Author Topic: Starting a bank?  (Read 1599 times)

bwall

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Starting a bank?
« on: February 24, 2017, 04:59:25 AM »
I am interested in starting a bank, but I've never worked in finance or banking. I know that there are lots of smart experience people on these forums, thus the post.

I've looked online at the basic requirements to start a bank and I feel as if I have the resources and identified the target demographic to move forward.

My question to the MMM community:

1) Has anyone here ever started a bank, or worked on founding a bank?

2) I know it's not easy, but how *hard* is it? Meaning, is it just a lengthy time consuming process upwards of one year, or is it almost impossible to get approval and just one mis-step and you're done?

3) What is the most difficult obstacle that you encountered?

I've also posted this under "Taxes" since I'm not sure the best place for these questions.

MrSpendy

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Re: Starting a bank?
« Reply #1 on: February 24, 2017, 07:13:22 AM »
http://m.bankingexchange.com/blogs-3/community-banking-blog/item/5837-will-there-ever-be-new-banks-again

De novo bank formation has all but ground to a halt as regulators have a much higher bar and regulatory costs have encouraged consolidation.

I would say it is next to impossible to start a bank with no experience because of the regulators. if there are literally 1-2 / year being created in the whole country (presumably by people with the cApital ( 8 figures) and experience) then what gives you the thought that you could do so. If you ran a community bank and had $20mm of capital lined up, I'd say "it will be very difficult because there aren't really de novo banks anymore". With no experience and (presumably???) no capital, I would say you have a higher chance of being an Olympic athlete or lottery winner.

That is a harsh and rude way to put it, I know. But I bieve it is in line with reality.

Just curious, why do you want to start a bank? What goal are you trying to accomplish? There may be other ways to accomplish that goal than getting a bank charter. I would advise exploring those thoroughly.

I am by no means an expert on banking, but through my work (investing) am familiar with the issues facing banks today and familiar with the change in regulatory landscape.

maizeman

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Re: Starting a bank?
« Reply #2 on: February 24, 2017, 07:19:38 AM »
Agree with mrspendy. It's basically impossible for anyone to start a new bank anymore.

With enough money and the right expertise folks who are interested in trying out new ideas approaches for which being a bank is necessary might end up buying up some small community bank instead (although enough this is expensive and takes lots of time and paperwork.

It might be worthwhile to read this article (https://dealbook.nytimes.com/2014/12/13/small-bank-in-kansas-is-a-financial-testing-ground/) although they don't focus on the barriers to buying a bank a lot of them are mentioned in passing, which would give you somewhere to start further research.

Quote
Getting a bank charter, even one from a troubled bank, isn’t easy.  ... Last year, for instance, 10 bank charter transfers were approved, out of 17 applications.

The couple had to apply to the Federal Reserve and the Federal Deposit Insurance Corporation, as well as Kansas bank regulators, to buy the bank in Weir.

The process began with a seven-page application; regulators responded with 26 pages of questions. In their application, the couple said they wanted to keep the bank in Weir alive, while working on new payment systems, which they described in detail. After 10 months, including many sleepless nights spent gathering thousands of pages of evidence, the couple received regulators’ approval.

Fishindude

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Re: Starting a bank?
« Reply #3 on: February 24, 2017, 07:33:36 AM »
Can you start a bank .... Yes
Is it easy to start a bank ... No

It's getting very difficult for banks under $100 mil in assets to survive and remain profitable & competitive, largely due to the cost and overhead associated with compliance requirements.  Some small, well managed banks are doing quite well, but many are being absorbed by larger banks.  In my state the number of active banks has been reduced  by close to 30% in the last 20 years for reasons stated.

If you are truly interested, join your state banking association, attend conferences, etc.   There are companies that specialize in valuing and selling banks, bank mergers, etc.

aschmidt2930

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Re: Starting a bank?
« Reply #4 on: February 24, 2017, 09:28:40 AM »
I'm intrigued by the goal here.  What sparked your desire to start a bank?

Small banks (a few hundred million in assets) are getting crushed all over the place by the bigger players in the market.  The traditional banking model seems impractical to break into without tens of millions of spare capital laying around and some serious connections.

If this is a dream of yours, consider going the route of peer-to-peer lending.  I'm certainly not suggesting this would be easy, but I think there's reasonable startup potential there.

Mr. Green

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Re: Starting a bank?
« Reply #5 on: February 24, 2017, 10:54:37 AM »
I have thought about starting a bank in the past. The goal was to essentially run it like a non-profit instead of taking advantage of people to make investors wealthy. I figured the biggest problem would be that I wouldn't be able to offer rates quite as low on loans/high on savings as bigger banks because I don't have economies of scale working in my favor and everyone today seems to only care about getting the most for themselves. That's why Wal-mart put all the little stores out of business. So I figure customers won't care that I'm not interested in making money off of them or taking advantage of them, they just want to best rate possible, even if it's an eighth of a point difference.

bwall

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Re: Starting a bank?
« Reply #6 on: February 24, 2017, 11:02:41 AM »
Thanks for all the feedback, both encouraging and *ahem* awakening. The links were insightful as well. Thank you for posting.

I'll try and address the issues mentioned below;

I do have capital, just no banking experience. I have 7 figures, but not 8. I'm fully aware that I'd have to bring in some people with banking experience as I do not want to run the bank, just found and be part owner. I know some people that I can approach, I just need to get more info before I call a meeting and pitch my idea.

It's never been a dream of mine to start a de novo bank. But, since I'm FI and kicking around for something to do during RE, I thought of opening a bank mainly b/c of the less than satisfactory experience I've received in my search for a bank for my business.

The problem I encountered is that no bank wanted to advise my companies Export Letters of Credit. After being turned down dozens of times and having so many banks walk away one day I thought I should just start my own bank so that we could advise LC's. We could advise the LC's of our entire industry and conservatively earn $1m in the first year just in LC fees alone. Any loan income would just be gravy, as LC fees would be the bread and butter.

Where I live there are only six banks operating and one of them stopped taking new clients. All of them offer sub standard service, no matter how much you offer them in fees. Others business owners I speak with also complain about their banking experience. Since the financial crisis the number of banks shrank from 15 (?) to 5 and one International Banking Entity (IBE) changed into a bank, so now there are six. Add to that the tax incentives available and I believe a de novo bank to be very lucrative opportunity.

However, I know that there is a lot that I do not know. I know that there is a lot of regulation and the compliance department has everyone in the bank scared for their lives. KYC nightmares keep bankers up at night.

I looked into the banking association. I seems like that membership/meetings are only available for deposit banks/bankers. :( Any ideas how to find out more about potential bank sales?

Mr. Green: you should start/join a Credit Union, as you describe their stated goal, IMHO.

Any and all feedback appreciated.


maizeman

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Re: Starting a bank?
« Reply #7 on: February 24, 2017, 11:42:21 AM »
Export letters of credit are way WAY outside my area of expertise but have you looked into whether you would need a formal bank charter in order for an organization to act as the "advisor" for the LoCs?

Essentially you'd be in the business of guaranteeing payments from foreign companies, so the risk of default might also be unfeasibly high, but that's a whole different question (business plan feasibility, not legal feasibility).

bwall

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Re: Starting a bank?
« Reply #8 on: February 24, 2017, 12:16:42 PM »
As best I can tell all you need to advise export LC is a SWIFT code and a SWIFT terminal, but somehow I assume it's hard to have one without the other? Dunno.

As I understand it, the issuing bank makes no guarantee of payment from foreign companies with an LC as long as they are not 'confirmed' by the issuing bank. Therefore, no financial risk for the advising bank.
« Last Edit: February 24, 2017, 01:54:19 PM by bwall »

maizeman

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Re: Starting a bank?
« Reply #9 on: February 24, 2017, 06:25:28 PM »
Seems like it is at least a possible you could get one without the other:

"SWIFT will initiate checks to verify whether your company is meet the eligibility
criteria to become a SWIFT user and will ask you to provide a number of documents
to support your application

The list of supporting documents depends on your organization type:

Supervised Financial Institution, this group also includes SWIFT’s
shareholders (Members-Sub members). You will find in these category users
which are: banks, investment funds, treasury counterpart, money exchanger,
etc.

Non-Supervised Entity active in the financial industry, this group includes
institution which is part of the financial industry but are not supervised by any
financial market regulator.

Corporate entities"

https://www.swift.com/sites/default/files/swift_joinswift_quickstartguide_welcomepack.pdf