Financial Update (April-June 1998)

Southeast Experiences High
Growth in De Novo Banks

By Michael Padhi, economic analyst

A nnual growth in the number of start-up, or de novo, banks in the United States reached its highest level of the decade in 1997. The upward trend in de novo bank growth is also evident in the Sixth Federal Reserve District.

Industry observers attribute the growth in de novo banks to a strong economy and to consolidation within the banking industry. Structural data presented in this article appear to support the link between bank consolidation and de novo bank activity.

Among the policy issues raised by the growth of de novo banks is the impact that new banks could have on the competitive structure of the banking industry. In rapidly consolidating banking markets where the number of established banks is shrinking, de novo entrants can help maintain competitive rivalry and thwart the exercise of market power. Although de novo banks tend to be small in size, research data from an Office of the Comptroller of the Currency working paper suggest that, in number, de novo banks have replaced roughly 40 percent of the commercial banks that failed or were acquired since 1980.

Chart 1
De Novo Bank Activity

Chart 1 - De Novo Bank Activity
The Growing Number of De Novo Banks

The number of de novo banks chartered in the United States grew 64 percent between 1991 and 1997 (see Chart 1). Federal and state bank regulators issued 175 new bank charters in 1997, the highest level so far this decade. Illinois led the nation in new bank charters between 1991 and 1997, followed by Texas.

Chart 1 also shows de novo bank growth in the Federal Reserve's Sixth District during the same period. The number of de novo banks in the district grew by 50 percent during this period. Three Sixth District states experienced some of the highest growth — Georgia, Florida and Tennessee ranked fourth, fifth and sixth in the nation, respectively. Louisiana, Alabama and Mississippi lagged behind, however, ranking 21st, 22nd and 23rd, respectively.

Bank Consolidation and De Novo Bank Activity

Recent consolidation in the banking industry serves as one popular explanation for the upward trend in new depository institutions. Anecdotal support for this explanation comes from bankers who have started new institutions in recent years. As small banks are increasingly acquired by larger institutions, many bankers claim that smaller customers' needs become underserved; if this argument is true, consolidation creates the opportunity for new community banks to serve this market. Additionally, consolidation can cause job losses at acquired institutions, thus freeing up banking talent to work elsewhere in the market, according to a number of recent articles on bank consolidation in industry publications.

On a statewide basis, there appears to be a relation between banking consolidation and de novo bank growth. As Table 1 indicates, the three leading Sixth District states in de novo bank formation since 1991 (Georgia, Florida and Tennessee) were also leaders nationwide in bank acquisitions. Moreover, a majority of de novo banks were chartered in metropolitan areas that were also undergoing rapid consolidation. The three other Sixth District states, Alabama, Louisiana and Mississippi, rank below the national average in both formation of de novo banks and bank acquisitions.

Table 1
Sixth District States, 1991-97
State Number of
New Bank
Ranking in
New Charters
Number of Depository
Insitiution Acquisitions by
Commercial Banking Firms*
Ranking in

Alabama 6 22nd 55 25th
Florida 32 5th 201 3rd
Georgia 33 4th 127 6th
Louisiana 7 21st 78 17th
Mississippi 5 23rd 28 31st
Tennessee 28 6th 91 12th

*Acquisition data covers 1991 through quarter three of 1997

Table 2
Sixth District Urban Banking Market Concentration*

Area Average
HHI in 1991
HHI in 1996
Average HHI
Percent Change

All urban markets 1,785 1,803 1.01
Urban markets with
recent de novo entry**
1,347 1,523 13.06

*Overall urban market HHI averages are for the entire states that fall within the Sixth District; markets with 1997 de novo entry HHI averages are only the Sixth District, which excludes parts of Louisiana, Mississippi and Tennessee.
**Urban markets with recent de novo entry are defined as those that experienced new bank formation in 1997.

As mentioned earlier, the level of de novo bank activity has important public policy implications — for example, in the evaluation of bank mergers and acquisitions. A high probability of de novo entry into a market as well as evidence of actual entry are often used to mitigate an increase in deposit concentration in a banking market as the result of a merger. Among the conditions that are likely to attract entry into a local market is the level of banking concentration, as measured by the Herfindahl-Hirschman Index (HHI). The HHI uses a mathematical formula to determine whether a banking market is unconcentrated, moderately concentrated or highly concentrated.

Urban Banking Market Concentration

Most 1997 de novo bank entries in the region occurred in urban markets. Table 2 shows changes in concentration for all urban markets in the region between 1991 and 1996 and the change in concentration of urban markets that experienced de novo entry in 1997. (The sample of rural markets that experienced de novo entry in 1997 is not large enough for comparison or discussion here.)

Urban markets in the region that experienced de novo entry in 1997 had a greater percentage increase in concentration during the preceding five years. The absolute level of the HHI in these markets, however, was lower than the average urban market in both 1991 and 1996. Therefore, urban markets that experienced de novo bank entry were generally less concentrated than other urban markets but increased in concentration at a greater rate.


The Southeast has contributed significantly to the recent surge in new bank charters in the United States. State data presented in this article suggest a relation between consolidation and de novo bank formations. These data indicate that de novo banks tended to be chartered in urban markets that grew in concentration at greater rates than the region's urban markets as a whole. Also of note is that the absolute level of concentration in urban markets that experienced de novo bank entry in 1997 tended to be lower than the regional urban average.

In the near future, factors that are conducive to de novo banking — including a strong economy and bank consolidation — are expected to prevail, suggesting that de novo activity will remain strong.

Aruna Srinivasan, senior economist, contributed to this article.

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