The Entry, Performance, and Risk Profile of De Novo Banks
34 Pages Posted: 10 May 2016
Date Written: April 2016
From 2000 to 2008, 1,042 new community banks were chartered. Despite the largest financial crisis in decades, the vast majority of these new banks either survived or were financially healthy when merged with another bank. In this paper we investigate whether the patterns of community bank de novo formation and failure for this cohort that formed just prior to the recent financial crisis were the same as for new institutions from earlier periods. Similar to previous periods, we find that many of the new banks chartered were in markets that experienced bank mergers or acquisitions, and were large and growing. Consistent with a “life-cycle theory” of de novos, compared with small established banks, recent de novos were financially fragile and failed at higher rates during the crisis. Discrete-time hazards models confirm that failed de novos from the recent period invested heavily in construction and development lending prior to the crisis, similar to the concentrated loan portfolios exhibited by earlier cohorts.
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