How to Start a Banking Business
Participating in the planning and creation of a bank is usually a good investment in the your community, your career, and your investment. Long range planning is absolutely essential to starting a bank as the process is tedious and demanding and it will be several years after start-up that the bank will exhibit consistent earnings and growth.
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Things You'll Need
- An extensive staff of lawyers for filing necessary papers and licenses.
- An accounting firm to handle pro-forma documentation and regular audits.
- A board of directors made up of leading citizens in the community.
Instructions
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Obtaining a Bank Charter
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Plan a bank start-up with great care and attention to detail. It takes a community of interested citizens to start a bank. There are high start up costs and a large amount of initial capital to be raised. Choosing a state or federal charter will affect regulatory oversight. Many services for security, cash management, community outreach and advertising must be supported with seed money before the bank is even chartered. However, if all these issues can be properly managed a bank can be a rewarding and profitable enterprise.
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Share responsibility among the seed investors. There are many tasks that must be completed while forming a bank. Seed investors must contribute risk capital and offer expertise in gaining community support. Seed capital of at least $500,000 is usually necessary to fund legal, accounting and other start-up expense. In addition initial capital raising for the bank will probably need to be about $7,000,000. An important early decision will be the choice of state or federal charter. Today, most banks opt for a state charter with its looser regulatory control.
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Start a bank with adequate working capital. New banks begin with high fixed expenses. The quickest way to profitability is to spread those fixed costs among a growing deposit base as soon as possible. Deposit money can be quickly invested in treasury securities with a positive cost of carry. Then a portfolio of loans can be created that are higher yielding and in the community where the bank is located.
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Choose community leaders for the board of directors. They must be important boosters of the bank in the community. They must lend their good names to the bank and provide introductions. They are not, however, expected to be bankers. The loan process in particular must be transparent and independent from any director influence. This is an important issue for the regulators monitoring new bank operations.
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Lead a bank by installing a strong management team. Banks usually require three to five years for sustained profitability through policy and procedures. The direction of the bank will be defined by the board and management. The board must aid in growing deposits. Local knowledge from the board is a necessary part of the business plan. Directors must address branch expansion, deposit growth, mergers, and aggressive marketing.
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Tips & Warnings
Have a strong plan and key individuals to fill important management roles before raising capital. Allow 2 to 3 years for all regulatory procedures and approvals needed to open the bank.
Make certain that every board member understands the importance raising deposits. Board members have deliberative functions but are important sources of funds. Steering a bank operation for years before the bank opens is difficult. Then allow two or more years to achieve sustained profitability Depending on the state individuals and families are limited to owning no more than 9.9 to 24.9 percent of any any bank.
