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Why Do De Novo Banks Choose a National Charter?

by Gary W. Whalen

Abstract

Examination of the charter choices made by the more than 1,600 new banks established from 1998 through 2008 reveals that since 2003 there has been a clear and persistent shift in preference away from national bank charters and in favor of state bank charters. This study seeks to understand the primary reasons for this change in chartering behavior.

Various econometric models are used to analyze annual local market entry by de novo-or newly chartered-banks in 929 urban banking markets during the 11-year period. This analysis suggests that higher supervisory costs may make de novo national bank entry more sensitive to local market competitive conditions than is the case for state banks. Indicators of competition found to be important determinants of de novo national bank entry include state intrastate branching restrictions, market concentration, and de novo branching by out-of-market banking organizations.

The evidence indicates that state-specific supervisory disadvantages decrease the likelihood and extent of de novo national bank entry. Greater numbers of mergers and acquisitions of locally headquartered national banks also have a positive effect on de novo national bank entry, possibly because they reflect the availability of senior management familiar with and to national bank supervisors.

Disclaimer

Any whole or partial reproduction of material in this paper should include the following citation: Gary W. Whalen, "Why Do De Novo Banks Choose a National Charter?", Office of the Comptroller of the Currency, Economics Working Paper 2010-2, May 2010.

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