Question: Are the steps necessary to open a bank in Alabama the same as in Angola?
Answer: pretty much, yes.
If you are surprised, don’t be. Certainly, there will be differences from state to state within the U.S. and, of course, country to country, but the steps necessary to launch a bank and the order in which those steps are taken are, for the most part, the same.
In almost 50 years of participating in the global banking industry as a principal or as a consultant, I have assisted in many bank startups, mergers, acquisitions, and restructurings. I’ve noted that, while banks may employ many different business models, due to the regulated nature of the industry, there is a well-defined process for getting started.
Before we dive in, it is necessary to remember that some form of a government agency regulates all banks. In 1781, Alexander Hamilton, a Founding Father of the United States, said: “Most commercial nations have found it necessary to institute banks, and they have proved to be the happiest engines that ever were invented for advancing trade.”
Hamilton was a firm believer in a centralized federal government, so it was only natural that he believed it was necessary – for the stability of the economy and the protection of depositors and borrowers – for the government to establish regulations as to how banks should operate.
Today, even the smallest countries have regulated banking systems. We mention this because bank regulation plays a vital role in the starting of a bank anywhere in the world.
Eleven Steps to Starting a Bank
If you want to start a bank, here are the steps you will need to take and the order in which they should be taken:
- Develop your Concept – Why do you wish to start a bank? Do you want to serve farmers in a rural area that is currently underserved by other banks? Perhaps you intend to be a business bank that only serves small- and medium-sized businesses. Maybe your goal is to run an investment bank that exclusively serves high-net-worth individuals. How about being an online bank that appeals to millennials who wish to refinance their student loans and borrow money for their first home?
- Assemble a Board of Directors and the Executive Management Team – Government regulators and investors are going to expect you to have a Board of Directors and management team that have banking experience and a track record of success. Many Board members have been senior executives with large, well-established banks and are now retired. Other Board members come from the real estate industry where they have been borrowers and investors. Your executive management team must have banking experience, especially in the areas of risk management, cash management, and asset/liability management. By the way, in the United States, in addition to the state and federal regulators’ approval of your Board and management team, all members must also pass an FBI background check.
- Business Plan and Financial Forecast – Step 3 is the preparation of your business plan and financial forecast. Why? Because Step 4 is the raising of your capital, and it will be challenging to raise capital without a comprehensive, professional business plan. The business plan and financial forecast are not optional. They will tell your government regulators and investors what you intend to do and how you intend to go about it successfully. Of most importance, the business plan will describe to the regulators how you will mitigate the various types of risks that all banks face. In case you are wondering, a business plan and financial forecast for a bank require considerable effort and will cost up to $75,000.
- Capital Raise – The capital requirement to start a bank will vary with country and type of bank. It is probably safe to assume that, in most countries, the capital requirement is $10-$30 million. Bank founders should also expect to incur expenses of $500,000 to $1 million (or more) before opening for business.
- Complete Your Legal Team – You have probably already hired securities lawyers to assist with the documents required to raise your capital. Next, you will need banking attorneys who will take you through the process of getting all of the necessary regulatory approvals. In the U.S., you will require the approval of at least two regulatory bodies. Regulators in the U.S. can include the Federal Reserve Board, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and in the case of a state charter, the state banking regulators in the state or states in which you intend to do business.
- Fully Describe Risk Management Protocol – A risk management protocol “identifies, measures, monitors, and controls the risks involved in a bank’s various products and services.” These risks include, but are not limited to, credit, market, liquidity, operational, legal, currency, cyber, headline, and reputational risk. This step will document the people, policies, and procedures involved in mitigating risk.
- Regulatory – Having accomplished all of the above steps, it is time to submit your business plan and other required documents to your regulators; usually, your attorneys will handle this. However, your Board, particularly your Chairman, and your CEO should expect to play a very active role in the process. The process will usually include responding to questions in writing and in person.
- Technology – Banks are highly reliant on systems to operate effectively and efficiently. A complete IT infrastructure will be required before you open the bank for business. This will include deposit systems, loan systems, accounting and general ledger, trading, communications, customer-facing website, and others. Because many vendors are offering end-to-end, cloud-based systems, you will not need to build everything from scratch.
- Select Your Location(s) – You will need an office or offices from which to operate. In most instances, you will choose a space that will accommodate your business model/concept, be affordable, comfortable for your employees, and welcoming for your customers and visitors. Perhaps one of the most important decisions to make at this time is whether to purchase your space or to lease. Many banks own their property because they think it is a good use of their capital. Others are very cautious about how they use their capital because liquidity is extremely important to banks.
- Create a Marketing Plan – You probably developed a preliminary marketing plan when you prepared your business plan. Now it is time to dot the I’s and cross the T’s. You must establish your brand and create awareness for the bank just before, and of course, after you open your doors. While word of mouth is a great marketing technique, you cannot depend only on that. Here are some good questions to ask: What do you want your target customers to think about when they think of their banking needs? And: What do you want your target customers to think about when they think of your bank? Do a detailed job of answering these questions, and you will have taken a big step toward creating a successful marketing plan.
- Staffing – You are getting close to opening your doors for business. Now is the time to hire and train an exceptional staff of bankers at every level. Banking is a people business, and not just in the case of customer-facing staff. All staff must be capable of dealing with customers and also each other, up and down the org chart. Also, staff must be experienced, highly skilled, and believe in your mission and vision for the bank.
It has been a year, possibly longer since you started on this journey and now its showtime! Remember to treat your customers with fairness and respect, and provide them with the products and services that they require to be successful in their business and personal lives.