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Econ Focus

First Quarter 2016


Opening Your Own Bank

Do you ever daydream about starting your own bank? It’s not as simple as just hanging up a sign and taking in deposits.

You may have to wait awhile to get approval from multiple regulatory bodies. Primary Bank in Bedford, N.H., the most recent new bank, applied for a charter in October 2014 and was approved by the state’s banking department in February 2015 and by the Federal Deposit Insurance Corp. (FDIC) the following month. The Bank of Bird-in-Hand in Lancaster County, Pa., applied for a charter in January 2013; it received approval from its state regulator in May and from the FDIC in November of that year.

Which agencies you’ll go to depends on whether you plan to operate a national bank or a state bank. The Office of the Comptroller of the Currency oversees and approves national banks, and national banks are always Fed members as well. Each state has its own chartering agency for state banks; in addition, state banks must choose either to become members of the Federal Reserve System (placing them under the Fed’s oversight) or to be nonmembers (placing them under the FDIC’s jurisdiction). Finally, while banks are not required to apply for deposit insurance from the FDIC, the conventional wisdom is that it would be difficult to compete without it.

Before filing applications, bank organizing groups are encouraged to meet with their regulators to identify any potential holes in their plan. Regulators evaluate the soundness of a bank’s business plan as well as the experience and skills of its proposed senior management and directors when deciding to grant a charter.

"Having a targeted plan to serve a perceived underbanked segment or market is critical for starting a bank today," says Fred Green, president and CEO of the South Carolina Bankers Association. The banking sector has been consolidating for decades, but Green says it remains highly competitive. Regulators want to ensure that any new bank can thrive in its market.

A bank’s business plan also affects how much initial capital regulators will require the bank to hold. Capital requirements for new banks thus vary case by case, but bankers suggest that new banks today may need anywhere between $15 million and $30 million in startup capital. It can take months or even years before a new bank is able to turn a profit, and capital is needed to keep the bank afloat and enable it to grow during this period. Banks must also maintain certain capital-to-asset ratios determined by their regulators or be subject to corrective action. These requirements are higher for new banks during their first years of operation.

Even setting aside capital, opening a bank is not cheap. Organizers pay an application fee to their chartering body, attorneys’ and consultants’ fees, and the salaries of the management team, which is active in presenting to investors and negotiating with vendors long before the bank opens its doors. All told, these costs can easily reach $1 million. For example, organizers for Bank of Bird-in-Hand reported spending about $800,000 to get their bank up and running.

It can be challenging to recruit executives and directors for a new bank. "Historically," Green says, "a lot of folks aspired to be on a bank board and be part of a founding group. Serving on a bank board was an honor." Today, the hurdles to starting a new bank seem higher and the rewards less enticing. From 2006 to 2010, the average return on assets for community banks less than five years old was negative, according to a 2012 FDIC report. Older and larger banks managed to earn positive returns on average during that period, though they too suffered a hit.

"It’s harder to find people that would have the energy and desire to be involved in a startup today," says Green.

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David A. Price (804) 697-8018