chairman Chaffetz. When did you start the process of coming 
up with the guidance?
    Mr. Gruenberg. We've already issued guidance, as I 
mentioned, in 2014 and 2016----
    Chairman Chaffetz. No, no, no. You're not answering the 
question. I'm sorry I'm going over time here. But this is a 
very simple question. You put it in your opening statement, 
okay?
    Mr. Gruenberg. Yeah.
    Chairman Chaffetz. When will you actually complete this 
exercise? When did you start it and when are you going to 
publish it?
    Mr. Gruenberg. I believe we began it earlier this year, and 
I believe we'll publish it before the end of the year, Mr. 
Chairman. And if you like, I'll come back to you with a 
specific timeframe for doing that.
    Chairman Chaffetz. That would be great.
    I've gone past my time. Let me now recognize the gentleman 
from Maryland, Mr. Cummings.
    Mr. Cummings. Let's start. Let me make this clear.
    Mr. Browning, what do you think--why do you think people 
are holding up your application? Let me get down to the nitty-
gritty. Because apparently, I mean----
    Chairman Chaffetz. I don't think he necessarily said that.
    Mr. Cummings. Well, he's here testifying. He's upset.
    Are you not?
    Mr. Browning. I am.
    Mr. Cummings. What do you think is the motive? Why would 
they deny your application? I mean, do you think they just 
don't like you? I'm serious. I mean, what is it? And I'm not 
trying to be smart. I'm just trying to figure out--I'm trying 
to get to the bottom of this.
    Mr. Browning. No, I don't think it's personal.
    Mr. Cummings. Then what do you think it is? Do you think 
it's competition, they're trying to protect competition?
    Mr. Browning. I believe the FDIC has yet to come out of 
crisis mode. I believe it's acting much more as an insurance 
company and less as a regulator governing safe and sound 
institutions. I think it is some lingering shell shock from the 
crisis and it is loath to accommodate new banks, which, 
historically, new banks are a bit riskier. But in terms of true 
risk to the Deposit Insurance Fund, it's de minimis. In terms 
of risk to the system, it's de minimis.
    And, in my example, we came forward with $30 million in 
capital. Our business plan showed profitability at the end of 
year 1. And we were effectively stonewalled for an extended 
period of time.
    Mr. Cummings. So you think they're being too careful, 
basically? Is that what you are saying?
    Mr. Browning. Yes, sir.
    Mr. Cummings. All right.
    Now, Mr. Chairman, how did the insurance fund fare during 
the financial crisis?
    Mr. Gruenberg. Well, as you----
    Mr. Cummings. I can't hear you.
    Mr. Gruenberg. As you know, Congressman, over 500 
institutions failed since 2008. The Deposit Insurance Fund was 
actually depleted during the course of the crisis and as a 
result of the failures.
    At the low point, the Deposit Insurance Fund was actually 
$20 billion in the red, and we were placed in the position of 
having, first, to impose a special assessment on the industry 
to bring in liquidity to manage all of the bank failures and 
then had to impose a prepaid assessment on the industry to 
bring in further liquidity to manage the failures and support 
the fund.
    Since the crisis, we've been able to rebuild the fund and--
--
    Mr. Cummings. Okay. I've got. I only have limited time 
here. I just wanted to get that. You told me what happened.
    The number of new bank charters is significantly lower in 
the years since the financial crisis than in the years before 
the crisis. Professor Johnson, what do you believe accounts for 
the decline in the number of new bank charters?
    Mr. Johnson. The primary explanation, Congressman, is the 
low interest rates. And I think the reconciliation of the 
points Mr. Chaffetz was making earlier is, for existing banks, 
if you have existing loans at relatively fixed rates, yes, 
there's some return to profitability.
    But if you're a de novo bank that doesn't inherit these 
loans, that actually holds a lot more in Federal funds, for 
example--this is all in the Fed paper Mr. Browning was trying 
to cite--it's all there. It's all clearly documented. The 
profitability for a de novo on a forward-looking, prospective 
basis, as being valued by the FDIC, is very low. In fact, it's 
lower than it's ever been in recorded data.
    Mr. Cummings. In an article published on June 24, 2016, by 
the American Bankers Association, the ABA's chief economist, 
James Chessen, wrote, and I quote, ``Great investment options 
don't exist in today's abnormally low rate environment,'' end 
of quote. Mr. Williams reiterated that today in his written 
testimony.
    Professor Johnson, do you agree with the concerns expressed 
by Mr. Williams and the American Bankers Association's chief 
economist?
    Mr. Johnson. Yeah. I think Mr. Chessen's article was spot 
on in that regard. Low interest rate environment, very hard for 
investors to make money. And if you're the insurance company--
remember, the FDIC is not chartering any banks at all, none. 
The FDIC provides--agrees to provide you with deposit insurance 
or not.
    So from an insurance company perspective, evaluating the 
risks, if they can't make any money, if they're not going to be 
profitable because of this low interest rate environment, 
that's substantially higher risk, and you should, therefore, on 
a prudent basis be less willing to provide them with insurance.
    Mr. Cummings. Mr. Williams also stated in his written 
testimony that he started his bank in 1990, quote, in the 
middle of a so-called S&L crisis and the beginning of a 
recession; despite these severe conditions, there were 193 de 
novos that year, end of quote. He compares that with the 
current business cycle.
    Professor Johnson, are there differences between that 
business cycle and this one? And how do interest rates compare?
    Mr. Johnson. There are huge differences, Congressman. Mr. 
Williams' achievement is impressive, let me be clear, but there 
was a very different interest rate environment. Interest rates 
did not fall anywhere near the level that they are today or 
they've been since the financial crisis. For the past 8 years 
almost we've had extremely low interest rates. There's a very, 
very different world than anything we have ever seen in the 
United States.
    Mr. Cummings. The American Bankers Association chief 
economist also wrote this quote, ``Sure, de novos are risky. 
They failed at twice the rate of other banks, historically. 
They create losses for the FDIC,'' end of quote.
    Professor Johnson, is Mr. Chessen right? Is that correct?
    Mr. Johnson. Yes, I think Mr. Chessen is actually citing 
the same Federal Reserve research that I was talking about. 
That's what they've documented very clearly in the data, a 
failure rate of de novo banks two times established banks. And 
as Mr. Gruenberg already said, there's a lot of failures 
between years 3 and 7 in that, which is why they heightened or 
extended the de novo scrutiny period in 2009.
    Mr. Cummings. What trends were observed regarding the 
failure rates of new banks during the crisis? Were adequate 
safeguards in place prior to the financial crisis to ensure 
that risky new banks were not approved?
    Mr. Johnson. Well, the FDIC has looked at this carefully, 
and I cite the research in my paper. I think it's good 
research. They found a lot of de novos failed, including this 
recent episode.
    Now, the FDIC is not charged with making sure that zero 
banks fail. It's an insurance company, so some failure is 
acceptable, as long as it's covered by the premium.
    Another key issue is, over the cycle, what happens to 
deposit funds. That's a really tangible, you know, hard-to-
argue-with measure of how this insurance company did. And as 
Mr. Gruenberg said, they were negative $20 billion. So they 
were on the side slightly of allowing too many banks with not 
very good prospects over the business cycle to enter.
    You know, I think, looking back and seeing how they managed 
to build it up, it's hard to complain too much. I don't think 
the FDIC did a bad job on financial regulation. But there's no 
way that they were shutting out the banks or preventing them 
from entering, and I don't think that's the business they're in 
today.
    Mr. Cummings. My last question. Professor Johnson, if the 
FDIC were to weaken its regulations in an effort to jump-start 
applications, would that help or harm the insurance fund?
    Mr. Johnson. It would create greater risk for the insurance 
fund, and over the cycle you would have bigger losses. Those 
losses would be covered by larger assessments, both on an 
income statement basis and on a cash basis, from the industry. 
The taxpayer is exposed to some risk. Deposit funds have failed 
in other situations, in other countries, at other moments of 
U.S. history. I don't think FDIC would fail. I think it's the 
bankers and the banking industry that would ultimately pay. And 
I don't think that's what the industry wants, and I don't think 
that's what the economy needs.
    Mr. Cummings. Thank you.
    Chairman Chaffetz. We now recognize the gentleman from 
Ohio, Mr. Jordan, for 5 minutes.
    Mr. Jordan. Mr. Johnson, so what's going to happen when we 
go to negative interest rates? We're not going to have anyone 
apply, anyone be approved. Is that right? If the argument is 
that the Fed keeping low interest rates, we're not getting any 
more banks, what happens when we go negative? Which my 
understanding is some European countries have already done 
that.
    Mr. Johnson. Well, it's a fascinating hypothetical, Mr. 
Jordan. Certainly----
    Mr. Jordan. I don't know if it's all that fascinating. It 
seems like it's pretty realistic right now based on what I'm 
reading.
    Mr. Johnson. Well, it certainly has happened in Europe. I 
don't think we're--that's an imminent development in the United 
States. But, yes, to your point, if interest rates are 
negative, that is going to squeeze the net interest margin 
further.
    Mr. Jordan. Hurts competition, hurts the consumer, right?
    Mr. Johnson. Well, in terms of net interest margin, it's 
certainly going to be difficult for de novo community banks.
    Mr. Jordan. Well, all I'm hearing is about community 
consolidating, and you're telling me no new ones are going to 
be created because the FDIC is not going to give them insurance 
because the rates so low and the chances of them making a 
profit is so low. Then, if we go negative, it's going to be 
even worse, further hurting competition, therefore hurting the 
consumer, all because the Fed--I mean----
    Mr. Johnson. Well, look, if you want to talk about the 
consumer, we should be talking more broadly about all of 
finance and entry into the financial sector, including the 
impact of fintech, which, as you know, is substantial and 
growing.
    So that conversation about the consumer is not only about 
community banks. But to the extent we're focused on de novo 
community banks, it's certainly not going to be helpful to the 
issues that the chairman has put before us today.
    Mr. Jordan. Exactly.
    Let me switch gears. I wasn't planning on asking that, but 
you've got me thinking.
    Mr. Gruenberg, you ever hear of Operation Choke Point?
    Mr. Gruenberg. Yes, Congressman.
    Mr. Jordan. You ever, at FDIC, ever have any interaction 
with the folks over at Justice Department regarding Operation 
Choke Point?
    Mr. Gruenberg. As you know, Congressman, our inspector 
general did a review of that, and the finding of the inspector 
general's report was that the FDIC played an inconsequential 
role.
    Mr. Jordan. That's not what I asked. Did you have 
interaction with the Justice Department regarding Operation 
Choke Point?
    Mr. Gruenberg. I think the IG report found that there was 
some legal staff level----
    Mr. Jordan. Did some of your lawyers talk to some lawyers 
at Justice about Operation Choke Point?
    Mr. Gruenberg. No, I think it was about specific 
institution that the Justice Department had questions on.
    Mr. Jordan. You send out financial institution letters, 
right?
    Mr. Gruenberg. Yes, sir.
    Mr. Jordan. Is there, like, a formal letter that goes out 
to banking institutions? Am I getting this right? And it's 
viewed as formal guidance documents, right? The banks take 
these things seriously?
    Mr. Gruenberg. I think that's fair to say.
    Mr. Jordan. All right. And you said your outreach with 
Justice Department and your working with Justice Department on 
Operation Choke Point was rather limited, even though your 
lawyers talked to them about it. But I look at this letter that 
you sent back in January of 2012, managing risk and third-party 
payment processor relationships. Do you remember this letter?
    Mr. Gruenberg. I don't know specifically what you're 
referring to, but----
    Mr. Jordan. Page 8 of this letter you talk about high-risk 
activity, and you give a list--ammunition sales, firearm sales, 
payday loans, travel clubs, to name a few. Do you remember this 
letter?
    Mr. Gruenberg. Yes, sir.
    Mr. Jordan. Yeah. First time I've seen the list. The list 
looks very familiar to the same kind of institutions the 
Justice Department targeted in Operation Choke Point. Would you 
agree with that statement, Mr. Gruenberg?
    Mr. Gruenberg. I really can't speak to what the Justice 
Department program was, since we were not a participant in it. 
What I can say is that back in 2011 there was an article 
published in a Supervisory Insights Journal that the FDIC 
produces on managing third-party----
    Mr. Jordan. Well, it sure looks very similar to me what 
Operation Choke Point was doing, going after the same kind of 
businesses and telling banks, hey, you want to steer clear of 
these. I've talked to folks who say, you know what, the folks 
we were doing business with, our bank, said, we've got this 
notice, and our bank said, we no longer want to do business 
with you; even though you're in a legitimate business selling 
firearms or in a legitimate business providing payday lending, 
we're no longer going to do business with you because you're 
now viewed as high risk and we're getting all kinds of 
pressure, even though we may have done business with you 20, 25 
years.
    Mr. Gruenberg. All I can say is our inspector general did 
look at that issue----
    Mr. Jordan. And all I can say is, here's the list, and the 
list looks very familiar.
    Mr. Gruenberg. I understand. And because of the----
    Mr. Jordan. And then we have this. I guess, here's--I've 
got just a few seconds. But we just heard from the chairman 
you're not approving anybody. We've got the interest rate issue 
as the reason you're citing. But the fact is, you're not 
approving anybody and it's different than it's historically 
been.
    Then we see this list of folks. I'll tell you what this 
looks like, Mr. Chairman, it looks--because we've dealt with 
this issue a lot in this committee--it looks exactly like what 
the Internal Revenue Service did. They said to folks who were 
at that applying for tax-exempt status, no, we're going to 
harass you, you've got to fill out a bunch of forms, we're 
going to keep asking a bunch of questions, we're not going to 
approve you.
    And they targeted them, just like this list seems to be 
targeting certain types of businesses that you don't like, and 
obviously the Justice Department didn't like, as evidenced by 
Operation Choke Point. That's what it looks like.
    Mr. Gruenberg. Candidly, Congressman, I don't believe that 
was the case. And I think the IG----
    Mr. Jordan. But do you see the similarities?
    Mr. Gruenberg. Sir, I can't speak to that. All I can say--
--
    Mr. Jordan. Well, I can, and I do.
    Mr. Gruenberg. Our inspector general reviewed this 
particular issue and didn't find any support for that, I 
believe.
    Mr. Jordan. Mr. Chairman, I yield back.
    Chairman Chaffetz. I thank the gentleman.
    We now recognize the gentlewoman from New Jersey, Ms. 
Watson Coleman, for 5 minutes.
    Mrs. Watson Coleman. Thank you, Mr. Chairman.
    Chairman Gruenberg--is that correct?
    Mr. Gruenberg. Yes.
    Mrs. Watson Coleman. Yes, thank you. I want to follow up on 
a question the chairman asked. There are a couple applications 
you said that are pending for de novo banks, but you said that 
there's been no action on them. So are they considered dead 
file? Because ``pending'' suggests to me that something is 
happening with those applications or with whatever is before 
you.
    Mr. Gruenberg. No, there are a couple of active 
applications by parties interested in establishing de novo 
banks that are under active consideration. I think the chairman 
was referring to applications that were actually filed several 
years ago, prior to the crisis.
    Mrs. Watson Coleman. Before. Right. And so those 
applications, are they pending or are they dead?
    Mr. Gruenberg. They're technically still pending, but 
they're not active because the applicants really haven't been 
pursuing them since the crisis.
    Mrs. Watson Coleman. Well, pending suggests to me that 
something----
    Mr. Gruenberg. Yeah.
    Mrs. Watson Coleman. Pending suggests that there's 
something that is expected of them or is expected of you to 
tell them what they need to do in order to move through the 
process. And so that's confusing to me.
    Mr. Gruenberg. No, I think you raise a fair point. And as I 
indicated, we're going undertake a review or undertaking a 
review of our application process and procedures. And I think 
we need to resolve that issue so that an application shouldn't 
be outstanding for that period of time.
    Mrs. Watson Coleman. Right. It shouldn't be pending and be 
dead at the same time, right.
    Mr. Gruenberg. Right.
    Mrs. Watson Coleman. According to reports issued by the 
FDIC in 2013, nearly 8 percent of households in the United 
States were, quote, ``unbanked,'' meaning that they did not 
have bank accounts. One of five households was, quote, 
``underbanked,'' meaning that the household had at least one 
bank account but also used alternative financial services, with 
the most common sources for alternative sources being grocery, 
liquor, convenience, or drugstores, or even, I guess, check-
cashing stores.
    Dr. Johnson, what challenges do consumers face in obtaining 
basic banking services from these institutions, these 
alternative institutions?
    Mr. Johnson. Well, Congresswoman, as you know, these 
alternative financial institutions charge very high rates of 
interest. The terms and conditions they provide are not always 
fully transparent. There are many instances of, frankly, 
predatory behavior in that industry.
    And, partly, I think it's about the consumers not 
understanding what they're getting into, not realizing how 
expensive this is. But as Mr. Cummings already said, there is 
an issue of how readily available are reasonable financial--
affordable financial services in that community, and that 
that's clearly a big problem.
    Mrs. Watson Coleman. Thank you, Dr. Johnson.
    Mr. Gruenberg, FDIC, you indicated you're committed to 
increasing participation of unbanked and underbanked households 
in the financial mainstream. What does that mean? What are you 
doing or what do you propose to do and what is the timeframe 
for doing those things?
    Mr. Gruenberg. As you indicated, Congresswoman, that's a 
significant issue in our financial system. We, the FDIC, 
actually partnered with the Census Bureau on the first survey 
ever done on who's unbanked and underbanked, and we've been 
focusing on trying to respond to this issue over the last 
several years. Among a number of things we've done, we've 
developed so-called model transaction accounts, which are low-
cost account-based debit card accounts with no overdraft fees 
as a condition of the account.
    And as a result of our work, a number of major financial 
institutions across the country are now offering these low-cost 
threshold accounts that really reduce the barriers to entry and 
expand the ability of people to get into the banking system, 
and we think that's actually a very, very important objective 
to pursue.
    Mrs. Watson Coleman. Thank you.
    In a lot of communities, the impact of the Great Recession 
is still very profound, and many individuals are continuing to 
suffer from it, entrances and exits from the banking system.
    Mr. Williams, what steps has your bank taken to reduce the 
number of unbanked and underbanked in Louisiana?
    Mr. White. Our bank is a blue collar as opposed to a blue 
blood bank. We operate in a number of parishes from Baton Rouge 
down to St. Bernard, and we provide free checking. So it 
doesn't get better than that. We advertise it, promote it, we 
also provide debit cards and payment cards that you can use. 
But the essential service that we provide is free checking.
    Mrs. Watson Coleman. Thank you very much.
    Thank you, Mr. Chairman. I yield back.
    Chairman Chaffetz. Thank you. I now recognize the gentleman 
from Michigan, Mr. Walberg for 5 minutes.
    Mr. Walberg. Thank you, Mr. Chairman, and thanks to the 
panel for being here. Reading information in preparation for 
this hearing and seeing the fact that we have the lowest number 
of banks in the United States, since records being kept to 
1934, is a concern. I mean, the reason why this country, as I 
recollect, is the greatest country in the world based upon only 
a short period of time of being alive as a country, 240 years, 
is because we had the ability to take risk and develop reward 
to get capital into the marketplace, into the hands of people 
who can generate opportunity for people.
    So to hear concerns fostered in the last 8 years about 
trying to protect us against what has really made us great and 
oversee in such a way that we hold back the genius of what 
compounded interest, capital being freely and relatively easy 
to gain if you have the process in place that says will you 
take that risk on me is a concern.
    Mr. Browning, your testimony says that constantly evolving 
and ambiguous requirements at the FDIC are putting up 
roadblocks to new entrance. Could you expand and describe the 
situation in a little more detail?
    Mr. Browning. Certainly. Congressman, thank you.
    As we engaged in our process, we put forward a plan with 
great detail on our loan programs tapping into an existing 
client base. We brought $30 million in capital, showed 
profitability in our first year. We had an exceptionally stable 
low cost deposit base built into the program and a variety of 
other things. There were vague suggestions that our deposit 
program was inadequate even though we had ready available 
deposits well in excess of four to five times what the bank 
would need in its first 3 years of life.
    There were additional suggestions of entering new lines of 
business such as SBA lending. And SBA lending is a great 
program, for sure, but it is not something we contemplated it 
with outside our expertise. We didn't have the infrastructure 
staff to originate such loans to service them, to sell them.
    Mr. Walberg. And yet you are not a novice in the field?
    Mr. Browning. Not at all, sir. And so it was expanding 
infrastructure, expanding processes in ways that were outside 
of our core plan, outside of our profile, and to us, introduced 
increased risk and increased cost, and were certainly not part 
of the statutory requirements of chartering a new bank.
    Mr. Walberg. Which is not the reason why you're getting 
into that line of work. You need to develop the risk as you 
determine as best to meet your agenda, which is, I would 
assume, to succeed and succeed for the people that use your 
resources.
    Mr. Williams, in your written testimony you mention that 
regulations are more detrimental to a bank's profitability than 
low interest rates. Why is that?
    Mr. Williams. Regulations cost time and money and hurt both 
the bank and the consumer when they are overburdensome. And a 
good example is the new TRID regulation. We are one of the 
largest mortgage lenders in southeast Louisiana.
    When TRID came in, all of the service providers raised 
their cost because, under TRID, if there is a change in cost, 
you have to redisclose and it resets the time period, so every 
cost went up. When TRID went in, the closings were delayed, and 
when TRID went in, the realtors, in particular we have some 
markets in New Orleans right now, Uptown and the Marigny, where 
they are very active markets. Realtors would say to consumers, 
if you don't have your financing either all cash or locked in, 
we're going to tell the seller not to take your offer because 
the TRID delays are just too cumbersome. So it's a triple play.
    The consumer now has a slower closing, pays more, and has 
less ability to shop. But when CFPB harms the consumer like 
that, there's nowhere to go because there is no oversight of 
CFPB. So that's a regulation that cost us money, cost the 
consumer money, and hurts everybody.
    Mr. Walberg. It takes the natural rhythm that would be in 
place in those types of dealings and puts it on its ear, 
doesn't it?
    Mr. Williams. It does. And I mean, it's counterproductive. 
It doesn't help the consumer, it doesn't help the bank, it 
was--and it's unfortunate, but that's an example of an 
overburdensome regulation that's unhelpful.
    Mr. Walberg. And you truly believe that if all of this was 
in place when you started back in 1990, that you probably 
wouldn't have started up the bank?
    Mr. Williams. Well, I was a little scared listening to Mr. 
Browning talk about spending so much money to apply. We put up 
all the money we had, which was a million five. We couldn't 
have afforded all the consultants that were necessary, and it 
just wouldn't be possible.
    And I think of what would be missed. You know, there is a 
charter school in New Orleans that funds--that has students 
that are all inner city, but yet all 400 students graduate and 
go to college. When that charter school started, they went 
around the city looking for a line of credit. We were the only 
bank that would provide it. They think that they wouldn't be 
open absent our bank. I'm an honorary member of the Warren 
Easton Hall of Fame because of that.
    Well, how do you measure the things that don't occur when 
you don't charter banks? We're missing an awful lot of success 
because we want to prevent a small potential failure.
    Mr. Walberg. Thanks for your service. I yield back.
    Chairman Chaffetz. I thank the gentleman. I now recognize 
the gentlewoman from Michigan, Mrs. Lawrence for 5 minutes.
    Mrs. Lawrence. Thank you, Mr. Chairman.
    I understand that part of the application process, there is 
numerous conversations typically occur between the applicant 
and the FDIC before a formal application is filed. Chairman 
Gruenberg, what types of conversations occur?
    Mr. Gruenberg. We actually encourage what are called 
prefiling meetings with interested groups looking to establish 
a new institution to walk them through the application and the 
requirements, to answer questions, and to give them the sense 
of what's involved in the undertaking. And actually, we may 
engage in multiple meetings as the group tries to inform itself 
about the requirements and what would be expected.
    Mrs. Lawrence. Is this before--is this an interest in an 
application or there is an official application filed and then 
you start having these pre-conversations?
    Mr. Gruenberg. Actually both. Oftentimes we encourage 
groups, before they actually submit the application, to come in 
and have what we call a prefiling meeting so that we can 
establish up front what the requirements are and sort of walk 
them through the process. And then once the application is 
actually submitted, we'll then follow up with them in terms of 
trying to fulfill all of the requirements.
    Mrs. Lawrence. Mr. Browning, you have had some concerns. 
Would you say this has been your reality?
    Mr. Browning. I certainly appreciate the intent of the 
chairman and believe that to be very genuine, but I think the 
reality is quite different. We went through many months of 
conversations with regional staff, and that went well, regional 
FDIC and State regulatory staff.
    Mrs. Lawrence. Okay.
    Mr. Browning. Once we engage in our prefiling meeting, that 
formal presentation the chairman referenced, things turned very 
differently from there forward. The process was taken from San 
Francisco, the regional office that had jurisdiction, taken 
back to Washington, and that's when very unusual questions, 
very novel criterion suggestions began to be made.
    Mrs. Lawrence. So if I could try to interpret your 
comments. There were conversations, but you felt that they were 
not productive and the type----
    Mr. Chairman, you've heard that comment. Do additional 
discussions occur between the applicant and the FDIC, after the 
application is filed, and where do you think the breakdown is, 
at least for Mr. Browning?
    Mr. Gruenberg. You know, I can't speak----
    Mrs. Lawrence. You need to turn on your mike.
    Mr. Gruenberg. Sorry. I can't speak to the specific case of 
Mr. Browning. I do think the application process is generally a 
very hands-on process with applicants.
    Mrs. Lawrence. Yeah.
    Mr. Gruenberg. And we do go to great lengths to work with 
applicants. I can tell you that in terms of the general 
experience from 2000 through today, applications are generally 
processed and decided on in a 4- to 6-month period. That's the 
overall experience. Obviously there are going to be instances 
where that may not be the case. That may be the instance with 
Mr. Browning, but I couldn't speak to that specific 
circumstance.
    Mrs. Lawrence. Mr. Chairman, can you tell me what have you 
done? What can you state that you've done to welcome new 
applicants?
    Mr. Gruenberg. We are very much focused on this, and we've 
done a number of things, as I indicated in my testimony. We 
brought together--you know, in any application process, it's 
not just the FDIC, but the chartering agency, whether the State 
or Federal agency has to participate, so we brought the other 
chartering agencies together with us to work through the 
application process.
    We are going to be holding outreach meetings in regions 
across the country where we are going to meet with interested 
parties in the industry to talk about the application process 
and how we can work with them if they're interested in 
applying. We are developing a manual which will really provide 
specific guidance on how to go through the application process.
    So, you know, we are prepared to do everything we can to 
lower the process procedure hurdle of getting through the 
application. But----
    Mrs. Lawrence. Chairman, I just want to say, on the record, 
I would like to hear this from you. Do you identify that there 
has been a high rate of denials of new applications and that 
you are implementing new practices, or are you stating that the 
history of the applicants not being approved had nothing to do 
with your process?
    Mr. Gruenberg. I think what we're seeing, in the period 
before the financial crisis, 2000 to 2007 where there were over 
1,000----
    Mrs. Lawrence. Yes, I understand.
    Mr. Gruenberg. There was a 75 percent approval rate.
    Mrs. Lawrence. Okay.
    Mr. Gruenberg. So there's a high level of approval. It's 
really this post-crisis environment in which both, there was a 
severe economic downturn and a historically long period of 
almost zero interest rates.
    Mrs. Lawrence. So are you doing new innovative things 
recognizing that has happened?
    Mr. Gruenberg. You know, we can't change the economics in 
terms of what interest rates are. We are trying to do 
everything we can within our own process to make it as 
responsive as we can to applicants and to at least lower the 
barrier of the application process itself.
    Mrs. Lawrence. Mr. Chairman, I yield back.
    Chairman Chaffetz. I thank the gentlelady. Now recognize 
the gentleman from North Carolina, Mr. Meadows for 5 minutes.
    Mr. Meadows. Thank you, Mr. Chairman.
    Mr. Gruenberg, how will you rate the FDIC on a scale of 1 
to 10 with 10 being the highest as a user-friendly organization 
as it relates to the application process?
    Mr. Gruenberg. It's probably not for me to judge. I would 
like to think----
    Mr. Meadows. Well, I'll judge it if you don't, so go ahead 
and give me a number.
    Mr. Gruenberg. I think we do a pretty good job between 5, 
7, 8, but I think we can do better, and I think that's going to 
be a priority.
    Mr. Meadows. Okay. Let me tell you the reason why I ask 
that, Mr. Gruenberg, because there is a belief that you have a 
retaliatory environment in the FDIC. And I'm here to tell you 
that the reason why I'm not going to give you real examples by 
banks is because they're afraid that you will come after them. 
And I'm here to tell you that I'm not going to allow that to 
happen.
    So let me give you some real examples, since you're talking 
hypothetically, let me give you some real examples. You've 
heard from Mr. Browning and Mr. Williams. Is there any reason 
why you would only have a 4 percent approval rating, in an 
environment that's encouraging new banks, other than low 
interest rates, because you're looking at a business model, and 
I was a business guy, and actually--you know, Mr. Johnson 
actually was in North Carolina.
    I knew Mr. Fuqua of which the school of where he practiced, 
I knew him personally. And so here's what I'm saying is, this 
retaliatory environment is very concerning. So how do you 
respond to that? Do you retaliate or do you not?
    Mr. Gruenberg. I do not believe we do, Congressman.
    Mr. Meadows. Okay. Well, I'm aware of some communications, 
from your FDIC personnel from here in D.C., that says we're 
going to teach them a lesson, we're going to go after them, 
we're going to make them sweat. Would you like copies of those 
emails in--because let me tell you where I have--from a 
regulations and a regulatory standpoint, that is inexcusable. 
Wouldn't you agree with that?
    Mr. Gruenberg. I would.
    Mr. Meadows. All right. So if that happened and you're 
going after people, what are the consequences for those that 
have that kind of environment and have been sending out those 
kinds of emails? Will you fire them?
    Mr. Gruenberg. Congressman, you know, I'd be reluctant to 
speak in the general on something like that. You have to look 
at the specific situation and the facts.
    Mr. Meadows. But if they retaliated against somebody, will 
you get rid of them?
    Mr. Gruenberg. Congressman, I would want to be very careful 
to look at the facts of a particular situation.
    Mr. Meadows. All right. Well, I'm going the give you the 
facts because let me tell you what I've got concerns about. Is 
I've got regulators that come in, and what they do is they say: 
Well, we need to make more loans to people that are 
underserved. And you tell that same bank: Well, you need to 
watch your aging process because it's going 30, 90 days. And 
when the banker tells your regulators that those are two 
conflicting issues, you know what your regulator said? True 
statement. You're the banker. You figure it out.
    Now, that is deplorable. Wouldn't you agree?
    Mr. Gruenberg. The way you describe it, sir, I wouldn't--
I'm not taking issue.
    Mr. Meadows. Okay. I'm going to give you the benefit of the 
doubt to believe that somewhere in your organization these 
kinds of things are just not rising to your level. But here's 
where I'm going to tell you, I'm going to work with the 
chairman to make sure that you understand that we are not going 
to tolerate this kind of chilling effect on this industry, 
because what it does is it affects not the--it doesn't affect 
the high income folks.
    It affects the places that Mr. Williams serves. It affects 
Baltimore. It affects many of the places that, quite frankly, 
they need banks. And Mr. Johnson is talking about too big to 
fail. Well, this whole process will create where we only have a 
few big banks because you're not going to approve the community 
banks. Do you agree with that?
    Mr. Gruenberg. Congressman, candidly, we had a process 
that's--same set of standards from 2000 to 2007, which large 
numbers and percentage of applications were approved.
    Mr. Meadows. I'm talking about after that, Mr. Gruenberg. 
You keep going back. The pendulum was you approved 75 percent. 
Now you come in to approve 4 percent. Somewhere in the middle 
is where we need to be. Wouldn't you agree?
    Mr. Gruenberg. Very much so, Congressman.
    Mr. Meadows. So when is the pendulum going to swing back 
and you're going to start to approve some of these things?
    Mr. Gruenberg. All I can say, Congressman, is the 
institutions--and we have to function in the economic 
environment in which we live, and right now that's a pretty 
challenging one to----
    Mr. Meadows. Well, here's what I want. As this hearing, I 
want whistleblowers, in the industry, to let us know--and we're 
going to give them the same protection because we're not going 
to give you the names of those--and when we get the emails, do 
I have your commitment that heads are going to roll if they 
continue this kind of process?
    Mr. Gruenberg. What I can say, if you get emails reporting 
incidents, we'll be glad to look into them.
    Mr. Meadows. All right. I've got one in terms of some 
lawsuits that you've got going on right now in discovery, and I 
found some stuff that's not even from my State. Are you willing 
to look into that as well? Because you're going after it in a 
real draconian way to try to prove something that, quite 
frankly, doesn't serve the American people and it doesn't serve 
the banking institute. Do I have your commitment to look into 
that?
    Mr. Gruenberg. I'll certainly take a look at it.
    Mr. Meadows. I yield back.
    Chairman Chaffetz. The gentleman yields back. Now recognize 
Mr. Cummings.
    Mr. Cummings. Yeah. I want us to be most effective and 
efficient. You just made some statements about--and I'm sure 
you have the evidence to prove it. I know--I know--and I'm not 
knocking it. I'm just trying to make sure we get to the bottom 
that there is some kind of retaliation and there may be some 
whistleblowers.
    And I just want to know what is your plan to get the 
information to the chairman so we can effectively deal with 
these issues? Wait, wait, let me finish. May I.
    Mr. Meadows. Sure.
    Mr. Cummings. I just want to finish. Because all of us take 
a very strict position with regard to whistleblowers. We want 
to protect them, and at the same time we want to accomplish 
what you want to accomplish, that is, to address whatever that 
issue is that they may be, rightfully so, complaining about. I 
just want to know what your plan was? That's all.
    Mr. Meadows. Well, and I thank the ranking member, and you 
have my commitment. I'll clear my calendar this afternoon, 
tomorrow, I will stay in August if you want to address this, 
but here's what we need to do. Is we need to take these real 
examples, and we can just take a random sample of all the ones 
that have been denied or inaction, and there is a problem is 
it's not even that there's action.
    It's just that they're out there in this holding pattern 
with you not making the decision and not making decisions on 
behalf of it. I'm willing to work with the ranking member in a 
real transparent way to address this problem.
    Mr. Cummings. Thank you.
    Mr. Meadows. I yield back.
    Mr. Cummings. Thank you, Mr. Chairman.
    Chairman Chaffetz. Thank you. I now recognize the gentleman 
from Missouri, Mr. Clay for 5 minutes.
    Mr. Clay. Thank you, Mr. Chairman. Let me thank the 
witnesses for being here.
    The FDIC is not subject to annual congressional 
appropriations process. Instead, the FDIC receives its funding 
from, quote, ``premiums that banks and thrift institutions pay 
for deposit insurance coverage and from earnings on investments 
in U.S. Treasury securities.''
    Some of my Republican colleagues have proposed legislation 
that would subject all financial regulators to congressional 
appropriations, including the FDIC.
    Professor Johnson, what risk to the financial system do you 
foresee if the FDIC were to be placed at the whim of 
congressional appropriations?
    Mr. Johnson. Well, Mr. Clay, this is a very serious issue. 
Indeed, the FDIC, since it was created in the 1930s, has been 
the gold standard for independent regulation, not just in the 
United States but around the world. So you have 80 years of 
success, and of course, there's a lot of pressures on all kinds 
of regulators, including through various kinds of revolving 
doors and other mechanisms that we've seen operate all too 
well.
    Mr. Clay. Right.
    Mr. Johnson. The FDIC has stood under that pressure over 
decades, and I'm afraid we can't say the same for other banking 
regulators. So I think it would be extremely unwise to change 
the funding basis of the FDIC and to bring it closer to 
Congress. We've had some very unfortunate experiences with 
regulators that are funded through the annual appropriation 
process, and I think it would be extremely bad for the banking 
industry, as well as for the economy, if the FDIC were to be 
moved in that direction.
    Mr. Clay. So if all financial regulators were subject to 
the appropriations process like, for instance, the CFPB, what 
kind of results do you think we would get from that?
    Mr. Johnson. Well, I think you would get much less 
effective regulation. I think it's much harder to have 
predictable regulatory environment when the funding is 
uncertain, and as various kinds of activities increase, this 
has been a big issue, for example, around derivative 
transactions, for example. We didn't increase the amount of 
scrutiny of that, in part, because of the constraints of the 
appropriation process, and you can get very large industries 
developing with almost no regulatory scrutiny, and of course, 
that hurt us very badly in 2008.
    Mr. Clay. It certainly did. And Chairman Gruenberg, how are 
the FDIC's annual expenditures approved?
    Mr. Gruenberg. By our board.
    Mr. Clay. By your board. And how does the FDIC ensure it 
does not overspend in its activities?
    Mr. Gruenberg. We have a pretty rigorous budget process 
that's overseen by our board, which is made up of 5 members, 
and as you know, politically diverse as well, and the--it is 
acted on in a board meeting, a public board meeting, and all of 
the budget, of course, is a matter of public record.
    And actually, since the crisis, we've been reducing our 
annual budget as we've been winding down from the build up to 
respond to the crisis.
    Mr. Clay. And isn't it true that even without being subject 
to the appropriations process, Congress still maintains 
meaningful oversight of the FDIC's operations. Is that correct?
    Mr. Gruenberg. I would say that's fair to say, Congressman.
    Mr. Clay. Kind of like this hearing today, and we're in the 
Oversight Committee, and so--and which I find it interesting 
because you usually come before the Financial Services 
Committee, and for whatever reason, you have shown up here 
today. But I appreciate that, Mr. Chair, and I will yield back 
the balance of my time.
    Mr. Meadows. [presiding.] I thank the gentleman from 
Missouri. The chair recognizes the gentleman from Georgia, Mr. 
Hice for 5 minutes.
    Mr. Hice. Thank you, Mr. Chairman.
    Mr. Gruenberg, let me ask you, your opinion and that 
overall of the FDIC, should banks be national? Or is there a 
need for local community banks?
    Mr. Gruenberg. Oh, I think community banks play a critical 
function in our financial system and economy, Congressman.
    Mr. Hice. I do, too, and yet they're closing all over the 
place and they're not being approved all over the place. Do you 
believe that there are too many banks in this country?
    Mr. Gruenberg. Certainly not too many community banks, and 
we could use more community banks.
    Mr. Hice. What about banks as a whole?
    Mr. Gruenberg. No, we have a strong banking system in the 
United States.
    Mr. Hice. Are there too many?
    Mr. Gruenberg. No, I don't think so.
    Mr. Hice. Does the FDIC in any way have a strategy, a plan, 
a policy for consolidation in the banking sector?
    Mr. Gruenberg. No, sir.
    Mr. Hice. And yet banks are being swallowed up by bigger 
banks?
    Mr. Gruenberg. You know, there has been a----
    Mr. Gruenberg. Are you saying that's all coincidental?
    Mr. Gruenberg. There has been a 30-year process in the 
United States of gradual consolidation within the banking 
industry, both at the large institutions as well as at the 
community banks.
    Mr. Hice. Does the FDIC have any role in that either 
through policies, or in any way would you think FDIC is 
responsible or has a role in that consolidation?
    Mr. Gruenberg. I think deposit insurance is something 
that's viewed as actually supportive and beneficial for 
community banks. And going back to 1933, when the FDIC was 
created, the strongest advocates for deposit insurance were by 
community banks to put them in a stronger position to compete 
with the larger institutions.
    Mr. Hice. Do you believe that competition in the market is 
important?
    Mr. Gruenberg. Critical, yes, sir.
    Mr. Hice. Should consumers have options when it comes to 
banks?
    Mr. Gruenberg. Yes.
    Mr. Hice. They're getting fewer and fewer options. We're 
all certainly watching that.
    Let me for a quick moment, Mr. Browning, let me go to you. 
Your written testimony estimates that it costs nearly a million 
dollars for the application process. How much would this have 
cost, do you think, had you gone the entire way through the 
process?
    Mr. Browning. Congressman, I think that is an unanswerable 
question, unfortunately. We went through a very protracted 
process, spending a great deal of time and money. As I 
mentioned, we spent nearly a million dollars. We had $30 
million in capital to put into the bank showing a plan that was 
profitable in year one, but we came to a conclusion that we 
could not actually achieve the end of the process.
    If we saw a light at the end of the tunnel, we stood ready 
to make reasonable changes, but we felt like we were 
shadowboxing and could not get clarity on what was actually 
required and did not want to pour good money after bad----
    Mr. Hice. So your experience is that the cost involved 
certainly affected not only you, but other interested 
candidates out there would struggle over the cost of the 
process?
    Mr. Browning. Certainly the cost of the process, but 
perhaps, more importantly, the ambiguity and indeterminate 
process. There wasn't a clear----
    Mr. Hice. No light at the end of the tunnel, as you 
describe.
    Your written testimony also mentions that the FDIC felt 
like there was no community need for your bank. Do you have any 
idea what the definition is of a community need?
    Mr. Browning. Well, I certainly know the historical 
application of that, and it's spelled out in the statutory 
requirements within the Federal Deposit Insurance Act. And for 
our application, our community were clients, retail clients 
coast to coast, that needed basic banking services in 
conjunction with their brokerage accounts. This was a built-in 
customer base, and these are just mom-and-pop retail investors. 
That was our community. The new interpretations or new 
suggestions were unknown to us.
    Mr. Hice. Did the FDIC explain to you what their 
interpretation of ``community need'' was?
    Mr. Browning. No. They did not give an explicit 
interpretation of what it was. What they suggested what it was 
not. They suggested that our existing customer base was not 
adequate, that serving consumer demand for banking services 
that we had a personal relationship with was not a sufficient 
justification to charter a bank.
    Mr. Hice. Who's best to make that determination, the FDIC 
or those in the local community as to what the community need 
is for a bank?
    Mr. Browning. I think those in the local community, and I 
would also look at some of the regional offices of FDIC who 
have experienced expert staff, on the ground, in the local real 
economies, that they have a very good grasp where I think it's 
much more difficult to regulate strictly from Washington, but 
certainly local business people enmeshed in the community are 
certainly the best testament to what those community needs are.
    Mr. Hice. Thank you, Mr. Chairman. I yield back.
    Mr. Meadows. I thank the gentleman.
    The chair recognizes the gentlewoman from the Virgin 
Islands, Ms. Plaskett.
    Ms. Plaskett. Thank you, Mr. Chairman, and thank you, 
gentlemen, for being here this morning. I wanted to ask about 
several policies related to keeping the financial system safe.
    Professor Johnson, in 2011, you published an article in the 
New York Times leading up to the financial crisis. Some 
bankers, and I quote, you wrote, understood, to a large degree, 
what they and their companies were doing, and they kept it up 
until the last minute and in some cases beyond because of the 
incentives they might receive.
    Could you explain what you meant by this?
    Mr. Johnson. I don't recall that precise article. I have 
written on that topic many, many times. The general point is 
that when you provide incentives, with some sort of downside 
protection, so too big to fail would be the most notable 
version of this, but also it comes up, by the way, in a lot of 
the conservative commentary about deposit insurance over long 
periods of time.
    If you're protecting people from downside risk, and on the 
upside, they do very well, then they are naturally, just as a 
matter of arithmetic applied to incentives, they are naturally 
going the take more risk.
    Now, sometimes you might feel that you can contain that. 
That has been the experience with deposit insurance in the U.S. 
over the years, but unfortunately, with regard to larger 
financial institutions and some of the largest and they run up 
to 2008, the risk that they took was so big that they ended up 
having a devastating effect on the real economy. That's why we 
had this massive recession.
    Ms. Plaskett. So those risks that they took at the largest 
financial institutions that you're speaking about, and the bank 
executives of those institutions, are they still incentivized 
in the same manner that they were at that time, and what is 
their incentives today to act in the best interest of the 
Nation?
    Mr. Johnson. I'm afraid that the largest, what are now, 
bank holding companies, they still have an enormous amount of 
effective downside protection provided by the Federal 
authorities, both the Federal Reserve and other parts of the 
U.S. Government, and we have not ended the problems associated 
with these too-big-to-fail financial institutions. So that's a 
distortion of their incentives.
    And as the chairman, Chairman Chaffetz opened the hearing, 
argued that systemic risk is going up. I think he's right but 
for a different reason, which is it's the effects of these very 
large financial institutions and the distorted incentives. 
Systemic risk is hardly affected at all by the margin of de 
novo community banks. That's just a matter, again, of 
arithmetic. They are very small relative to GDP. The largest 
financial institutions are huge. The largest single bank in the 
country, JP Morgan Chase has a systemic footprint, which the 
Fed calculates to be about 40 percent of U.S. GDP, four-zero 
percent, so dwarfs anything that we've been discussing so far 
this morning.
    Ms. Plaskett. So those systemic issues that you're 
discussing and the risks that banks are willing to take, and 
particularly, the bank executives in making those risks, do you 
believe that the FDIC should look at compensation and the 
compensation models that these banks have in their application 
process to determine what potential risk that the bank and its 
executives might make in their decisionmaking because of the 
compensation that they receive based upon those risks?
    Mr. Johnson. Yeah. It's certainly how you compensate your 
executives is a very important part of the risk profile that 
your bank or any firm adopts. And as I read the FDIC criteria, 
which frankly, I find to be pretty transparent, well explained, 
and I like the Q&As as well, as I read them, that is one of the 
criteria. There is other criteria as specified by Congress, but 
yes, from a point of view, deposit just the narrow deposit 
insurance, I think the FDIC does take that into account.
    Of course, the FDIC also has additional responsibilities 
created by Dodd-Frank with regards to some of the largest 
financial institutions, including with regard to living wills, 
and that, may also be a consideration that although, frankly, 
there's less transparency on that process.
    Ms. Plaskett. As a lawyer, I guess the living will piece 
sounds really interesting to me.
    But Chairman Gruenberg, could you explain to me how the 
compensation models might play and how you evaluate that in 
determining the applications of banks in terms of would the 
compensation model show that an executive would be willing to 
take on more risk because the output to them, in terms of 
compensation, would be greater if there is a greater risk?
    Mr. Gruenberg. In reviewing an application for deposit 
insurance, just to be clear, our responsibility goes to deposit 
insurance, not to the charter for the institution. But 
certainly one of the key components of it would be the 
management plan and the proposed executive leadership of the 
institution, both management and----
    Ms. Plaskett. Sure, but you're determining that. You're 
determining the insurance deposit would let us know that, hey, 
they need greater insurance because you view them at a greater 
risk than others would.
    Mr. Gruenberg. And in an appropriate compensation scheme 
for the institution, with not undue incentivizing of risk, 
would be part of the things we look at in terms of reviewing 
the application.
    Ms. Plaskett. So because it's my belief that the 
compensation models must be--and I'm glad to understand, in 
consideration by the FDIC in terms of how much deposit do you 
believe that they should have or what is the insurance 
compensation that's needed, and I'm thankful for the 
information that you've given us.
    Thank you, Mr. Chairman. I've run out of time. I yield 
back.
    Mr. Meadows. I thank the gentlewoman. The chair recognizes 
the gentleman from North Carolina, Mr. Walker for 5 minutes.
    Mr. Walker. Thank you, Mr. Chairman. Thank you, Panel, for 
being here today. Being from North Carolina, I am concerned 
that over the last 7 years we've lost 40 percent of our 
charters with no new banks being chartered during that time. 
Bank closures and consolidations account for most of the loss, 
but this is still a dramatic trend in banking and threatens the 
future of community banking as a business model.
    And over this time, a new bank has not been chartered in 
North Carolina since 2009, 7 years. The cost of the application 
and the regulatory compliance are cited as early obstacles to 
profitability as everyone testifies today, at least from what 
I've heard, seems to agree that community financial 
institutions have an important role in our economy.
    What has the FDIC, Chairman Gruenberg, done or considered, 
to lower the barriers to entry for these new bank charters?
    Mr. Gruenberg. I think what we have under control, 
Congressman, is the application process itself, in trying to 
make that as user friendly and responsive as possible, and fair 
to say, a significant aspect, particularly for smaller groups 
trying to set up a smaller institution, are legal and 
consulting fees to support the application process. To the 
extent that we, in the course of working with an applicant can 
help defray those costs, provide them the information and 
support and organizing group needs, our goal would be to try to 
contain that cost.
    Mr. Walker. When you say your goal is to contain the cost, 
is that something you're regularly looking at, reviewing, 
discussing, talking about, and is there any action steps or is 
it just something that's laid out there as a goal somewhere in 
the future?
    Mr. Gruenberg. No, as I indicated and as I outline in my 
testimony, we are pursuing a number of steps to try to promote 
new applications, including holding meetings in regions around 
the country for interested parties and industry groups to walk 
them through and explain the application process and encourage 
them to engage with us, as well as working with the State and 
Federal agencies who are responsible for chartering new banks 
and who are partners in terms of entry to the system.
    Mr. Walker. And I appreciate that. Just curious as to maybe 
for me, maybe for the public, what would be the cost or capital 
needed to charter a bank today, and what are the factors that 
would affect the amount of capital required to grant this 
charter?
    Mr. Gruenberg. It's hard to generalize. I think that the 
capital required of the institution would be related to its 
business model and risk associated with it. It's generally a 
minimum of $2 million, but I think in practice it's more $10 to 
$20 million of capital is probably the more general experience. 
And I think in terms of a startup cost for just putting the 
application together, it probably runs close to a million 
dollars.
    Mr. Walker. In these meetings and discussions to work for--
on the cost and some of the startup fees, has the FDIC 
considered streamlining the business plan for a de novo bank 
applicant?
    Mr. Gruenberg. I think we'd like to make it as simple and 
fast as we can. You know, we have a balance to strike. That's 
really what--we want to facilitate the entry. At the same time 
we have to ensure that the institution that's going to be 
established is going to benefit from Federal deposit insurance, 
and so we have to be sure both that the process is as user 
friendly as we can but also ensure that the new institution 
established can meet the standard so it can be set up.
    Mr. Walker. Sure. And with the de novo banks, one of the 
major costs is hiring the regulatory attorney. The question is, 
as this is incredibly expensive, could this process be 
streamlined so that no regulatory attorney is necessary?
    Mr. Gruenberg. I don't know that I could say or advise a 
group not to have legal counsel. To the extent we can simplify 
and work with the institution to reduce that cost, that would 
be an objective.
    Mr. Walker. And what considerations or accommodations is 
extended to new charters in the area of regulatory oversight?
    Mr. Gruenberg. I think it's important in the initial 3 
years of the establishment of the institution. You can look at 
it both ways. You want to have careful oversight in the initial 
period as they get themselves started up. That's a period of 
risk for a new entity. And I would view we have more attentive 
supervision, and I would view that as actually supportive of 
the long-term success of the institution.
    Mr. Walker. And if I have time, maybe to expound on this 
last question. In North Carolina we have seen successful 
nontraditional creative bank structures like Square One Bank in 
Durham and then Live Oak Bank in Wilmington. Will 
nontraditional charter applicants still receive favorable 
conditions from the FDIC, assuming all of the boxes are 
checked, capital management, et cetera?
    Mr. Gruenberg. We'll work with any group that has an 
interest, Congressman.
    Mr. Walker. My concern, from what I'm hearing over in the 
hour or so of testimony today, is that--let me ask you this. 
How long have you been chairman of the FDIC?
    Mr. Gruenberg. I've been--became--I was confirmed as 
chairman in November of 2012.
    Mr. Walker. Okay. So we're coming up on 4 years. I hear a 
lot about, hey, these are our goals, this is something we're 
looking into, we're having meetings, we're checking into this, 
even some of the questions earlier about any kind of pushback 
on some of the whistleblowers. I hope that some of that is 
actually being processed and some of those goals are being met 
in the days ahead. I have a couple more. My time is expired, so 
I yield back to the chairman. Thank you.
    Mr. Meadows. I thank the gentleman. The chair recognizes 
the gentlewoman from Illinois, my good friend, Ms. Kelly.
    Ms. Kelly. Thank you, Mr. Chair. I would like to address 
two issues affecting the ability of the FDIC to keep the 
financial system safe.
    First I'd like to ask about the FDIC's orderly liquidation 
authority. The Dodd-Frank Act permits large and complex 
financial institutions that are failing to be resolved through 
a process known as ``orderly liquidation.'' Mr. Chairman, can 
you please explain what that is and how is it different than 
bankruptcy
    Mr. Gruenberg. Thank you, Congresswoman. Just to put it in 
context. Prior to the crisis, the FDIC's resolution 
authorities, or authorities to manage the failure of a 
financial institution, was limited just to the insured 
institution, the insured bank itself. What we saw during the 
crisis that it wasn't just the insured bank but actually the 
parent company and the consolidated financial company these 
very large institutions that got into difficulty as well in 
some cases nonbank financial companies, Lehman Brothers is 
perhaps the most striking example. And the FDIC had no 
authority to place either the consolidated complex financial 
institution or a nonbank financial company into a public 
receivership
    The orderly liquidation authority that you mention actually 
provides us those authorities. So it's really a threshold 
capability if we were going to try to actually manage an 
orderly failure of a systemic institution like this. It was a 
authority we didn't have in 2008 and it was--it is an authority 
we have today
    Ms. Kelly. If another financial crisis were to occur today, 
we hope not, could a failing financial institution be resolved 
through bankruptcy?
    Mr. Gruenberg. I believe we have the authority and 
capabilities today that we didn't have in 2008. I would just 
say, though, until we actually do it, and then I would be, you 
know, a little modest about making heroic assertions, but I do 
think we are in a very different place today than we were back 
in 2008.
    Ms. Kelly. Professor Johnson, do you agree with that? Is 
bankruptcy a feasible way to resolve a failing institution at 
this point?
    Mr. Johnson. Well, I want to make sure I understand the 
question, and the wording is really important. Bankruptcy 
generally, refers to the process where the FDIC is not 
involved, you go to the courts, and it's administered as a 
court run process. That's the standard, obviously, for 
nonfinancial companies.
    We have attempted that. Sometimes financial companies, for 
smaller relatively simple financial companies, yes, bankruptcy 
does work. For any kind of large complex financial institution, 
bankruptcy didn't work in the past, would not work today. It 
would be a catastrophe. You'd be back to Lehman Brothers. 
That's why we have the OLA, that's why we have the potential 
for the FDIC resolution process. I think that could be helpful 
under some circumstances, but I think that the large complex 
institutions are still a bit too big and too complex and that 
none of them have produced living wills, to the best of my 
knowledge, that really would assure us that they could be 
resolved in an FDIC run process without major negative effects 
on the financial system and on the economy.
    Ms. Kelly. Our chair of Financial Services has recently 
proposed legislation to rescind the FDIC's orderly liquidation 
authority.
    Professor Johnson, are you familiar with that?
    Mr. Johnson. Yes, I am
    Ms. Kelly. And what would be the effects?
    Mr. Johnson. I think it would be a disaster. I think that 
we experienced vivid and horrible detail in 2008 what happens 
when you say large financial institution is failing, let's have 
it sorted out by bankruptcy. Lehman went bankrupt. Let's be 
clear. Lehman went through the bankruptcy process, and I don't 
think any of us enjoyed the consequences, and I really don't 
think we want to go back there.
    Ms. Kelly. The chairman also has the CHOICE Act, which will 
require FDIC to calculate and weigh the costs and benefits of 
new regulations.
    Professor Johnson, again, in the financial services arena, 
how credible are quantitative cost benefit analysis?
    Mr. Johnson. Look, if you're talking about the full costs 
and benefits of financial regulation, including avoiding a 
massive recession with millions of jobs lost, the loss of at 
least 1 year's GDP, low growth for 8 years, if that's in the 
cost benefit analysis, then I'm in favor, but unfortunately, 
that's not what is put in even the legislative language or in 
the standards of protection of cost benefit analysis. They use 
a much narrower definition. That frankly is deeply, deeply 
misleading with regard to why we have financial regulation, how 
financial regulation works, and what happens when it fails
    Ms. Kelly. Thank you. Chairman, I won't you to ask you to 
comment on that, but can you tell us if the FDIC currently 
conduct any analysis of proposed regulations, benefits, and 
costs?
    Mr. Gruenberg. Actually we do, Congresswoman, and as you 
may know, we're in a process required by Federal statute called 
EGRPRA, which requires the Federal banking agencies every 10 
years to review all the rules and regulations that we've issued 
and determine whether any of them are no longer necessary or 
should be modified, and we're actually working on that process 
now.
    We're require to issue a report by the end of this year, 
and I think we'll be--we've already made some changes, and 
we'll be proposing additional changes in an effort to reduce 
regulatory burden and the costs associated with them.
    Ms. Kelly. From a nuts-and-bolts perspective, how would a 
quantitative cost benefit analysis affect the FDIC's ability to 
put forward new rules, especially in the midst of a financial 
crisis?
    Mr. Gruenberg. It would really determine on how--as 
Professor Johnson indicated, how it was run, and since I'm not 
really familiar with the legislative proposal, I'd rather not 
comment on that.
    Ms. Kelly. Yes, sir.
    Mr. Meadows. I believe the gentlewoman's time is expired, 
but--it didn't inspire 5 minutes and 48 seconds ago, but I 
think we are 48 seconds into expiration.
    Ms. Kelly. I was wondering. Okay. Thank you
    Mr. Meadows. The gentleman from Tennessee is recognized
    Mr. Duncan. Well, thank you very much, Mr. Chairman.
    Mr. Gruenberg, I have a letter from the Tennessee Bankers 
Association which says: Among the key factors that are both 
restricting new banks and driving consolidation are the ability 
to attract the very high levels of capital required to start a 
new bank, and for that matter, the high levels of capital 
required after imposition of the Dodd-Frank Act and the new 
Basel 3 requirements.
    And secondly, the regulatory burden imposed by the Dodd-
Frank act, which requires significant resources to be directed 
simply toward compliance issues. And I really heard that second 
matter for many bankers, but you talk about these high capital 
requirements.
    I heard Mr. Browning say that his people had $30 million 
they were planning to put into this bank, and I'm wondering, 
can you give me a rough guess? I've been provided by staff 
saying that there was only one new bank approved in 2013 and 
one in 2015.
    In the last 3 years, let's say, or 3 or 4 years, how much 
capital have these new banks that--two or three new banks that 
have been approved, how much capital have they come up with?
    Mr. Gruenberg. I couldn't tell you that offhand, 
Congressman. We'd be glad to check on that and come back to 
you, if that would be okay.
    Mr. Gruenberg. I think in regard to the application 
standard, the capital requirement today is the same capital 
requirement that's been in place really since 1992. So we do 
require higher capital for startups for that first 3-year 
period, and the reason for that is in the startup phase of an 
institution, one, it's going to be a growth period so they need 
the capital to support the growth; two, startups generally 
experience higher rates of loss as they get their business 
going; and three, they need the initial capital just to get the 
operation----
    Mr. Duncan. Well, how much capital do you require just 
generally?
    Mr. Gruenberg. It's an 8 percent minimum requirement.
    Mr. Duncan. Eight percent of what?
    Mr. Gruenberg. It's an 8 percent leverage capital 
requirement related to the total assets of the institution, and 
that's been the minimum requirement since 1992. And you can 
argue that it's too--some people argue that it's too high. 
Others have argued, because of the failure experience during 
the crisis, it should have been even higher.
    We think it's a reasonable basis to assure a significant 
probability of success as the institution gets started and 
tries to get through the initial startup period.
    Mr. Duncan. Well, you may need to take another look at it 
if nobody's applying for new banks anymore or they're not 
getting any approved.
    Let me ask another question real quick before my time goes 
out. I know when they passed the Dodd-Frank law, and I was here 
then, the people who supported it said they were doing it to 
get back at the big banks and Wall Street firms that led us 
into the recession. Yet 2 years ago, George Mason University 
released a report that said that since the financial crisis, 
U.S. banking assets and deposits have continued to consolidate 
in a handful of large banks. The five largest banks now hold 44 
percent of U.S. banking assets compared to 23-and-a-half 
percent in early 2000.
    And I'm wondering, Mr. Williams, have you seen that as 
the--are the total deposits continuing to just go to the big 
giants? And is it possible for a small bank--I've heard one 
banker say that it's not possible for a bank under a billion 
dollars in assets to even survive today.
    And have you seen more of your time and expenses being 
devoted to compliance costs as compared to say when you started 
in the banking business?
    Mr. Williams. Oh, my goodness, yes. When we started the 
bank, we actually didn't have a compliance officer, and we 
treated the consumer better than we do today. Now we have a 
number of compliance officers, we have an unbelievable 
regulatory burden, and essentially all of that cost has to be 
passed onto the consumer, it's passed onto the investors, but 
it's not a productive cost.
    The fundamental factor about compliance is complexity 
favors the large. I'm going to say that again because it's 
important. Complexity favors the large. The regulations from 
Dodd-Frank would fill several phone books. Just paying an 
attorney to read them is a significant expense. That's not a 
problem for Bank of America, but for Gulf Coast Bank, it is a 
big deal
    Mr. Duncan. What are your total assets? What size is your 
bank?
    Mr. Williams. A billion 450.
    Mr. Duncan. Is it possible for a small bank to survive 
today, or it's certainly becoming much harder, isn't it?
    Mr. Williams. It is, but it's more difficult. It's a 
challenge, and the more regulation you have, the larger you 
have to be to succeed. And we've raised the level of complexity 
to the point that it's very challenging for the very small 
banks, the 100- to 200- million to make money. And 
unfortunately, we don't go back and relook at the regulations.
    We say that we will, but we add 16,000 bricks to the wagon, 
we take away three, and as a banking industry, we're supposed 
to applaud that effort. The regulations never decrease. They 
only increase.
    Mr. Duncan. The more any industry becomes Federally 
regulated, the more regulated it becomes, the more it ends up 
in the hands of a few big giants. Thank you, Mr. Chairman
    Mr. Meadows. I thank the gentleman. The chair recognizes 
the gentleman from Massachusetts, Mr. Lynch for 5 minutes
    Mr. Lynch. Thank you, Mr. Chairman. Look, I actually love 
my community banks. Those are the banks that are making the 
loans, doing the mortgages, helping folks out in my community, 
and I actually have sponsored a regulatory relief bill for 
community banks because they are making the loans and out doing 
all those crazy stuff with derivatives. They've got adequate 
capital, and they are engaged as traditional banks.
    But I do want to look at the data here, because I don't 
think there's a conspiracy within the FDIC to basically, you 
know, manipulate the application process to stop banks from 
coming into existence, and that seems to be the suggestion here 
today.
    If you look at the data, in 1985 we had 18,000 banks. 
Today, we've got a little over 6,000. It's almost a two-thirds 
decline, but if you look at what happened, about 85 percent of 
those banks went out of business because they merged with other 
banks and they became bigger and bigger. As a matter of fact, 
as my colleague just pointed out, the 10 biggest banks back in 
1985, they had 19 percent of industry assets, but today, 
they're closing in on 60 percent. Those 10 banks control almost 
60 percent of industry assets.
    So we've got these huge whales out there that are basically 
gobbling up these other banks, and that's not healthy. But it 
is not the application process that is causing that. At the 
same time, we've got a very, very low interest rate 
environment. We've got very, very low margins here. Between--
you know, if you take deposits, and you know, you're getting 
very low interest on that and you have to lend out your money 
at a very low interest rate to be competitive, there's a very 
low margin of interest for banks, so it's tough to operate in 
this environment.
    So I don't think there's any secret plot out there. It's 
just a tough environment, and that's why, not surprisingly, de 
novo bank applications are down. They're--it's just a tough 
time to try to get into the business.
    And I do want to say that, you know, that idea of reducing 
the regulatory burden for community banks is a good one, and I 
know that Tom Hennig from--he's on the board, right, on your 
board, Mr. Chairman? He's got some good ideas. He actually sat 
down with a number of the members on both sides of the aisle 
here, and we think that we can come up with a good regulatory 
relief bill for community banks that are doing the right thing 
and just trying to help local small businesses, and that's the 
direction we should be going in.
    But let me ask Mr. Johnson, is there something I am missing 
here? Apart from what I laid out in terms of the consolidation 
going on, the small number of banks that are in existence today 
and the pressures, or do you really think there is this 
conspiracy out there or some type of nefarious plot to, you 
know, to stop banks from coming into existence?
    Mr. Johnson. Mr. Lynch, I don't think there's any kind of 
conspiracy. There's a longstanding process of consolidation in 
the industry, which was prompted by Congress, by the way, when 
it repealed the restrictions on interstate banking. So that's 
what happened, historically, and as banks were able to spread 
across States, you got the prospect of consolidation. The one 
big thing we haven't talked about today, perhaps, is economies 
of scale in banking due to technology.
    So the fact you have pretty demanding information 
technology requirements is another squeeze on the banks under 
$100 million, and this has been looked at carefully by the 
FDIC, among others. Economies of scale, so in terms of what 
your costs are relative to your assets, they come down quite 
quickly until you get down to about $100 million, in assets, 
and then it flattens out.
    So this is more pressure on that lower--the smaller banks, 
historically, they were more important than they are today. And 
from a de novo bank, it raises the amount of capital that you 
need up front because you've got to get to that economies of 
scale. That just reinforces what you're saying, Mr. Lynch.
    Mr. Lynch. Okay. So we have a list that the FDIC looks at 
when somebody applies to get a charter. The financial history 
and condition of the depository institution, adequacy of 
capital, future earnings prospects, general character of 
fitness of the management, risk presented by depository 
institutions to the deposit insurance fund, convenience, needs 
of the community, and whether its corporate powers are 
consistent with the purpose of the act.
    Do we think any of those are inappropriate that we might be 
able to reduce the number of factors, or do we think those are 
all sound?
    Mr. Gruenberg. I think our experience is those are pretty 
much basic considerations for a bank application.
    Mr. Lynch. Okay. My friends at the American Bank 
Association, any of those factors you think are overbearing 
or----
    Mr. Williams. The factors have been the same factors for a 
number of years. The dilemma is the application where at one 
time it was relatively easy to start a new bank. Now it is 
incredibly difficult, and I think we've use the pendulum 
example. It's gone too far. If you prevent a single bank 
failure, you'll also prevent an awful lot of success. You know, 
in my other life I'm a pilot, and I fly medical patients to get 
treatment. Well, over the 20 years I've done this, we've 
noticed a significant improvement in cancer treatment. It's 
because they've tried a lot of things that didn't work.
    Well, new banks will fail, but they present a trivial risk 
to the system in the fund. But if you stop new banks from 
failing, you also stop banks from succeeding, and a bank like 
mine doesn't exist, the community is weaker. And in a small 
town, if you don't have a hometown bank, you really don't have 
a vital economy.
    Mr. Lynch. Right, right, right. So you're looking to strike 
that balance.
    Mr. Williams. Yeah, and I think we've struck--we've gone 
too far the direction of no failure.
    Mr. Lynch. Okay. I've abused my time. I want to thank the 
gentleman for his courtesy.
    Mr. Meadows. I thank the gentleman. The chair recognizes 
the gentleman from Georgia, Mr. Carter for 5 minutes.
    Mr. Carter. Thank you, Mr. Chairman. I thank all of you for 
being here. I would certainly be remiss if I didn't comment on 
what--on one of the comments that was just made about the 
mergers that have taken place in the banking industry here in 
recent years. Let's keep in mind, a lot of those mergers 
weren't necessarily wanted. A lot of them were fire sales, a 
bank selling to bigger banks before they went into business.
    You know, full disclosure here. First of all, I've served 
on community bank boards. Full disclosure, I'm a small 
businessman. If it weren't for a community bank, I would not 
have been able to start my small business. I went into business 
November 21stof 1988, and it was because a small community bank 
was willing to extend me credit to open up my business, so I am 
a big community bank fan.
    And I will tell you, Mr. Williams, I couldn't agree with 
you more. When I was serving on the bank board previously to 
becoming a member of Congress 18 months ago, the only new hires 
we were making were compliance officers. That was all we could 
do was every time we'd make some money, we'd hire a new 
compliance officer. That was the only thing we could do.
    Mr. Gruenberg, I want to ask you: Do you know what bank 
deserts are? What are bank deserts? Can you just briefly tell 
me.
    Mr. Gruenberg. I'm not--I'm sorry I'm not familiar with the 
term.
    Mr. Carter. When I would refer--it was a term we kind of 
used in Georgia. You're aware of what's happened in Georgia?
    Mr. Gruenberg. Yes, sir.
    Mr. Carter. I believe Georgia leads the Nation in the 
number of banks that have closed since all this started. You 
know, and listen, I've listened to all of you during the day, 
and I know you all agree that community banks are important and 
they're necessary and we've got to have them, but bank deserts 
exist in both rural and urban areas, particularly in rural 
areas.
    In the State of Georgia we have 159 counties. We've got 48 
counties that don't have a locally chartered bank. That would 
be referred to as a bank desert. Nationwide, there are 654 bank 
deserts in rural communities and 351 in urban areas. What we 
don't have a locally chartered bank.
    Chairman Gruenberg, can you tell me, it sounds like what 
you have articulated here today that you're concerned, that the 
FDIC is concerned about these bank deserts and the need for 
community banks. But I'm still not clear, when we talk about 
the convenience and need to the community, what you mean by 
that?
    Mr. Gruenberg. Well, first of all, Congressman. You're 
correct. I think we're very concerned about it. Community banks 
play a critical role, but large institutions really cannot fail 
for exactly the point that you were making.
    Community banks do relationship lending, particularly with 
small business. That is very hands on, and that is not the kind 
of business large institutions are interested in. So they 
really fill a critical--let me just come to your--so your 
question is, if you could just----
    Mr. Carter. So you acknowledge that. Tell me what you're 
doing about it.
    Mr. Gruenberg. Oh, look, the--we want to do everything we 
can to----
    Mr. Carter. I know there's a different in want and in 
doing. Tell me what you're doing about it.
    Mr. Gruenberg. Well, so we can't change the interest rate 
environment. That's not under our authority. What we can try to 
do that's within our authority is at least to try to make the 
application process, the groups interested in forming a bank, 
as user friendly and reduce the cost, and to the extent we can, 
reduce the reliance on what can be expensive consultants for a 
group to put together a new financial institution. I think 
that's a contribution we can make, and we are looking at ways 
to do that.
    Mr. Carter. Okay. I've got very limited time, and I've got 
to--let me ask you, Chairman Gruenberg, how many bank charters 
were approved last year? How many new bank charters were 
approved last year?
    Mr. Gruenberg. I believe just one, Congressman.
    Mr. Carter. One?
    Mr. Gruenberg. Yes.
    Mr. Carter. Did you say one?
    Mr. Gruenberg. Yes. No, we--at the end of my testimony, we 
provide a chart listing all the new charters, and what we've 
really had is an unprecedented experience in the period since 
the financial crisis. We really have not seen--we haven't--
we've only a handful of new charters and only a handful of 
applications, because we have an economic environment that's 
extraordinarily challenging to start a new institution. I think 
that's the point that was made earlier.
    Mr. Carter. But how are you going to help? I mean, you 
know, we need to help these people.
    Mr. Gruenberg. I agree, but we can't----
    Mr. Carter. We've got 48 out of 159 counties in the State 
of Georgia that do not have a locally chartered bank. If small 
community banks go away, small business goes away.
    Mr. Gruenberg. I couldn't agree more, Congressman. We 
don't--community banks in particular----
    Mr. Carter. But what I'm hearing--I'm sorry, but what I'm 
hearing is that that is the problem. There's no transparency, 
that the process is difficult, it's hard it navigate.
    Mr. Gruenberg. If you look at our Web site, and our 
application and the requirements are there for everyone to see, 
which I think is the bottom line, and we do work actively with 
any groups, we are prepared, and we'll look at our procedures 
for deposit insurance applications and try to make them as user 
friendly as we can.
    Mr. Carter. Okay. Well, my time has expired. But I've got 
to tell you, small business is what made America.
    Mr. Gruenberg. I agree.
    Mr. Carter. And this is killing us. We have got to have it. 
And we need help. We need to make it easier.
    Now, we need to make sure these de novo banks, we need to 
make sure these community banks survive. If they don't survive, 
small business is not going to survive.
    Thank you, Mr. Chairman. I yield back.
    Chairman Chaffetz. I thank the gentleman.
    I'll now recognize the gentlewoman from New York, Mrs. 
Maloney, for 5 minutes.
    Mrs. Maloney. Thank you very much.
    And I would like to discuss the too big to fail and living 
wills for large financial institutions. Professor Johnson 
mentioned earlier in testimony, when we had the crisis that 
cost this Nation $15 to $18 trillion in lost homes, lost jobs, 
the worst--and it was caused by mismanagement, the first major 
financial crisis in our history that could have been prevented 
with better regulation and management of banks. And he alluded 
to the problem that we faced: We could either let it fail, like 
we did with Lehman, or we could bail it out, like we did with 
AIG. Neither response was a good one.
    So in Dodd-Frank, we came forward, saying that the largest 
financial institutions would be required to submit to 
regulators, including the FDIC, a resolution plan to be 
implemented in the case that they failed, and these plans were 
called the living wills. And if a bank consistently fails to 
provide credible plans, Dodd-Frank permits regulators to 
increase the bank's capital, liquidity, and leverage ratio 
requirements, or even to require the bank to divest certain 
assets or operations.
    So, Professor Johnson, could you please explain why Dodd-
Frank permits these penalties?
    Mr. Johnson. Yes, Congresswoman. The point, very simply, is 
exactly what you are referring to, which is we would like every 
firm in this country to be able to go bankrupt, potentially, 
without any kind of government intervention. I think that's a 
completely shared goal.
    And that is the case of the nonfinancial sector. It is not 
the case, as we learned vividly in 2008, for the financial 
sector.
    So the living wills are supposed to be a documentation 
provided to the regulators that demonstrates beyond a 
reasonable doubt, presumably, that these large financial firms 
can fail without the FDIC or anyone else being involved. So 
that's Title I of Dodd-Frank.
    Title II, ordered liquidation authority, is a backup in 
case the bankruptcy process doesn't work. But the FDIC and the 
Federal Reserve are supposed to be completely confident, by 
reviewing the living wills, that these banks can fail without 
any kind of government involvement or government financial 
assistance or temporary loan or anything. So that's, I think, a 
completely reasonable goal that should be shared across the 
political spectrum.
    Mrs. Maloney. Okay. These penalties are really sticks to 
encourage banks to file credible plans, but they are effective 
only if banks know regulators will use them. And since 2013, 
banks have had four chances to get this right, but regulators 
say that most of the plans still have shortcomings. This year, 
the FDIC found the plans of five banks are not credible, and 
these five banks must resubmit their plans by October 1.
    So, Chairman Gruenberg, if the living wills continue to be 
deficient in October, you have the authority to impose 
penalties at that time in order to protect the taxpayers. Is 
that right?
    Mr. Gruenberg. Yes, Congresswoman.
    Mrs. Maloney. And the plans being submitted this October, 
in some cases the fifth attempts by some of the largest banks 
to have credible plans, and the banks have shown that their 
resolution plans are due since the Dodd-Frank--they've known 
that they have to do this since 2010, yet five banks are still 
not getting it right. And no penalties have been imposed for 
their failures to produce credible resolution plans.
    So my question, Professor Johnson, how can the public and 
the banks be sure that the FDIC is serious about obtaining 
credible living wills if they are not, you know, putting these 
penalties forward? And then I'd also like the chairman to 
answer.
    So, Professor Johnson.
    Mr. Johnson. Yes, Congresswoman, I think it's a very big 
question. And, of course, it's not just the FDIC. It's the FDIC 
and the Board of Governors of the Federal Reserve System. They 
act together in this. And I'm afraid, for precisely the reason 
that you identified, because we haven't seen any of these 
remedial actions required, I'm afraid that public confidence in 
the FDIC and the Fed with regards to having viable living wills 
that really would keep the taxpayers off the hook and give us 
much broader financial system stability, I'm afraid confidence 
in that is low, and I would presume it will decline further.
    Mrs. Maloney. Chairman.
    Mr. Gruenberg. Yeah, Congresswoman. So, as you know, the 
eight most systemically important financial institutions 
submitted resolution plans, living wills, last year, and those 
plans were reviewed jointly by the FDIC and the Fed. And we've 
recently issued evaluations of those plans. And of the eight, 
the Federal Reserve and the FDIC jointly found five of them to 
be noncredible. That's the standard under the statute. And the 
statute provides that if we make that joint determination, we, 
together, have to issue a notice of deficiencies laying out the 
inadequacies of the plan, which we did. And all of that was 
made public in the course of releasing these evaluations.
    And as you indicated, we gave those institutions until 
October 1 to submit plans addressing those deficiencies, and 
we'll then be at the point of having to evaluate their 
responsiveness. And as you indicated, the law provides this 
authority, that if the plans don't address the deficiencies, we 
have the authority to impose additional prudential requirements 
relating to capital liquidity leverage, as well as constraints 
on activities. And that's a decision we're going to have to 
make once those submissions are made October 1.
    Mrs. Maloney. Mr. Chairman, may I do a follow-up question 
to his answer?
    You've had four times to have an evaluation. This is the 
fifth time, correct?
    Mr. Gruenberg. Yes.
    Mrs. Maloney. And the other four times that you've had an 
evaluation, you haven't come in with the penalties that Dodd-
Frank gives you. And so when my--you know, I was one of the 
participants in the conference committee on Dodd-Frank, as you 
know, and I support it. But how do we know--and I think people 
that are critical have a right to be somewhat critical--that 
it's going to be implemented if you're not implementing it? 
What's different this time? Are we going to be going to plan 6, 
7, 8, 9, 10?
    Mr. Gruenberg. As you may know, Congresswoman, it requires 
a joint determination.
    Mrs. Maloney. Yeah, joint, I know, realize.
    Mr. Gruenberg. And the FDIC in a previous round had failed 
the institutions, but we didn't reach joint agreement. I do 
think what's important is that in this round we did reach a 
joint agreement on five of the plans, and we're now in a 
position to see the institutions, presumably, address these 
deficiencies, or if not, then, you know, there are authorities 
under the law that would be available to us.
    Chairman Chaffetz. I thank the gentlewoman.
    Mrs. Maloney. Could I just ask him to submit to you what 
your outcome is, since we are distracted?
    Chairman Chaffetz. Sure. That would be good.
    Mrs. Maloney. This is a very important financial security, 
safety, and soundness issue, and I think to present your 
findings, since we are--they are not coming to us, they are 
coming to you. So I think to give us those--that information 
would be helpful.
    Mr. Gruenberg. Okay.
    Mrs. Maloney. Thank you.
    Mr. Gruenberg. Sure.
    Chairman Chaffetz. When will we have those?
    Mr. Gruenberg. Well, I'm assuming relating to the 
evaluations that were made?
    Mrs. Maloney. Yes.
    Mr. Gruenberg. And that's a matter of public record, and 
we'd be glad to provide that to the committee.
    Chairman Chaffetz. We now recognize the gentleman from 
Wisconsin, Mr. Grothman, for 5 minutes.
    Mr. Grothman. Thank you, Mr. Chairman.
    We've had several questions before, but when I talk to my 
smaller banks, going back to what Congresswoman Carter said, 
all they're doing is hiring compliance officers, which, 
obviously, is in some cases just is squeezing, you know, the 
amounts you've got to in deposits or whatever. In other cases, 
it's causing a lot of buyouts, because these smaller banks, 
they just can't afford to operate and they allow themselves to 
be bought out and that sort of thing.
    Have you kept track of the huge cost to the banking system 
of the additional compliance? Do you have a dollar figure you 
can put on that?
    Mr. Gruenberg. You know, we've actually--it's tough to 
quantify. Clearly, it's meaningful, particularly for the 4,000 
institutions in the United States with assets under $250 
million. I think for those institutions the cost of regulatory 
compliance is significant. As a technical matter, it's tough to 
quantify, but there's no doubt that it's meaningful.
    And, look, I think, from the standpoint of the bank 
regulators, we want to find ways to reduce regulatory burden 
and cost. We have been undertaking a review as required by the 
law. I think there are areas we can address, including 
simplifying capital, risk-based capital compliance, appraisal 
thresholds. These community banks have raised particular 
concerns about call report burden.
    I think there are a number of areas where we can and are 
planning to take steps that will actually reduce burden and 
cost, and I think, to the extent we can, we really should do 
that.
    Mr. Grothman. Thank you.
    Mr. Johnson. Congressman, I have some data. Can I give you 
the data on this? It's actually from Mr. Browning's testimony. 
This is drawing from the Richmond Fed's research and the Fed's 
research, and it's consistent with what the FDIC has also 
published.
    Now, I'm not trying to trivialize these expenses and costs 
at all, including for certain segments of the market, but if 
you take on average what Mr. Browning's testimony says, he's 
quoting these academics, the increase is relatively small and, 
more importantly, the size of the expense is just too small to 
have a big effect on bank profitability.
    Mr. Grothman. Like too many professors, you've got to get 
out of the university and spend more time talking to small 
bankers.
    Mr. Johnson. I'm sorry, this is the data, Congressman, this 
is the data, and I do spend a lot of time working with the 
private sector, with all due respect, in my university----
    Mr. Grothman. That's okay. We have 5 minutes, and I 
intended to talk to Chairman Gruenberg here.
    There's been a huge drop in the number of banks. Do you 
consider that a bad thing? I mean, you know, a lot of local 
people say, and maybe it's consistent with my experience, you 
get better service from the small local bank. Do you view that 
as a bad thing that we have such a huge drop in the number of 
banks we've had since a few years ago.
    Mr. Gruenberg. I don't view it as a good thing. No, I 
don't, Congressman.
    Mr. Grothman. Are you doing anything to make sure that 
these smaller banks are able to keep going? Do you view this as 
a fundamental problem. I realize it's not all yours. I mean, 
obviously, the people who voted for Dodd-Frank wanted to finish 
off a lot of these small banks too. But what are you doing to 
make sure that we keep these small banks going and they aren't 
forced to be bought out?
    Mr. Gruenberg. Well, I think it is part of our 
responsibility. A strong community banking sector has enormous 
value for the financial system and the economy.
    I think we want to find ways to reduce regulatory burden 
and costs. I think that's one way we can do it. We have tried 
to make our supervision of institutions risk-based and 
appropriate to the nature of the institution. So for a smaller, 
simpler bank, we're able to do exams less frequently and try to 
do it in a way that's really appropriate to the model of the 
institution.
    So both in terms of trying to reduce regulatory burden and 
doing our supervision in a way that's responsive to the 
business of the bank, those are the two things we can do.
    Mr. Grothman. Okay. Now, I get a concern, the Consumer 
Financial Protection Bureau, okay, that insofar as they get 
involved here, standards that were meant for bigger banks are 
kind of seeping down to the smaller banks. Is there anything 
you can do about that to make sure this doesn't happen anymore?
    Mr. Gruenberg. I think this so-called trickle-down issue is 
certainly one of the things we hear about from the bankers. And 
we work pretty hard to make clear that whatever obligations are 
imposed on the larger institutions are not expected of the 
smaller institutions, and we try to make that very clear in our 
supervisory program.
    Mr. Grothman. Okay. I can see, and Mr. Williams wants to 
speak down here, just one second. Would you, Mr. Williams?
    Mr. Williams. Sure. Yeah. I mean, will all respect, the 
unfortunate consequence of the trickle down is that the 
regulations like Basel that were intended for the most complex 
banks are pushed down to community banks like ours. And then 
you have the pernicious effect of best practices. It becomes a 
best practice, and then we have to do it.
    So it may not be a regulation, but then it becomes a best 
practice, and then it gets pushed down to a billion-dollar 
bank, then to a 500 billion, and then things that don't make 
economic sense and weren't intended for banks like ours become 
realities.
    Mr. Grothman. Okay. Chairman Gruenberg, could you do 
something in which you can have a hard rule to make sure this 
stuff doesn't become best practice or doesn't affect people?
    Mr. Gruenberg. I think we have a pretty clear policy. I 
mean, I'll glad to come back to you on that. But we have to try 
to make it very clear in all of our guidance that expectations 
for large institutions are not imposed on smaller institutions.
    Mr. Grothman. Well, my experience, talking to my bankers, 
is the same as Mr. Williams. I mean, your expectations aren't 
being realized. And there's a lot of fear out there on that.
    I guess I've used up my time, but thanks.
    I really hope--you know, maybe people are afraid to talk to 
you. But when I talk to my small banks, well, I think over time 
your people become friendlier. We, right now, there's a 
perception we hate small banks in this country. It's not 
entirely your fault. It's also the fault of the people who put 
together that Dodd-Frank bill.
    But I wish we'd get back to the days in which we have more 
small banks and they aren't being forced into being merged.
    Thanks much.
    Chairman Chaffetz. I thank the gentleman.
    We now recognize the gentleman from Alabama, Mr. Palmer, 
for 5 minutes.
    Mr. Palmer. Thank you, Mr. Chairman.
    I just want to point out, in regard to the impact of Dodd-
Frank on small banks, that Harvard found that small banks lost 
6 percent of their share of industry assets during the 
financial crisis, but since Dodd-Frank they've lost 12 percent. 
So I do think that validates that we're losing community banks 
as a result of Dodd-Frank. I think Frank Keating, the president 
of the American Bankers Association, said we're losing one bank 
a day, 7 days a week.
    So it is a problem, and particularly in context to the 
answer you gave Mr. Carter about how many new banks the FDIC 
approved last year. Did you say one?
    Mr. Gruenberg. Yes, sir.
    Mr. Palmer. That is problematic for a lot of us who 
represent rural counties, and I think practically all of us in 
Congress have some rural counties. I grew up in a rural 
community, and our community bank was extremely important to 
us.
    Let me ask you this. Why have you been able to approve--why 
have you been unable to approve the creation of more community 
banks? What's the holdup?
    Mr. Gruenberg. This has been a subject of discussion during 
the course of the hearing, but at least it's--as far as we can 
tell, we've had an extraordinarily, nearly unprecedented 
economic environment, really, in the aftermath of the financial 
crisis and recession. It's been the longest prolonged period of 
near-zero interest rates, really, in our country's history. And 
community banks make money by making loans and charging 
interest. So when you have a very low or zero interest rate 
environment, it becomes a significant obstacle to establishing 
a new institution.
    We think that's the core issue. As the economy can continue 
to progress and we see some rise in interest rates, we're 
expecting to see some increased activity. What is under our 
control is the process and procedures for submitting an 
application and working through an application process, and 
that may be the area where we can make a contribution to 
facilitating those institutions.
    Mr. Palmer. I don't disagree that the economic conditions 
are a part of the problem. But I think one of the reasons that 
our economy--for instance, our economy has grown 1.55 percent 
over the last 8 years. The 70-year average is 3 percent. You 
want to talk about something that's unprecedented.
    And I think a large part of that is due to the regulatory 
environment. We've seen record numbers of proposed rules. I 
think 2011 was somewhere north of 84,000. That record was 
broken in 2015. I think we'll probably break that record again 
this year. I think we're on pace for that, maybe. And as has 
been pointed out already, I think the biggest uptick in hiring 
in banks has been people to comply with regulations.
    And one of the things that we've got to do in this, I 
think, in trying to help our banks, but also to help the 
economy, is untangle them from all these regulations.
    Let me ask you this. If the FDIC is open to accepting new 
bank applications, where in the field is the breakdown 
occurring? And are your field examiners or other senior staff 
meeting with potential applicants expressing other concerns?
    Mr. Gruenberg. No. Look, I think our people are ready and 
available, and we certainly work closely with the groups that 
have an interest. I can only say that it's--I think the 
economic environment remains a challenging one, that's why 
we're actually seeing, at least thus far, only a handful of 
applications.
    Mr. Palmer. Well, one of the things that interests me in 
this. FDIC routinely uses financial institutional letters to 
announce changes for de novo banks. Stakeholders are unable to 
comment on these. And why does the FDIC choose to utilize a 
financial institutional letter and then not give stakeholders 
the opportunity to come in? You know, that might be a way to 
improve the application process.
    Mr. Gruenberg. You know, we have just put out our 
application--existing application for public comment to take 
comments from industry and participants on how we can improve 
it and simplify it. So we do seek public comment. Financial 
institution letters are a means we used to communicate with the 
industry and to provide guidance to them.
    Mr. Palmer. Don't you think more participation by the folks 
who are interested in starting a bank would be helpful?
    Mr. Browning, if I may, I'd like to ask you a question. Did 
you participate in any meetings prior to your filing with the 
FDIC, and would a meeting like that have been helpful?
    Mr. Browning. Well, thank you, Congressman. We engaged in a 
long series of conversations before our prefiling meeting. We 
held that prefiling meeting jointly with the San Francisco FDIC 
as well, as Washington, D.C., FDIC. From that prefiling meeting 
is when things got a little curious for us.
    Mr. Palmer. Did you receive any communications from the 
FDIC, you know, on why they would not accept your application?
    Mr. Browning. So we never actually formally filed an 
application, because we could never gain clarity on what was 
actually required to submit an application that would be deemed 
complete. We held a series of conversations for many, many 
months but could never gain that clarity.
    Mr. Palmer. So you had trouble getting any clear 
communications that would have helped you in your process?
    Mr. Browning. Yes, Congressman. And the statutory 
requirements that have been longstanding are themselves clear 
and, I believe, adequate. What is different today, as Mr. 
Williams explained, the pendulum has swung, is the 
interpretation and application of those requirements and the 
authenticity that they're applied within certain segments of 
the FDIC.
    Mr. Palmer. If I may, Mr. Chairman, just one more question.
    It's my understanding the FDIC does not track prefile 
meetings because these are optional. Is that correct?
    Mr. Gruenberg. Yeah, I believe that's----
    Mr. Palmer. And if it is, why aren't you documenting this?
    Mr. Gruenberg. I don't think we have a problem with doing 
them. They are voluntarily. Some applicants utilize them. We 
encourage them. But since it's an informal prefiling process, 
it's not something we would track as part of the application 
process. We certainly can do that, and as I indicated, at the 
outset, we're undertaking a review of our procedures relating 
to deposit insurance applications. So that's certainly 
something we can consider.
    Mr. Palmer. I hope you will. I hope you will implement 
that.
    Thank you, Mr. Chairman. I yield back.
    Chairman Chaffetz. I thank the gentleman.
    We now recognize the gentleman from South Carolina, Mr. 
Mulvaney.
    Mr. Mulvaney. Staying right there, Mr. Gruenberg, on the 
prefiling of meetings, can you do that on your own initiative 
or would it help if we made the formal request?
    Mr. Gruenberg. We can certainly do that on your own 
initiative, Congressman.
    Mr. Mulvaney. Got you.
    Here's why I think you are hearing so many of us pound on 
this lack of new entry into the market.
    And, Mr. Johnson, it's good to see you, again.
    Mr. Johnson and I have talked several times over in the 
House Financial Services Committee. While he and I don't agree 
on many things, what we probably will agree on, that if you see 
an industry that is seeing increasing in profits--and certainly 
one of the criticisms of the financial services industry is 
they are actually making money--typically, Dr. Johnson, what we 
would see is a flow of new entries. New capital will go into 
someplace that's actually making money. So there's a disconnect 
here.
    And I hear what you're saying about the environment being 
tough for new entrants because of low interest rates, but, 
clearly, somebody is making money. And I don't have a problem 
with that.
    Yes, Mr. Johnson, I will, I promise, I'm last, so they will 
probably give me a little bit more time. But I want to stay on 
this a second.
    Let me ask you. Let's drill down a little bit more. You 
don't track your prefile meetings, how many applications did 
you actually formally begin, say, last year? You said you 
approved one. How many actually formally started the process?
    Mr. Gruenberg. I was corrected by our staff. For what it's 
worth, there were two applications approved last year.
    Mr. Mulvaney. How many actually got started?
    Mr. Gruenberg. And two--yeah, two applications were 
received.
    Mr. Mulvaney. So you approved two of two? That's 
fascinating.
    Mr. Gruenberg. I'm sorry. One of those was received in 
2014.
    Mr. Mulvaney. Okay. I'm sorry, how long?
    Mr. Gruenberg. No, one of the applications was received in 
2014.
    Mr. Mulvaney. How long is it supposed to take to get your 
bank approved?
    Mr. Gruenberg. As I indicated, the average period from 2000 
till today for approving applications tends to be 4 to 6 
months, but it can take longer in individual cases.
    Mr. Mulvaney. Out of the two that you approved last year, 
how long did each one of those take?
    Mr. Gruenberg. Apparently, within that timeframe, 
Congressman.
    Mr. Mulvaney. Maybe I misunderstood. I thought I heard--
again, we're talking over each other a little bit--that one of 
the applications that was approved this year was received in 
2014. Is that not right?
    Mr. Gruenberg. Let us come back to be clear. But I believe 
it was received in 2014 and approved in 2015.
    Mr. Mulvaney. Okay.
    Mr. Gruenberg. But let us come back to you to get it right.
    Mr. Mulvaney. Let me ask this. Mr. Browning, you said that 
there are some statutory requirements on how long is this 
supposed to take? Did I hear that correctly?
    Mr. Browning. Well, there is clear criteria on how to 
evaluate--on what basis to evaluate an application, and the 
FDIC's internal guidelines suggest that an application review 
process should be expeditious. Its track record, as the 
chairman has stated, is typically in the 3- to 6-month range. 
But it says only in unique or extenuating circumstances should 
it take longer and certainly no more than a year.
    Mr. Mulvaney. I won't ask the question about whether or not 
everybody believes that new entry into the market is healthy, 
because I think other folks have asked you that question. And 
everybody, universally, has said that it is, whether you are 
running the Deposit Insurance Corporation or you're an academic 
or actually in the business, that new entrance is helpful.
    Mr. Gruenberg, you said you were doing some things to help 
encourage that, and said you were trying to reduce--you said 
regulatory burden can act as a barrier to entry.
    By the way, off the top of your head, do you know of any 
portions of Dodd-Frank that, perhaps, shouldn't be applied to 
community banks?
    Mr. Gruenberg. We--I don't know about--I don't know that I 
have a comment on that, Congressman, off the top.
    Mr. Mulvaney. Well, if you wouldn't, who would? I mean, I 
think we all admit that Dodd-Frank, even those of us who oppose 
it--I wasn't here at the time--was designed to supposedly 
prevent another meltdown with the large financial institutions. 
It was not intended to deal with, necessarily, the community 
banks that weren't at all involved during the financial 
meltdown. In fact, some places were actually profitable during 
that time.
    You've heard testimony that said there is a trickle-down 
theory. So my question to you is, have you seen the trickle-
down theory, and can you name any portions of Dodd-Frank that 
were never intended for, perhaps, smaller financial 
institutions but that have ultimately impacted them?
    Mr. Gruenberg. One area we've tried to be clear about is 
that, you know, Dodd-Frank does require stress tests for 
institutions over $10 billion.
    Mr. Mulvaney. Right.
    Mr. Gruenberg. And I think there was a concern that relates 
to this trickle-down issue that we were effectively subjecting 
the smaller institutions to the stress test requirements.
    Mr. Mulvaney. What about the Volcker rule, do you think 
that should apply to small banks?
    Mr. Gruenberg. The Volcker rule as finally approved, 
actually, for small--if a small bank does not engage in the 
activities relating to the Volcker rule, there's no compliance.
    Mr. Mulvaney. You're absolutely right, except they have a 
regulatory burden to prove that they don't participate, don't 
they?
    Mr. Gruenberg. Only if--they simply have to have a policy 
statement stating that. And even if they do engage in it, all 
that's required of them, as I understand it, is a policy 
statement as to how they engage the activity.
    Mr. Mulvaney. You mentioned in response, I think, to Mr. 
Carter that you had taken steps to reduce the regulatory burden 
on small banks. By the way, did I hear you correctly say it 
costs about a million dollars to do this?
    Mr. Gruenberg. To start a new institution?
    Mr. Mulvaney. Yes, sir.
    Mr. Gruenberg. I think that's the average cost, yes.
    Mr. Mulvaney. And I also heard you say that the minimum 
amounts you would like to see in terms of capital are someplace 
about 2 million, but that the average is someplace around $10 
to $20.
    Mr. Gruenberg. I think--yes, sir.
    Mr. Mulvaney. Does that ratio bother you at all, that it 
might take up to 50 percent of my working capital to get 
approved for my bank?
    Mr. Gruenberg. To the extent we can lower the cost in 
regard to the million dollars that you are referring to?
    Mr. Mulvaney. Correct.
    Mr. Gruenberg. To the extent we can lower that, and a lot 
of that, as you know, is accounted for by legal representation 
or utilization of consultants, to the extent we can help reduce 
that, that's----
    Mr. Mulvaney. Can you give us two or three examples of the 
ways you've reduced the regulatory burden or the costs in the 
last year? If we are trying to encourage new entries, can you 
give us two or three real examples of what the FDIC is doing to 
reduce those barriers to entry?
    Mr. Gruenberg. Well, we had considerable concern by smaller 
institutions in regard to so-called S Chapter banks and how 
they dividend down, and we were able to adopt a policy to make 
it clear that they can dividend down to their shareholders, 
which was an important--and that's a large number of community 
banks.
    Mr. Mulvaney. Yeah, but that only--okay.
    Mr. Gruenberg. It's several thousands, I think, are----
    Mr. Mulvaney. But it hasn't worked, right? I mean, you've 
only got two applications and you got two approvals, it hasn't 
encouraged new entry into the market.
    Mr. Gruenberg. No, I thought you were speaking generally to 
regulatory burden on community banks.
    Mr. Mulvaney. I'm asking what you meant by encourage new 
entry.
    Mr. Gruenberg. Yeah, I think the--well, probably the most 
significant thing we've done during the crisis, because de novo 
banks were failing at twice the rate of the industry as a 
whole, we have a--had a 3-year monitoring period for new 
institutions. During the crisis we extended that to 7 years in 
an effort to reduce the number of failures.
    Now that we're past the crisis, earlier this year we were 
able to eliminate that extension and went back to the 3-year 
monitoring period, which is something, I think, the industry 
thought was worth doing.
    Mr. Mulvaney. I could go on, but I'm already way over my 
time. You've been very gracious, Mr. Chairman.
    Chairman Chaffetz. The gentleman is free to ask another set 
of questions in another round.
    But let me go, first, to Mrs. Maloney of New York.
    Mrs. Maloney. Thank you, Mr. Chairman. This is really a 
very interesting hearing, and I thank all the panelists.
    Chairman Cummings, regrettably, had to go to another 
meeting, he has a conflict, but he asked me to get some 
clarification on Mr. Browning's testimony.
    In your testimony, and you talk about your startup on your 
LinkedIn page, and you state that you, and I quote, quote, 
``led strategy and execution of a de novo bank charter 
application,'' end quote.
    You also say on your LinkedIn page that you, and I quote, 
``halted filing, due to the Volcker rule constraints, at a 
parent company.''
    I would first like to ask our resident professor, Professor 
Johnson, if you would give us a good definition of the Volcker 
rule. It is thrown around in every discussion. Give us a good 
definition of the Volcker rule.
    Mr. Johnson. Well, the Volcker rule, which is complex in 
its details, is designed to reduce or eliminate--substantially 
reduce proprietary trading by financial institutions, by banks. 
So this should be--you shouldn't--you're not allowed, if you 
are a bank, to engage in more than a small amount of trading in 
securities for your own--using your own capital for your own 
account. So it's separation of client activity from proprietary 
trading.
    Mrs. Maloney. Thank you.
    So, Mr. Browning, my question is, you said on your, as I 
said, your LinkedIn page, that you halted it due to the Volcker 
rule constraints. Exactly what were the Volcker rule 
constraints that prevented you from moving forward with Sterne 
Agee's FDIC application? It's a question to Mr. Browning.
    Mr. Browning. Yes, thank you, Congresswoman. This simply, 
without getting into the extremely complex mechanics of the 
Volcker rule, which I'm happy to follow up with you on, this 
came down to a business tradeoff. The business, Sterne Agee, 
had been around for a century. It had multiple avenues to 
pursue. It was pursuing actively a bank charter, and that was 
its primary focus, where it was going to dedicate substantial 
capital.
    As we worked through the process, we felt we would never 
actually achieve the desired end result of gaining a deposit 
insurance and a bank charter. And, therefore, Sterne Agee made 
a business decision to halt that process, go into another line 
of business that involved the Volcker rule, and as a result of 
that, we could not pursue the bank charter any further. It 
basically foreclosed that option for Sterne Agee.
    But it was a business decision predicated on the fact of 
our experience in the application process and the lack of 
clarity, what we deemed an inauthentic application of those 
statutory criteria, that we would never be successful. So 
decisions at the parent company were made to pursue another 
course that took them down a path engaging in Volcker rule 
activities.
    Mrs. Maloney. Well, Mr. Cummings is very interested in 
this, and he would like to know, specifically, even though it's 
complicated, what prevented you, so you said, your application? 
How did the Volcker rule prevent you from going forward?
    And also, he wanted to note that you did not provide the 
committee with any documents. The FDIC has produced documents 
in response to the committee's request. And one of those 
documents, dated May 27, 2014, provides information regarding 
the Sterne Agee. This document states that the bank would be 
owned by Sterne Agee, a brokerage firm, and would, quote, ``be 
funded via sweep accounts from consumer brokerage accounts,'' 
end quote.
    So, Mr. Browning, is it correct that your proposed ILC 
would have been funded primarily in this manner?
    Mr. Browning. So that is very different from the Volcker 
rule implications. But, Congresswoman, yes, you're correct. 
Using sweep deposits, these are deposits from Sterne Agee, they 
have retail one-on-one client relationships with these 
brokerage account holders, those deposits are swept into other 
banks today. Having that primary account relationship, we were 
to take a small portion of those deposits to sweep them into 
this bank.
    All of those deposits are FDIC insured in other banks 
today. There were roughly four to five times the volume of 
deposits in that program that this bank needed, so we were 
planning to take a small portion of those deposits.
    Mrs. Maloney. Okay.
    Professor--my final question--Professor Johnson, what are 
bank sweeps, and are they as stable a source of capital for a 
bank or other sources?
    And if I may, because this is a deeply debated issue before 
Congress, if you could get back to us in writing, even though 
it's complicated and intricate, exactly how the Volcker rule 
would have prevented you.
    Mrs. Maloney. But the last question is to Mr. Johnson. Yes.
    Mr. Johnson. So Mr. Browning can correct me, but my 
understanding of this in general would be these are funds that 
clients have made available for trading, buying, and selling 
securities. And you, obviously, have some cash available, 
because you've sold something or because you're planning to buy 
something and you haven't yet bought it. I believe what they're 
going--what they'll be doing is sweeping that out of an 
account, which perhaps was held at another bank--I'm not sure 
about that--and sweeping it into their bank.
    And the bottom line, Mrs. Maloney, would be this is less 
stable as a source of funding than a typical retail deposit, 
which is not subject to daily decisions that people are making. 
Should I buy securities? Should I sell securities? Those are 
big decisions relative to the underlying amount of funding. We 
don't do that, obviously, in our day-to-day retail financial 
transactions.
    Mrs. Maloney. Thank you.
    Does Mr. Browning want to respond?
    Mr. Browning. We could debate the technical aspects of the 
program we planned to use, which we've laid out in great detail 
to the FDIC, to show that these were actually dedicated deposit 
funds not used for other purposes. They were put into savings 
account deposit programs to be FDIC insured, and that there was 
a structure in which these were the last funds to ever be 
touched. And so it would be mathematically proven to actually 
be more stable than retail checking accounts.
    Chairman Chaffetz. I thank the gentlelady.
    Mr. Johnson, did you ever review, prior to this hearing, 
the information in Mr. Browning's application?
    Mr. Johnson. I did have a chance to look at his testimony 
that was available on the table, and I am quite a quick reader, 
Mr. Chairman, yes.
    Chairman Chaffetz. Yeah, I think it's pretty cavalier for 
you to pass judgment on the entire process by which Mr. 
Browning was trying to interact with the FDIC and for you to 
pass judgment on that. But that's my judgment.
    Mr. Johnson. I'm sorry, Mr. Chairman, I didn't speak to 
that at all, in anything----
    Chairman Chaffetz. I think you did. I think the record will 
reflect it. And I think you were very cavalier about that.
    We now recognize Mr. Meadows for 5 minutes.
    Mr. Meadows. Mr. Johnson, we will have a follow-up 
discussion about the security of sweep accounts versus a 
traditional deposit relationship at some particular future 
time. But I can assure you, being very familiar, I don't know 
that your statement is accurate 100 percent of the time. Would 
you agree with that?
    Mr. Johnson. Well, I look forward to discussing these 
details with you further, Mr. Meadows.
    Mr. Meadows. But would your statement be accurate 100 
percent of the time that sweep accounts are not as secure as 
traditional banking relationship deposit accounts, 100 percent 
of the time, your sworn testimony?
    I would challenge you, I would be careful, because it's 
sworn testimony. Is it 100 percent of the time? Is that an 
accurate statement?
    Mr. Johnson. Look, I understand it's sworn testimony. The 
chairman has already said something about my sworn testimony 
that I believe is not accurate, Mr. Meadows.
    Mr. Meadows. Mr. Johnson, yes or no?
    Chairman Chaffetz. You were asked a direct question. We 
expect a direct answer.
    Mr. Meadows. A hundred percent of the time?
    Mr. Johnson. I feel that you are trying to trap me here, 
Mr. Meadows.
    Mr. Meadows. No, I'm trying to get----
    Mr. Johnson. I think it's unfair, and I think it's 
unreasonable, Mr. Chairman, for you and for Mr. Meadows to put 
me in this position.
    Mr. Meadows. Well, it is unreasonable for you to challenge 
the integrity of someone sitting to your right when your 
statement may not be accurate 100 percent of the time.
    Mr. Johnson. Mr. Meadows, I'm not challenging Mr. 
Browning's integrity, and there's nothing in the record today 
that will demonstrate to any fair reader that I have challenged 
his integrity.
    Mr. Meadows. Well, I would invite you to come to my office, 
and we'll have a long economic and perhaps financial discussion 
over coffee that I'll be glad to provide, Mr. Johnson.
    Mr. Johnson. Mr. Meadows, I will be delighted to have that 
conversation.
    Mr. Meadows. All right. Thank you.
    Mr. Gruenberg, let me come back to you, because there's 
three different areas that we need to clear up.
    One is, you have laid out in very, what I would classify as 
ambiguous terms, how you're going to make sure that new bank 
applications improve. You've talked in generality, and in the 
sales environment we would say that's like vaporwear.
    What I need from you is a business plan. If you were a bank 
applying for an application for a new charter, based on the 
ambiguous nature of your plan to improve it, it would be 
denied.
    And so I guess what I need are specific timeframes. What 
can a consumer, wanting to establish a new charter, expect if 
they have a prediscussion? Because there are comments that you 
have a don't-call-us-we-will-call-you mentality on those pre-
application meetings as it relates--which provides a chilling 
effect in terms of new application.
    And I guess the results speak for themselves. If we only 
had two applications last year, there is a problem somewhere. 
Wouldn't you agree with that.
    Mr. Gruenberg. I agree with that.
    Mr. Meadows. Okay. So here's what I need are specific 
deadliness, that if someone contacts you--and I don't want to 
go over historical, because it was much faster prior to 2007 
than it is from 2010 to current timeframes--what kind of 
timeframe can a new charter application expect to get a real 
response from you? And what are those benchmarks? And so I'd 
like a business plan. And can you get that to this committee in 
the next 120 days?
    Mr. Gruenberg. I think we probably can.
    Mr. Meadows. Thank you.
    All right. Further, on all the applications that are either 
pending or have been denied, do you know what the total market 
cap that we're looking at? I mean, what would be the capital 
requirement for all of these? Because Mr. Browning said his was 
$30 million that he was going to provide, and you said that you 
can approve most that are $2 to $3 million. What are we looking 
at?
    Mr. Gruenberg. I don't think I can tell you off the top of 
my head.
    Mr. Meadows. Well, we need to find that, and so that's why 
I'm asking whether it's in the pre or the official filing. We 
need to know. Because when we're talking about saving the 
American taxpayer's dollar, you could potentially approve 100 
percent of these, and we're talking about a gnat on an 
elephant's back in terms of other regulatory compliance issues 
in the banking industry. Wouldn't you agree? That these are 
small potential risk to the American taxpayer.
    Mr. Gruenberg. Let us see if we can get back to you on 
that.
    Mr. Meadows. Would you agree that it's small relative to 
the entire financial institutions?
    But you can get me a market cap on what we're looking at, 
the potential?
    Mr. Gruenberg. I think that's what we'll try to do.
    Mr. Meadows. All right. In that same 120-day timeframe?
    Mr. Gruenberg. We'll try to do that.
    Mr. Meadows. Okay. Then the last thing that I would ask 
from you, Mr. Mulvaney was asking about potential Dodd-Frank 
compliance issues that should not apply to small or medium-
sized banks, and you didn't want to give an official response 
to that. Here's what I would ask you to do, is officially 
respond to this committee in writing what Dodd-Frank compliance 
issue should not come all the way down to the smaller midsize 
or community banks and what should Congress look at to, 
perhaps, amend the Dodd-Frank regulations, because it is, 
perhaps, too onerous on those smaller institutions that do not 
provide the same risk that a larger institution perhaps. Can 
you provide three of those within the next 30 days?
    Mr. Gruenberg. Well, I mean, let us go back and take a look 
at it and we'll come back to you in 30 days with some thoughts 
on it, if that would be okay.
    Mr. Meadows. All right.
    I'll yield back. I thank you.
    Chairman Chaffetz. Will the gentleman yield to the 
gentlelady from New York for a moment, please?
    Mr. Meadows. Sure.
    Mrs. Maloney. I would also like to add to the gentleman's 
question Basel III. Now, the complaints that I get from the 
community banks are the requirements of Basel III, which is 
international banking. And they say to me, and it makes all the 
sense to me in the world, we're not involved in international 
banking. We are involved in helping a community. We're not over 
in Basel, Switzerland, or any other place.
    And why do all--and they complain, believe it or not, Mr. 
Meadows, more in my district, and I have a lot of community 
banks that saved the city during the financial crisis. They 
were the only ones providing loans. But in any event, their 
major concern to me is the Basel III requirements that is just 
killing them.
    And I don't see--maybe this is too simplistic--why you 
can't just say, if you're not involved in international 
banking, then you don't have to do Basel III requirements. I 
think that's a simple way to look at it, but then I'm always 
told, oh, you can't do that.
    But I am very sympathetic to it. When somebody needs a 
college loan, when they need a house loan, when they need a 
small business loan, as Mr. Williams talks about, it's usually 
100 percent the community banks that are providing it. And so 
I'm very sympathetic to the statements of Mr. Mulvaney and Mr. 
Meadows on this.
    But I would like to add that too, if Mr. Meadows would 
allow that, to why--what are the things that you think are in 
Basel III that are needed for safety and soundness for 
community banks? It doesn't make any sense to me at all.
    Mr. Gruenberg. And I think it's fair to say as part of this 
GPRA review process, the review of the regulatory--regulations 
issue, one OF the issues that the agencies, the three banking 
agencies are focused on is simplifying risk-based capital, 
which would be Basel III, for community banks. To do that it 
would require a joint rulemaking, so the three of us would need 
to get together on that. And we are working on that, and I'm 
hopeful we can come up with a joint proposal in regard to that.
    Chairman Chaffetz. Thank you.
    Mr. Gruenberg. A joint proposal.
    Chairman Chaffetz. We now recognize the gentleman from 
South Carolina.
    Mrs. Maloney. He's got his hand up, the community bank.
    Chairman Chaffetz. Hold up. Let me allow Mr. Williams to 
add to that, and then we will allow Mr. Mulvaney of South 
Carolina.
    Mr. Williams. Just to further your comments on Basel III. I 
was in Europe this spring. The Europeans are shocked that we 
apply Basel III to community banks. They said it should really 
only apply to the 12 or so banks in America.
    Chairman Chaffetz. I thank the gentleman.
    We now recognize the gentleman from South Carolina, Mr. 
Mulvaney.
    Mr. Mulvaney. To follow up, and I appreciate the 
opportunity, Mr. Chairman.
    When we left off, Mr. Gruenberg, we were talking about two 
or three things that you all have done to try and encourage new 
entry. And I don't think we finished that conversation. So can 
you name two or three things you've done in the last, I don't 
know, 2 or 3 years to try and encourage more entry into this 
space?
    Mr. Gruenberg. As I mentioned, we've reduced the monitoring 
period from 7 to 3 years for de novos. We are holding meetings 
in regions around the country with interested industry and 
organizing groups to inform them about the application process.
    We have--are going to be releasing before the end of this 
year, and I owe the chairman a report on the date on this, a 
handbook laying out, essentially a guidebook for applicants 
interested in accessing deposit insurance. We've issued 
guidance in a couple of instances trying to clarify the 
application process itself.
    Mr. Mulvaney. Okay.
    Mr. Gruenberg. And we've worked with the State and Federal 
regulators responsible for chartering institutions, because 
deposit insurance has to go with the charter as well, so we 
need to work together if we are going to make the process----
    Mr. Mulvaney. I appreciate that and don't want to, and 
won't, diminish that. But looking at the appendix from your 
testimony, it seems like maybe we could be doing more, because 
it doesn't seem to be working, that the numbers seem to be 
there have been 49 total applications received since 2009 and 
only 3 have been approved. I'm not real good on math, but 
that's really close to, like, 6 percent approval.
    What does return mean in your world, Mr. Gruenberg, on an 
application? If an application is returned, what does that--
that's not an approval, right?
    Mr. Gruenberg. No. It's generally when an applicant is 
unable to satisfy all the application requirements.
    Mr. Mulvaney. And then a withdrawal would be similar to a 
return or----
    Mr. Gruenberg. When the applicant itself decides to--
chooses to withdraw the application.
    Mr. Mulvaney. All right. So return is the closest thing to 
a rejection that you guys do then, I guess, is what it comes 
down to?
    Mr. Gruenberg. In order to make a decision on an----
    Mr. Mulvaney. It's not that big a deal, because you haven't 
done one since 2010, so I'm just trying to get the nomenclature 
right.
    Mr. Gruenberg. And this is, as you can see from the chart, 
from the appendix, both of these things occurred in the early 
part of the decade as well.
    Mr. Mulvaney. Correct. Okay. And there are two pending, 
apparently?
    Chairman Chaffetz. Will the gentleman yield?
    Mr. Mulvaney. Absolutely. To the chairman, I've learned 
that that's usually a good practice.
    Chairman Chaffetz. How many have you rejected?
    Mr. Gruenberg. Well, I think--the way----
    Mr. Mulvaney. If return equals rejection----
    Chairman Chaffetz. No, I don't think it does.
    Mr. Gruenberg. I think with--the general experience is that 
when an application is going to be rejected, we give the 
applicant an opportunity to withdraw the application, because 
as a general matter they prefer that than a formal rejection, 
which could have some consequence for them. And we try to give 
them that accommodation.
    Chairman Chaffetz. But a rejection would have a consequence 
for you too.
    Mr. Gruenberg. Yeah. And, look, Congressman, I think, as we 
talked about, in terms of reviewing the process here, I take 
your point on that. I think that's something we could look at.
    Mr. Mulvaney. I thank the chairman.
    Dr. Johnson, thank you. It's good to see you again. Let's 
talk about barriers to entry and talk about new capital 
formation.
    It's healthy, right? You and I would agree? You and I 
typically disagree on a lot of thing, but we'd agree new 
entrants into this space is a good thing. I think you said that 
earlier. So, in your mind, what could we be doing? If you and I 
both agree on an end goal, we might disagree on how to get 
there, but what are your ideas on how to encourage new entrants 
into this market?
    Mr. Johnson. So I think we completely agree on this point, 
Mr. Mulvaney. Just to be clear, though, on the data, you made a 
very important point at the beginning. You said it's a highly 
profitable industry, we should expect a lot of entry. That's 
totally correct. But as we were discussing earlier, the 
profitability of de novo banks is rather low as an unfortunate, 
you could say, side effect of the very low Federal funds rates 
and the low 10-year Treasury rate.
    Mr. Mulvaney. Yes.
    Mr. Johnson. Now, as interest rates go up, that will help.
    Mr. Mulvaney. But let me cut you off there, and I'm sorry 
to do that, but I get to do that, because I'm on this other 
side of the aisle, right? I apologize.
    But you said something else, which is regarding economies 
of scale. One of the reasons that the small banks can't be as 
profitable is because they don't have economies of scale. You 
mentioned specifically technology. Would you agree with me, 
sir, that there's an economy of scale when it comes to 
compliance and that it's easier for the big banks to meet the 
compliance regulations and requirements than it is a small 
bank?
    Mr. Johnson. Absolutely. And I think a lot of the 
discussion here and a lot of the suggestions you're making to 
the FDIC are completely appropriate. I think we should be 
asking, are there compliance requirements that are unfair, 
unreasonable, out of proportion to the risks that are posed? I 
think that's an entirely reasonable question.
    The only point I was trying to make was there are other 
factors which according to the research are very important in 
the current situation, so don't be too hard on them given the 
interest rate environment. But as interest rates come back up, 
we should, to your point, Mr. Mulvaney, exactly expect more 
entry into the sector.
    And to also support you, Mr. Mulvaney, if we look at 
Fintech, so other kinds of financial services where it's not 
generally funded by an insured bank, right, that's a typical 
characteristic of fintech, we see a lot of entry into that 
sector, we see a lot of risk capital, we see a lot of people 
wanting to provide loans to--particularly away from mortgages 
to consumers in different ways. So that's----
    Mr. Mulvaney. Capital is trying to find a way into this 
space.
    Mr. Johnson. Exactly. Exactly. So there are impediments in 
this sector, no doubt. The impediments are about the structure 
of banking. The impediments are about the nature of the 
economies of scale and potentially also the compliance. 
Fintech, you know, is an end run around some compliance. Maybe 
that's appropriate. Maybe we should have some concerns about 
it, separate discussion. But I think we're agreeing, Mr. 
Mulvaney, more than anything else here.
    Mr. Mulvaney. And I think it's rare, so I'm enjoying it 
while it's lasting.
    I guess my primary point is this, is that if we boil it 
down to just three barriers to entry, and we know that's not 
the case, but if the three that we've talked about today were 
the low interest rate environment, the high regulatory burden, 
and the technology component, there's really only one that 
anybody at that table can do anything about, and it's Mr. 
Gruenberg. And he could help lower the regulatory burden.
    We can't--technology is market driven. And the Fed has more 
to do--as much as I'd like to think we have more influence over 
them than do, we don't. So we don't have much influence over 
the interest rate environment, but we do have influence over 
the regulatory burden to new entry into this marketplace. And 
I'm hopeful that maybe as a result of this hearing we can try 
and do something about that.
    I thank the chairman for the opportunity.
    Chairman Chaffetz. I thank the gentleman.
    As we conclude here, you could see people filing in for the 
next hearing, which starts in 7 minutes.
    This has been very productive. I appreciate all the 
participants.
    Mr. Gruenberg, for both the ILCs and the community banks, 
can we by the end of the month, can you give us a good listing 
of what you are going to be working on to provide for this 
committee? Is that fair?
    Mr. Gruenberg. Yes, sir, I think we can do that.
    Chairman Chaffetz. That would be great.
    And then, Mr. Meadows was pretty generous on saying 120 
days. But I think we have several of those items, including 
Dodd-Frank and others, that we would like to see. So if you can 
provide it to us by the end of the month, that would be most 
helpful. I appreciate it.
    Thank you all for your participation. It's an important 
segment, important to our economy, and affects more Americans 
than most people realize. And we thank you all for your 
participation.
    The committee stands adjourned.
    [Whereupon, at 12:54 p.m., the committee was adjourned.]

                                APPENDIX

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