Banks have been the backbone of economies and financial hubs for retail customers since ages. From the times of early banking of merchant banks who stored loads of grains for travelling merchants to the first recorded bank in Italy – Banca Monte dei Paschi di Siena – they have been playing a pivotal role in allocating savings from people to businesses to create more capital. Thus, it is essential that there are sufficient banking channels within communities to help mobilize savings from house-holds and enable liquid money available for loans. Only the most established and known companies are allowed to open a bank keeping in mind the stability and credibility required.
How Profitable is this Business?
The US small banks have been doing rather well with reportedly 6,770 community banks earning $67 billion over the past five years.[i] Thus, it is easily a lucrative business for a large business house or established name. There are few considerations involved – the first is the need for opening a new bank when there are already many existing. Understand and focus on the segment of retail investors you wish to target. Investors will very not just on the basis of requirements but also on the basis of capital and money to invest.
Getting Ready to Start a Bank[ii]
- Deciding the USP – You cannot provide the same service to a person looking to deposit $100,000 as compared to a person who just wants to safe-keep $500. You need to have an exact feel of the requirements of the businesses and customers around you. Walk in for meetings to business managers and finance managers.
- Capital Requirements[iii]-Secondly, the most obvious is the capital required. It is one of the most capital intensive businesses to be in. While a minimum of $20 million is required, the capital requirements need to be adjusted as per the number of loans you give out and your expansion. This is mandatory compliance require across the world. Capital is divided into tiers which need to be fulfilled.
As explained by the Federal Reserve capital requirements, the type of capital instruments determine how robust the bank is. There is common stock, perpetual preferred stock. Regulators prefer a larger amount of capital in the form of stock. A new bank is expected to maintain “leverage capital ratio” of 8-9% of the total assets during the first three years of operations. Keep in mind “loans” given are an asset for the bank on its balance sheet. Thus, it needs to maintain total capital of 8-9% of its total consolidated assets. The bank should be in a position to liquidate its assets in a financial crisis.
- Creating a Robust Business Plan – A business plan is the roadmap for any business entity and along with capital base and compliance with regulatory norms, it is essential to give an aim to be decide the hiring and training along with service orientation.
- Management – The controlling company – which can be a trust – needs to be well-defined with an experienced person in the banking industry to plan and look after the creation of business units.
- Robust Infrastructure – A robust IT system can make or break a banking experience. People expect security of the highest level compliant with the latest laws and protection against new threats. It is essential to create an appropriate level of services along with information technology systems to cater to clients.
- Risk Infrastructure – Risk assessment is an ongoing activity for a bank. A risk monitoring team has to be in place to ensure operational, credit, systemic and human risks can be measured, monitored, and restricted.
- Establishing Banking Relationships with other banks – This is called as Correspondent banks. These help clearance of instruments of this bank with other banks and their branches. Various instruments have to be cleared and settled. The bank has to be recognized and approved for acceptance. All this made possible once the banking license is approved.
Banks need to be credible and trust-worthy with availability of liquidity when customers demand their money. The image and trust have to be managed smartly as no bank can ever give back the money deposited all at once. Deposits are to be approved for insurance from Federal Deposit Insurance Corporation.
Issuing your instruments require registration and approval with various trading regulators. You need to ensure your trading desk is established and is ready to manage assets and liabilities by bridging the gap through buying and selling. A strong trading and investment team needs to be setup.
Finally, ensure the message of your bank gets across as a trustworthy and reliable partner of customers for safe-keeping and business activities.