Starting a New Bank? Try This Alternative

Article By: Chris Johnson

A few weeks ago it was reported that the FDIC and state regulators were in discussions to ease the standards for being granted deposit insurance. It appears that for the first time since the moratorium on de novo bank charters was lifted that regulators are truly welcoming the idea of new applicants. With these changes in the regulatory environment, is now the time to consider applying for a new bank charter?


In the past two years there have only been two new charter approvals with an average application processing time of well over a year. As most problem banks have now been dealt with and bank failures are at a 7-year low , it is evidently the right time to begin increasing that number. Even with regulators seemingly open to the idea of new applicants, processing time will remain a factor. As time increases, so do expenses; the key is to find ways to balance the two to reach the goal of starting a new bank.


Where do these expenses come from?

In proving that not only does a need exist for a potential bank’s services, applicants must have the leadership team in place with resumes that show they can carry out the proposed business plan. The “big three” are a CEO, CFO and Senior Lending Officer. With each month that the application is in processing, these people, rightfully so, get paid a normal bank executive salary, which can cost hundreds of thousands.


If that wasn’t enough, fees for Board members, retainers for legal counsel, rent for building occupancy, and other costs create a large hole for the bank to crawl out of before early projected operating losses begin.


What alternatives are there?

Many small community banks are suffering from management and director fatigue after years of trying to stay afloat during a poor economy. Family-owned community banks are more frequently finding the next generation wanting to spend their time and money elsewhere. These are all perfect targets for a bank acquisition by an outside group.


Buying a bank charter can be less expensive, timelier and have a higher chance of regulatory approval than applying for a new one. The key is to find a charter that will not limit the organizing group’s operating plans.


What limits does this alternative have?

When acquiring a bank charter the problems currently existing in that bank are now the responsibility of the new owners. This makes choosing the right bank charter to acquire an important decision. In many situations, new capital can go a long way towards eliminating potential operating constraints.


With an influx of capital, new management, a change in the business plan, and a move to a different operating area, an organizing group can have the bank they desire without the lengthy and costly wait-time of a new charter application.