Starting a Bank is Easiest in the USA
One of the easiest countries in the world to start a bank bar none is…drum roll…surprise!
THE USA!
Surprised? What with all that debacle on Swiss Bank Privacy, Bank bailouts, making it difficult for private investment in banks…one would think the country was anti-banking. Yet the USA is probably the easiest place to create your own bank.
Did you realize that the USA had the most banks of all G20 countries – ever? 12,000+ in 1985. And then after many losses and downturns, it’s now about. 8,400. But by 2010 the numbers may be 1,000 smaller than that…read more. Bank failures are rife today.
USA Banking Hotspots
But then you might think investors have shied away from this banking business due to the heavy risks of failure involved. But surprisingly, more banks are springing up. 78 new banks have already been given their lisences to operate in the US so far this year, according to the FDIC. That is on top of the long ques of interested private investment companies waiting to snap up the failing banks’ assets and liscences – if the FDIC would let them.
Last year, there were 173 last year despite the huge crash of the US financial industry with Lehman Brothers causing a tailspin in the world’s financial markets that has still yet to end. One reason cited for the slowing down of bank approvals is becuase of new legislation that requires banks to have the necessary credibility such as between 10 – 25% of shares and the necessary paid up capital. But the requirements are far and away much less stringent than the European, Canadian or even the so called bank secrecy havens of Singapore and Switzerland.
What’s typical in a period of uncertainty and this time it’s a massive one, people – living breathing human beings – move their assets into the safety of secure assets like cash.In times of war, my grand parents used to hide their cash under their matresses. Who can blame anyone when the hurt and insecurity of the stock markets drive people in droves to hold large amounts of low interest paying bonds or certificates of deposits with banks?
[The Garden City Park, N.Y., bank was swamped with customers, and a push to lure $20 million in cash by selling certificates of deposit attracted $43 million. As investors fled the stock market, some brought Hanover as much as $1 million at a time according to bank officials.]…wsj.com.
But What of the Impending Bank Failures?
At best, it’s a love hate relationship. In good times, bankers can make a huge payoff. But in bad times, banks fall like pins in a bowling alley. You might think, “I feel for those investors -the bankers and share holders must have had it bad.” If that bank has been running for some years and it went down, very likely you’re dead wrong!
In fact, whether the bank has been around for a long time or have been profitable, the real victims are the depositors and depositors who have not either not kept their individual accounts to below the FDIC insured amount ( currently $250K in the US) or they have lost all their money in investment products. When the bank goes, all interest and investment money goes with it. Yes, shed a tear. Many life savings are lost this way. But wait, it doesn’t end there. Customarily, an unhealthy bank’s assets are then divided up into performing and non-performing.
Non-performing assets like defaulted credit card balances are sold, often for pennies on the dollar to debt collection agencies. Very suddenly the debtors will find life getting a little more complicated as very aggressive debt collectors are not so easy to deal with as the bank.
Other performing loans – like overdrafts may be taken over by a healthy bank. So, how may this be bad for a store owner? He or she may suddenly find that he has to deal with very different sets of circumstances. The overdraft may suddenly shrink to too low a limit for the business’ daily operations for example.
Then other businesses or or people trying to make loans, often find circumstances have changed for the loan criteria. Imagine you’re used to one system and then find that you are required to “tune” your loan application in another way. It can happen to your car loan for example. People with their deposits covered by the FDIC will get their principal covered but they notice their interest has gone up in smoke. Business owners who have had a long relationship with the old bankers will suddenly find that they have to do this all over agan. The banks afterall operate in a certain neighbourhood.
Investors’ Mecca
The investors who start up banks know these issues intimately. The potential for making it big far outweigh the dangers of failing. It’s like a business Mecca, the Holy Grail of business. Did you realize that banks do indeed create money? Your money becomes many times the amount allowed under the current climate of very high multiples. So, for a certain deposit, the banks stand to make a huge gross profit.
Therefore, within some countries, the financial risks are truly minimized especially when they operate in bad times, and in periods of allowed high multiples and the bankers’ own financial wizardry. Once you understand this, you can see that it is very much a worthwhile venture. Also, another big payoff is when a big bank eats up the little one and pay a premium doing so. It’s big pay day time to the investors, but not necessarily for the depositors.
Another thing that bank investors know is that the US is also relatively flush with capital despite the losses and destroyed lives from the financial disasters. Relatively speaking, when compared to many so called tax havens (which really is a DoDo) people with cash are everywhere. People no longer hide their money under their mattresses any more – they go to the bank. If you gat a social security check, it goes to a bank. When you get paid the company sends the paycheck to the bank. You pay your utility or credit card bills through the bank…Therefore there is always operating capital available in a country with a significant population base, which frequently use the bank like a utility.
I could go on on the beuaty of the technicailties involved but you get the picture by now why the USA is actually one of the easiest countries on the planet to start a bank.
Disclaimer: Do I necessarily encourage investors to start a bank in the USA? Not necessarily. In fact, there are many arguments why you should not – especially if the bank does not have significant competitive advantages. We’ll discuss this issue in another installment.
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I think you have really posted a very nice article for that topic, but what i think it’s not an easy to establish a bank on which people can make a trust. It’s my opinion but you have written very well.
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