Banking is a highly competitive, highly regulated business that requires high start-up costs relative to other service-oriented businesses. As is the case with any new business, it's not advisable to create a new bank, also referred to as a de novo bank, without having identified a genuine gap in the market that will create demand. Small banks typically don't benefit from the large marketing campaigns associated with the largest mega-banks, and must compete on the basis of the attractiveness of the loans and investments they offer.
Private banks raise capital through a private stock offering to accredited individuals who meet onerous financial requirements related to their net worth and annual income. While privately-held bank stock is not publicly traded, there often is a healthy secondary market for it, facilitated by boutique investment banks that specialize in small bank stocks and even new hedge funds that invest in de novo banks. Banks tend to earn high returns on assets and equity, and typically are managed conservatively by executives with strong ties to the business community. A small number of non-accredited investors, usually people with personal relationships with insiders, are allowed to participate in the stock offering as well.
Federal Deposit Insurance Corporation
Federal Deposit Insurance Corporation membership must be obtained by all commercial banks, and all FDIC requirements must be met before the new bank begins operations. The bank must fill out and submit the Interagency Charter and Federal Deposit Insurance Insurance Application, which will be shared by the FDIC with all relevant regulatory bodies. Along with the application, the applying bank must submit a mission statement, a business plan containing three years of projected financial statements, and policy descriptions for loans, investments and other bank operations. Complying with these requirements can take hundreds of hours, and often requires engaging financial consultants with de novo bank experience.
Obtaining Bank Charter
Commercial banks with a national charter are overseen by the Office of the Comptroller of the Currency, while banks with state charters are overseen by their state banking commission. Savings banks are regulated primarily by the Office of Thrift Supervisions, all of which rely on the Interagency Charter and Federal Deposit Insurance Application for initial charter approval. In deciding which type of charter is appropriate for the new bank, there is a section on the application where you can indicate your decision.
Regulators recommend that while the application is being processed by the various agencies, bank executives establish channels of communication within the agencies and obtain specific instructions related to the charter proposals. The regulatory agencies are particularly concerned regarding the applying bank's managerial factors, financial factors, capital adequacy, and convenience and need. As a condition of membership with the Federal Reserve, new banks must purchase stock in their district's Federal Reserve Bank amounting to 6 percent off the bank's capital and surplus. The stock generates annual dividends and allows for some voting rights related to the election of certain directors of their Federal Reserve Bank.
The bank's management begins with the Board of Directors, who appoint the bank's executive management and oversee the regulatory compliance function. This requires monitoring capital adequacy levels and making sure that the bank does not deviate from the FDIC-approved business plan. If the bank's directors want to make changes to the bank's funding structure or expand lending activities, prior approval must be obtained from the FDIC. Regulators typically require that de novo banks exceed capital requirements, understanding that it often takes roughly three years for new banks to achieve profitability. Meanwhile, its capital requirements also are contingent on its location, growth prospects and risk profile, all of which the bank must demonstrate are being actively managed.
- De Novo Strategy: How to Start a Bank
- Federal Deposit Insurance Corporation: Organizing a De Novo Bank
- Federal Deposit Insurance Corporation: Interagency Charter and Federal Deposit Insurance Application
- Partnership for Progress: De Novo Bank Application Process
- Partnership for Progress: Capital Requirements